Posts Tagged ‘Mark Mobius’

Mark Mobius: Q&A on Emerging Markets

Thursday, March 11th, 2010

A recent Q&A with Mark Mobius, Templeton Asset Management’s emerging markets guru, follows below, courtesy of the company’s Market Views newsletter.

What are the pros and cons of investing directly in emerging market equities and bonds as opposed to companies based in developed markets with emerging markets operations?

By directly investing in emerging market equities you obtain full exposure to emerging markets while with investing in developed market companies with emerging market operations, you don’t get that full exposure and you also get slow moving markets with lower growth potential mixed in. One advantage of some developed market companies is that they could have a global coverage thus giving the investor a more diversified coverage. Of course, there are also some emerging market companies that have that kind of coverage as well.

How probable is further tightening of monetary policy in China within the near future - and what would that step look like?

It is highly probable that there will be tightening of monetary policy in specific areas and not as a general policy. The Chinese have made it clear that they want to ensure that economic growth continues at a high pace and that means that they would want to keep liquidity and money supply at a high level with the proviso that if inflation increases then they would restrict lending and money supply to some degree. They will try their best to avoid taking any measures which would jeopardize the country’s growth and therefore any tightening will be specific and targeted to inflation in certain areas.

What is your outlook for Africa?

We believe that the outlook for Africa is very good for three main reasons: (1) abundant natural resources, (2) a young population, and (3) heightened interest from rich emerging market countries. Africa has some of the world’s greatest deposits of natural resources, and only a fraction of those resources have been tapped. In addition, it has a young and growing population who could improve their education and skills to become a major asset to expanded manufacturing and mining enterprises. These factors have stimulated the interest of countries like China and India, who require more natural resources for their growing economies, as well as countries like Russia and Brazil, who look to expand their enterprises into global operations. Countries around the world are showing growing interest in manufacturing within Africa for the African market, particularly emerging countries that have the capabilities to operate in challenging political and economic environments.

Africa is an interesting region. In South Africa, efforts by local companies to expand their international market share, as well as the presence of capable management teams, can assure investors of finding bargains here. Higher global demand for commodities, a recovery in domestic demand and the preparations for and hosting of the 2010 World Cup should further support economic growth this year.

In addition to South Africa, we have been taking a look at the lesser-known frontier markets in Africa, some of which are very large countries, such as Nigeria. Regional markets such as Egypt and Kenya are also beginning to look attractive, and we are seeing the growth of new markets in this region. Libya, for example, already has a stock market and is encouraging the privatization of state-owned enterprises - a development being repeated in a number of African countries.

Some commentators are saying that frontier markets represent some of the best contrarian investments at the moment - do you agree with this and why?

Yes, that is certainly the case. For example, many people would never invest in Nigeria or even might not even visit the country for fear of confronting violence but actually there are excellent investment opportunities. So there are opportunities simply because those opportunities are not attractive to other investors since they are not familiar with the possibilities.

Qatar, Kazakhstan and Nigeria are among those countries being cited as ones to watch this year - why do you think this is?

Those are some countries that are citied as being watched but we should add a number of others such as Vietnam, Romania and a number of others. Qatar, Kazakhstan and Nigeria are all being watched because of their natural resources: Qatar - gas, Kazakhstan - oil, and Nigeria - oil.

Are there any particular sectors within frontier markets that you think will perform better than others?

We employ a bottom-up, value oriented, long-term approach. As we look for investments, we focus on specific companies rather than sectors or regions. However, during our analysis, we also consider the company’s position in its sector, the economic framework and the political environment.

Our focus continues to be on two key themes: consumers and commodities. With rising per capita income and strong demand for consumer goods, the earnings growth outlook for these stocks is positive. Commodity stocks also look good because we believe commodity prices will trend upwards, partly because of weakness in the U.S. dollar, and also because we expect the global demand for commodities to outgrow supply over the long term.

Source: Mark Mobius, Franklin Templeton Investments - Emerging Markets Overview, March 10, 2010.

Tags: Abundant Natural Resources, Bonds, BRIC, Diversified Coverage, Economic Growth, Emerging Market Companies, Emerging Market Countries, Emerging Markets, Full Exposure, Global Coverage, Guru, inflation, liquidity, Mark Mobius, Market Operations, Monetary Policy, Money Supply, Pros And Cons, Proviso, S Market, Templeton Asset Management
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Mark Mobius Threats to Global Economy

Friday, January 8th, 2010

The two biggest threats facing the global economy are the derivatives market and tightening money supply, Mark Mobius, executive chairman at Templeton Asset Management, told CNBC yesterday. “If money supply starts heading down, that would be a bad sign for markets generally,” he said.

Source: CNBC, January 7, 2010.

Tags: Cnbc, Derivatives Market, Executive Chairman, Global Economy, Mark Mobius, Money Mark, Money Supply, Templeton Asset Management
Posted in Markets | No Comments »

Mark Mobius on Leading Emerging Markets Regions

Friday, December 11th, 2009

The paragraphs below come courtesy of Mark Mobius, emerging markets guru and executive chairman of Templeton Asset Management.

Asia and Latin America are probably the most interesting emerging market areas in the world. This is not only because of their different cultures but also because their conomic histories have been so varied. If we consider the performance of markets in both areas, the Asian investor might be misled to think that Asian markets have outperformed Latin American markets but that is not necessarily the case in all time periods. For example up to November of this year, the MSCI AC Asia ex Japan Index was up 65% in US$ terms while the MSCI Latin America Index was up 100%. In 2008, the performance of both areas was about the same with Asia moving down 52% and Latin America falling 51%, a slightly better performance than Asia. In 2007, Latin America again beat Asia. While Asia was up 41%, Latin America was up 51%. Again in 2006, while Asia was up 34%, Latin America recorded a bigger rise of 44%. Of course there have been periods when Asia performed better than Latin America but recent history shows that Latin America has been the leader in performance rankings.

If we look at the demographic, geographical and economic characteristics of the two regions, there are some significant differences as well as similarities. Let’s take population; while Asia’s population numbers 3,600 million, Latin America’s population is only 550 million. Population growth in Asia has been slightly lower than that of Latin America. Between 2003 and 2008, Latin America’s population grew by 1.3% while Asia’s grew by 1.2%. One strong benefit that Latin America’s population has is that they have more land available to them. While Asia’s land mass is 25 million square kilometers to hold that 3,600 million people, Latin America has 20 million square kilometers to hold 550 million, a clear difference.

In the economic arena, growth in Asia has been superior to that of Latin America. Between 2003 and 2008, while the average annual growth rate in Asia was 8%, it was 5% in Latin America. This year we expect Asia’s growth to be flat but Latin American economies will shrink it’s economies by an average of 2.5%.

Of course despite the slower growth in Latin America, total GDP is, on a per capita basis, better than Asia. In 2008, Asia’s GDP totaled US$9,180 billion so that the per capita income was about US$2,600 while Latin America’s GDP was lower at $4,170 billion but its smaller population resulted in a per capita income of $7,580, significantly higher than that of the Asians.

In the foreign reserves area, Asia is definitely the superior with reserves now surpassing US$3,500 billion while in Latin America, total reserves amount to only about US$500 billion. Although Asian exports and imports amounted to US$7,300 billion in 2008, compared to Latin America’s US$1,700 billion, the growth of trade for both regions has averaged about the same during the last five years with an annual average growth of 19%.

Looking at the stock markets in both regions, the market capitalization of Asian stock markets has reached US$9,510 billion compared to Latin America’s US$1,814 billion. Asia also has many more listed companies with about 15,200 stock exchange listings compared to Latin America’s 1,300.

We continue to find good value in Latin American stock markets despite the smaller size compared to Asia. Currently, the price/earnings ratios of both areas average 14x, while the price to book value ratios are also the same at about 2x.

Dividend yields differ though, with Asia at 2% and Latin America with 3%. The large markets in Asia are China and India where the emphasis is on manufactured goods and services while in Latin America Brazil, the dominant country, is strong in commodity exports. Nevertheless, we are finding opportunities in almost all sectors in both regions with a number of good manufacturing, consumer and banking stocks throughout Latin America and Asia.

As such, the future of both regions is good and holds a great deal of promise for investors, which is why investors should have exposure to both regions. This will enable investors to benefit from the developments in Latin America and Asia.

Source: Mark Mobius, Franklin Templeton Investments - Emerging Markets Overview, December 11, 2009

Tags: America Index, Asian Markets, Asset Management Asia, China, Commodities, Different Cultures, Economic Arena, Economic Characteristics, Emerging Market, Emerging Markets, Executive Chairman, India, Japan Index, Land Mass, Latin America, Latin American Markets, Mark Mobius, Market Areas, Performance Rankings, Population Growth In Asia, Population Numbers, Square Kilometers, Templeton Asset Management, Time Periods
Posted in Emerging Markets, India, Markets | No Comments »

Mobius, Rogers, and IMF Love China

Thursday, October 1st, 2009

China is getting a great deal of attention upon its 60th anniversary. This is great news for the Canadian economy and investors in Canada’s well-positioned market. Bloomberg reports today that the IMF has raised its 2010 GDP growth forecast for China to 9%. It also trimmed its forecast for India by 0.1% to 6.4% from 6.5% which is still very good, given that India has not embarked on as bold a spending strategy. The two are altogether different though. China is an economy now more equitably balanced between its exports sector and domestic spending, with domestic spending taking a near 60% share of the economy, versus 60% exports just ten years ago. India’s GDP consists of 85% domestic spending and has been far better insulated economically from the credit crisis, that the Indian parliament was not forced into providing a massive stimulus as India’s economy was not as vulnerable to a downturn in exports as China’s was. The silver lining here is that China’s bold 4-trillion Yuan (US$ 586-billion) stimulus may successfully transform China into a formidable domestically biased economy, well ahead of original expectations, from once being held as export dependent or vulnerable to export shocks.

As the year progresses though, India’s GDP forecast may get upgraded again on increased spending plans. During the course of the last year, India has begun a new political cycle, and its incumbent Congress party won a mandate in the election earlier this year. In the midst of the credit crisis in the spring, and in the midst of campaigning, India’s spending plans were criticized as being somewhat anemic as compared to China’s. In hindsight, it would have been political suicide if the incumbent party had embarked on bold stimulus initiatives when so many were fearful of the credit crisis. Don’t ignore India at China’s expense. On this basis, its very likely that the Indian government will step up spending, though on a gradual basis over the coming year, which could push growth forecasts higher for 2010. It is notable that India has a sound fiscal position and a nice and clean banking system, and a strong tradition of high savings rates.

Investors looking at investing in emerging markets should consider positions in both India and China, rather than one or the other. These are the only two economies in the world that have sustained their records of growth throughout the current crisis.

Either way, if you choose not to invest directly in India and China, this is good news for the commodities complex, and its good news for Canadian investors taking exposure in the commodities sector.

Mark Mobius says China is his top pick among the emerging markets:

Jim Rogers says he likes China for the next 60 years:

HSBC CEO, Sandy Flockhart says China is the strategically the most important market to HSBC:

Tags: 60th Anniversary, Canada, Canadian Economy, Ceo, China, China China, China Economy, China Mark, Commodities, Congress Party, Credit Crisis, Domestic Spending, Downturn, Emerging Markets, Gdp Forecast, GDP Growth, Great News, Hindsight, Imf, Incumbent Party, India, India Economy, India S Economy, Indian Government, Indian Parliament, Jim Rogers, Love, Mark Mobius, Mobius, Political Suicide, Sandy, Silver Lining, Stimulus
Posted in Emerging Markets, India, Markets | No Comments »

Q&A on emerging markets with Mark Mobius

Thursday, August 13th, 2009

I have been positive on emerging markets for a while, maintaining that especially China and other Asian countries, as well as resource-based Latin American countries, would be the leaders of the economic recovery and stock market performance in the next upswing. These views are supported by a recent Q&A with Mark Mobius, Templeton Asset Management’s guru on emerging markets, as published in the company’s Market Views newsletter.

Emerging markets have been outperforming thus far in 2009, do you think this trend will continue for the rest of the year?
Although we are optimistic about the opportunities for upside potential, it is important to realize the volatility is still with us and will be with us for some time. This means there will be periods when the markets go down as well as periods when they go up. We should therefore take advantage of dips in the markets to buy stocks cheaply, paying attention to valuations and long-term earnings growth prospects in order to avoid buying or holding expensive stocks. We continue to find good value in markets like China, Thailand, Brazil, Mexico, Turkey and South Africa.

What sectors are you looking at now?
Commodity stocks look attractive because many of them have declined below their intrinsic value and we expect the global demand for commodities to continue its long-term growth. Consumer stocks also look attractive. With rising per capita income and strong demand for consumer and other goods, the earnings growth outlook for these stocks is positive.

Will the global equity market retest the low point in March?
There is always the possibility of this happening and it could be triggered by something totally unexpected, such as war breaking out on the Korean peninsula or a massive global flu pandemic. As I have said, markets will continue to be volatile as global economies remain fragile and we should see rises and falls in the months ahead.

Which country do you expect to be the best performer among the BRIC markets?
That would be impossible to say at this time but we think China has a good chance of achieving that goal. Of course, I’m talking about measuring that move from the beginning of this year. Russia also looks very undervalued.

In view of China’s strong market performance, would you say it’s in a bull market?
You can see that it is a bull market since the increase has been so dramatic, but it would be difficult to call it a sustainable bull market in view of its very sharp rise. I still feel we will face volatility and there will be corrections along the way. We do, however, expect China to continue to lead the global market recovery.

Will the Chinese government propose another stimulus package in 2009, and why?
That all depends on the success of the measures already in place. They clearly have the resources to do this again. We should expect them to act if current measures and programs do not produce the desired results.

You mentioned in October that Russia’s cheap stocks were a once-in-a-lifetime opportunity. Since then, the RTS Index in Russia fell a bit more to 498, then subsequently doubled this year. After that great performance, are stocks still good value, or is it time to take a breather?
Russian stocks still look cheap. Yes, they have risen dramatically from their low point but they are still a long way from their previous high. Of course, the PE has risen this year but Russian stocks, as represented by the MSCI Russia Index, are still trading at a single-digit PE of 6.8x as at end May 2009 - an increase from an even lower 3.4x as at end December 2008.

Do the economic problems within Russia - unemployment rising to 10%, inflation at 13%, and possible GDP contraction of 6% - undermine the investment case for the country right now?
These factors will have a short-term impact on the market, but we always evaluate companies on a long-term basis - taking a five-year view. Thus, we are in fact able to benefit from buying stocks at cheaper prices now.

Do you see any parallels between the market crash of 1998 in Russia and the one over the last year? Is there fear focused on this market that leads to sharper crashes than elsewhere? Did you learn anything in 1998 about Russia that helped you navigate this crisis?
No, because Russia and most other markets are in a much stronger position, financially and economically, than they were in 1998. Russia has built up strong foreign exchange reserves and trade surplus that have enabled it to withstand external shocks to its economy.

The Russian market was also affected by the correction in commodity prices due to its high exports of oil and other commodities, as opposed to any extraordinary fear focused on this market. However, we maintain the view that commodity prices will continue to increase in the long term due to greater demand from emerging markets and a relatively inelastic supply. This will thus benefit Russia in the future.

The most important lesson we’ve learnt from 1998 or any other crisis is that markets always recover - it’s just a matter of time. Thus one should always maintain a long-term and patient view with regard to investing.

Lastly, you have been investing in the emerging markets for the last four decades. Being an expert in investing in emerging markets, do you have any advice to share with investors during the current market situation?
It is very important for investors to remember some key principles: (1) diversify - it is important to diversify in order to minimize risk - this is why investing in a diversified mutual fund is best for investors, (2) look globally - no country has a monopoly on good opportunities so you must search globally - this is why we have global emerging-market funds, (3) be patient - don’t expect to obtain quick gains - the long-term investors do best, (4) don’t invest unless you understand the investment you are making - understanding will strengthen your confidence and enable you to make long-term investments.

Source: Mark Mobius, Templeton Asset Management - Market Views, July, 2009.

Tags: Asian Countries, BRIC, Commodities, Commodity Stocks, Consumer Stocks, Earnings Growth, Economic Recovery, Emerging Markets, Global Demand, Global Economies, Global Equity, Global Flu Pandemic, Growth Outlook, Growth Prospects, Intrinsic Value, Korean Peninsula, Latin American Countries, Mark Mobius, oil, S Market, Stock Market Performance, Templeton Asset Management, Term Earnings
Posted in Emerging Markets, Markets | No Comments »

Q&A on emerging markets with Mark Mobius

Sunday, June 14th, 2009

In view of China’s strong market performance, would you say that it’s in a bull market?
You can see that it is a bull market since the increase has been so dramatic, but it would be difficult to call it a sustainable bull market in view of its very sharp rise. I still feel we will face volatility and there will be corrections along the way. We do, however, expect China to continue to lead the global market recovery.

Will the Chinese government propose another stimulus package in 2009?
That all depends on the success of the measures already in place. They clearly have the resources to do this again. We should expect them to act if current measures and programs do not produce the desired results.

You mentioned in October that Russia’s cheap stocks were a once-in-a-lifetime opportunity. Since then, the RTS Index fell a bit more to 498, then subsequently doubled. After that great performance, are stocks still good value, or is it time to take a breather?
Russian stocks still look cheap. Yes, they have risen dramatically from their low point but they are still a long way from their previous high. Of course, the PE has risen this year but Russian stocks, as represented by the MSCI Russia index, are still trading at a single-digit PE of 6.8x as of end May, 2009 - an increase from an even lower 3.4x as of end December 2008.

Source: Mark Mobius, Templeton Asset Management - Market Views, June 12, 2009.

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Tags: Asian Countries, BRIC, Commodity Stocks, Consumer Stocks, Earnings Growth, Economic Recovery, Emerging Markets, Global Demand, Global Economies, Global Equity, Global Flu Pandemic, Growth Outlook, Growth Prospects, Intrinsic Value, Korean Peninsula, Latin American Countries, Mark Mobius, oil, S Market, Stock Market Performance, Templeton Asset Management, Term Earnings
Posted in Emerging Markets, Markets | No Comments »

Mobius: Emerging Markets Q&A

Friday, May 15th, 2009

I have been positive on emerging markets for a while, maintaining that especially China and other Asian countries, as well as resource-based Latin American countries, would we the leaders of the economic recovery and stock market performance in the next upswing. These views are supported by a recent Q&A with Mark Mobius, Templeton Asset Management’s emerging markets guru, as published in the company’s Market Views newsletter.

What’s your assessment of the global economy?
The global economy is in a situation where individuals, companies and economies are in a strong position to overcome the global crisis with support from their governments and central banks. We also believe that emerging markets will play a much greater role in the global economy. Countries such as China and India are expected to emerge as leaders due to their relatively stronger macroeconomic and financial positions.

In which regions are you most optimistic about investment opportunities?
Since it’s usually possible to find at least a few bargains in most markets, all emerging market regions are looking exciting. While global growth has slowed, emerging markets are still expected to grow at a much faster rate than developed markets. The accumulation of foreign exchange reserves also puts emerging economies in a much stronger position to weather external shocks with reserves, for example, in China, totaling nearly US$2 trillion. More importantly for us as value investors, the current valuations of emerging markets are attractive. Certain countries such as Turkey and Russia are now trading at single-digit price to earnings ratios.

Asia is the largest emerging market region in the world. Asian countries are also growing relatively fast. They include countries like China and India with very large populations whose per capita income is growing, and capital markets in those countries are undergoing rapid development. Economic growth remains relatively high, per capita incomes have been rising, valuations remain attractive and reforms continue, thus improving the region’s business and investment environment.

Valuations in Eastern European markets are also attractive, very attractive in some markets such as Hungary and Turkey which are trading at low single-digit P/Es. Poland is one of the few countries in the region that is expected to record positive GDP growth in 2009. Its valuations are, however, are not as attractive as some of its regional peers. Russia is another interesting market. With its huge land mass, large population and abundant natural resources, the country could become one of the fastest-developing economies in the longer-term.

Most Latin American economies are faring relatively well taking into account the current global macroeconomic conditions. There are selective countries which are more prone to the global downturn. For example, Mexico, but greater inter-regional trade has offset some of the adverse impact of lower export demand from the US. One of the region’s main attractions is its huge consumer market with pent-up demand for goods and services and world-class companies that are at the same time under-leveraged and inexpensive.

In addition, the region’s natural resources are among the largest in the world. Countries such as Chile and Peru which are among the world’s leading copper producers. Mexico is a net exporter of oil. Brazil is a major exporter of iron ore, and soft commodities such as soybeans and coffee as well. Colombia also exports commodities such as oil, coffee, coal, and so on. While commodity stocks have been negatively affected by the recent decline in commodity prices, many companies are still profitable at current price levels.

Also, frontier markets, which are the emerging markets of the future, are starting to look interesting. For example, the Middle East is of great interest and we believe the potential for economic growth and development remains considerable, especially if the current trend toward the implementation of political and economic reforms remains on course. Africa is another area we’re excited about. In addition to South Africa, regional economies are also beginning to look attractive.

In your opinion, what are the biggest threats to the global economy?
- loss of confidence
- excessive or poor regulation
- adoption of protectionist measures
- abandonment of the market economy philosophy

Why are you so positive about the outlook for emerging markets?
One key reason is the rapid growth of money supply, not only in the US but all over the world. Governments are trying their best to avoid deflation by pumping money into the economic system. This money must find a home and current savings interest rates, for example, for the US dollar, is not very warm and cozy. Investors have already begun to show renewed confidence and are seeking better returns. The obvious choice is equities. Specifically for emerging markets, we are optimistic because emerging markets:

- are undervalued, trading at extremely attractive valuations and have strong fundamentals
- have undervalued domestic currencies
- are expected to grow, in aggregate, faster than the developed countries
- will emerge as leaders due to their relatively stronger macroeconomic and financial positions.
- have strong holdings of foreign reserves, allowing them to better withstand any external shocks
- follow prudent fiscal policies
- have expanding trade and economic relations with each other; lowering their dependence on developed markets
- represent a huge consumer market as well as a large labor force
- have abundant natural reserves in countries such as Russia, Brazil and South Africa
- have strong potential for development in areas such as infrastructure

Source: Mark Mobius, Templeton Asset Management - Market Views, May 12, 2009.

Tags: Asian Countries, Central Banks, Current Valuations, Emerging Economies, Emerging Market, Emerging Markets, External Shocks, Financial Positions, Foreign Exchange Reserves, Global Crisis, Global Economy, Global Growth, India, Latin American Countries, Mark Mobius, Market Regions, Rapid Development, S Market, Stock Market Performance, Templeton Asset Management, Value Investors
Posted in Emerging Markets, India, Markets | No Comments »

Video Digest: Investors “look past the valley”

Friday, May 1st, 2009

As the financial markets await the bank stress test results in the US, a potpourri of video clips was produced. Although the discussions were varied, a golden thread prevailed: the duration of the financial crisis and the economic recession, and whether stock markets have hit bottom.

Needless to say, the plight of the beleaguered automakers and fears of an escalation in the number of swine flu cases also captured the attention of battle-weary investors. However, the S&P 500 Index rallied to a gain of 9.4% for April - representing its best monthly advance since March 2000 - and US Treasury yields jumped to levels last seen in November as investors “looked past the valley”.

Commentators featured on camera in this post include Simon Johnson, Michael Perino, Jim Walker, Steve Forbes, Christopher Whalen, Joseph Stiglitz, Marc Faber, Bill Ackman, Paul Kasriel, James Galbraith, Paul Volcker, Sheila Bair, Mark Mobius, Robin Griffiths and Jim Rogers.

The selection kicks off with a recession singalong - a Walt Handelsman animation entitled “Worst Slide Story”, and concludes with an interesting visualization of President Obama’s planned budget cuts.

Walt Handelsman: Animation - recession singalong!
“The classic ‘West Side Story’ is enjoying its Broadway revival. Now comes the remix, ‘Worst Slide Story’.”

Source: Walt Handelsman, Newsday, April 13, 2009.

CNBC: How swine flu spreads in humans
“A deadly outbreak of swine flu has killed more than 100 people in Mexico, and infections have been reported around the world. Malik Peiris, professor at University of Hong Kong, spoke to CNBC about how the flu can spread.”

Source: CNBC, April 27, 2009.

Bloomberg: Jim Rogers says flu may be “disaster in weak economy”
“Jim Rogers, chairman of Rogers Holdings, talks with Bloomberg’s Betty Liu and Peter Cook about the potential impact of swine flu on the global economy.

Rogers, author of ‘A Gift to My Children’, also discusses the restructuring efforts at US automakers, ‘short’ strategy and investment opportunities in commodities. He speaks from Singapore.”

Source: Bloomberg, April 28, 2009.

Bill Moyers (PBS): Conversation with Simon Johnson and Michael Perino
“Bill Moyers speaks with economist Simon Johnson and Ferdinand Pecora biographer and legal scholar Michael Perino. Johnson is a former chief economist of the International Monetary Fund (IMF) and a professor at MIT Sloan School of Management, and Perino is a professor of law at St. John’s University and has been an advisor to the Securities and Exchange Commission.”

Source: Bill Moyers Journal, PBS, April 24, 2009.

CNBC: Financial crisis still has long way to go
“Hold on to your horses as the global financial crisis still has a long way to go, says Jim Walker, founder & CEO at Asianomics. He tells CNBC’s Martin Soong that we are probably in the horizontal part of a L-shaped recession.”

Source: CNBC, April 29, 2009.

Fox Business: Forbes - recovery hinges on credit market

Source: Fox Business, April 27, 2009.

CNBC: Christopher Whalen on financial fallout from stress tests
“What the stress test results will mean for financials going forward, with Paul Miller, FBR Capital Markets, and Christopher Whalen, Institutional Risk Analytics.”

Source: CNBC, April 27, 2009.

The Wall Street Journal: Can America handle the truth?
“Evan Newmark and Dennis Berman discuss whether Americans can swallow ‘the truth’, especially in relation to the results of the bank-stress tests.”

Source: The Wall Street Journal, April 28, 2008.

Credit Suisse: Joseph Stiglitz calls for US bank nationalization
“Leading economist and Nobel Laureate Joseph Stiglitz advocated the nationalization of troubled US banks and raised concerns about the American government’s efforts to stimulate the economy, in the keynote economic session at the Credit Suisse Asian Investment Conference.

“Addressing a record crowd of delegates, Stiglitz said the current global downturn had been worse than he had expected. ‘The one ray of optimism in this really dark cloud is that China and India look like they’re going to continue to grow, although somewhat slower than they have been growing,’ he said.

“Stiglitz said the US will play a critical role in the recovery of the world economy, and that the key issues would be consumption growth - which until now had been led by ‘unbridled borrowing - and the restructuring of the financial institutions. ‘(Americans were told) if you don’t have income, don’t let it bother you, keep spending, and we lent them money and they kept borrowing and the debts grew,’ he said.”

Source: Credit Suisse, April 17, 2009.

The Wall Street Journal: Was John Thain a scapegoat?
“In an interview with WSJ’s Susanne Craig, former Merrill Lynch Chief Executive John Thain told her he was unfairly scapegoated for the growing problems of Bank of America.”

Source: The Wall Street Journal, April 27, 2009.

CNBC: GM’s third restructuring plan
“General Motors CEO Fritz Henderson discusses the automaker’s third restructuring plan since December, with CNBC’s Phil Lebeau.”

Source: CNBC, April 27, 2009.

Financial Times: Wilbur Ross on Detroit and the economy
“Wilbur Ross, chief executive and chairman of WL Ross & Co, talks to Chrystia Freeland, FT’s US managing editor, about the possible bankruptcy of GM, the fate of the auto suppliers and the future ownership structure of GM. He also discusses the treatment of bank bondholders, the US government’s handling of the economic crisis and the prospects for recovery this year.”

Source: Financial Times, April 30, 2009.

Bloomberg: Faber says GM’s debt offering right way to restructuring
“Marc Faber, publisher of the Gloom, Boom and Doom report, talks about General Motors Corp’s offer to exchange $27 billion of bondholder claims for equity. Faber also discusses the Federal Reserve’s money printing efforts to fight economic crises.”

Source: Bloomberg, April 27, 2009.

CNBC: Global meeting of the minds
“Insight on the world leaders convening in Washington over the weekend for the G-7 meeting, with Dominique Strauss-Khan, IMF managing director, and John Sununu, former senator (R-NH).”

Source: CNBC, April 27, 2009.

Charlie Rose: A conversation about the economy
“A conversation about the economy with Bill Ackman, major investor and hedge fund manager of Pershing Square Capital Management LP, Kate Kelly of The Wall Street Journal, Andrew Ross Sorkin of The New York Times and Joseph Stiglitz, economist and a member of Columbia University faculty.”

Source: Charlie Rose, April 24, 2009.

Paul Kasriel (Northern Trust): Coming out of the downturn
“Paul Kasriel, Northern Trust’s Chief Economist, discusses the current economic climate and the potential impact on market consumption during any recovery.”

Source: Paul Kasriel, Northern Trust, April 30, 2009.

Fox Business: Galbraith - economic strings attached?
“Professor James Galbraith on his concerns about the economic turnaround. He makes four essential points about the expansion yet to come.”

Source: Fox Business, April 29, 2009.

Bloomberg: Volcker - economy leveling off, stimulus not needed
“Former Federal Reserve Chairman Paul Volcker talks with Judy Woodruff about the outlook for the US economy.”

Source: Bloomberg (via YouTube), April 29, 2009.

CNBC: Bair Speaks
“CNBC’s Trish Regan talks about banks and the economy with FDIC Chair Sheila Bair.”

Source: CNBC, April 28, 2009.

CBS: Shrinking necessities
“A new study finds that Americans are downsizing their list of things considered essential. Charles Osgood reports.”

Source: CBS, April 27, 2009.

Barron’s: Big money poll - the long view
“After the worst stretch for stocks in decades, America’s money managers say they’re bullish. But do they really believe it? Based on the results of our latest Big Money poll, the pros are hoping for the best, but … hold on! Aren’t those fresh bear tracks in the mud?

Click here for the article.

Source: Jack Willoughby, Barron’s, April 27, 2009.

Financial Times: Have markets hit bottom?
“Have markets reached a bottom? How the market participants affect the direction of stock markets? Michael Mauboussin, an expert in the wisdom of crowds theories, talks to John Authers about market timing and understanding how different players change sentiment.”

Source: Financial Times, April 28, 2009.

Money Control: Mark Mobius - emerging markets on cusp of next big bull run

Click here for the article.

Source: Money Control, April 27, 2009.

John Authers (Financial Times): Deflating the earnings bubble
“The bad news is that shares are predicting a 50% fall in non-financial companies’ earnings. The good news is that this is already priced in.”

Click here for the article.

Source: John Authers, Financial Times, April 27, 2009.

CNBC: Hugh Hendry - downturn still underway
“The recent rise in stocks and talk about green shoots in the markets are optimistic assumptions, as the world downturn ‘still has a way to run’, Hugh Hendry, CIO at Eclectica, told CNBC.”

Source: CNBC, April 28, 2009.

CNBC: Charts - Asia signals new bull market
“While western stock indexes struggle to rally in an overall bear market, their emerging counterparts are set to enjoy the real thing, Robin Griffiths, technical strategist at Cazenove Capital, told CNBC.”

Source: CNBC, April 27, 2009.

John Authers (Financial Times): Obama’s first 100 days
John Authers puts Obama’s first 100 days into context, looking at equity markets, volatility and overall economic sentiment.”

Click here for the article.

Source: John Authers, Financial Times, April 28, 2009.

YouTube: Obama budget cuts visualization
“How much is the $100 million dollars in budget cuts compared to the federal budget as a whole? This video imagines the budget as $100 in pennies to provide the answer.”

Source: YouTube, April 24, 2009.

Tags: Bill Ackman, Broadway Revival, Christopher Whalen, Deadly Outbreak, Economic Recession, Emerging Markets, ETF, Flu Cases, India, James Galbraith, Jim Rogers, Joseph Stiglitz, Marc Faber, Mark Mobius, Paul Kasriel, Paul Volcker, Robin Griffiths, Sheila Bair, Steve Forbes, Swine Flu, Us Treasury Yields, Walt Handelsman, West Side Story
Posted in Bonds, Commodities, Credit Markets, Emerging Markets, Gold, India, Markets | No Comments »

A Postcard from Mexico - Mark Mobius

Thursday, April 9th, 2009

This is is a guest contribution by Mark Mobius, Executive Chairman, Franklin Templeton.

Whenever we visit Mexico, we always stop at Monterrey because so many major Mexican firms are headquartered there.

Monterrey is located in the north of Mexico, in the state of Nuevo Leon bordering the US. Since the city lies at the foothills of the Sierra Madre Oriental mountain range, there are spectacular mountain views each direction. As you get out of the city there are canyons, trails and roads crossing deserts as well as forests. Bisecting the city is the Santa Catarina River, which is really a dry riverbed most of the year on the surface but with flowing underground water.

Industrialisation was accelerated in the mid 19th century with the construction of the Fundidora de Fierro y Acero de Monterrey, a steel-producing company that accelerated the already fast industrialisation of the city and became one of the world’s biggest at that time. Mexico’s steel industry still is centered in Monterrey. There are thousands of manufacturing companies in and around the city including many transnational conglomerates. The greater Monterrey city has a population of over three million and is one of the most industrialised parts of the country. The city accounts for about 95% of the Nuevo Leon state population.

ECONOMY

As with the US, Mexico has been hit with deteriorating confidence and tighter credit with banks hunkering down for any unexpected problems. One very dramatic indicator of the slowdown was the 50% year-on-year decline in auto production in January. A higher price of oil is good for the Mexican government since a substantial portion of government income comes from Pemex, the oil monopoly. In 2008, when oil prices were high, the government had a revenue windfall of US$22 billion. Some of that will be used to stimulate the economy and some for stabilisation funds and pension restructuring. The government announced a fiscal package to stimulate the economy in January and included 25 measures to support low-income families by reducing the operation cost of small and medium-size businesses and lowering or freezing the utility rate, expanding credit availability, extending unemployment benefits and increasing infrastructure spending.

CURRENCY

The weak peso means that visiting Mexico is now cheaper than before. Some experts believe that the peso is too weak and should strengthen but others have said that it will weaken to the MXN 15/US$ range by the end of the year. The Central Bank, Banxico, has used over a billion dollars to intervene in the foreign exchange market. but they still have about US$83 billion in international reserves. Remittances from Mexican workers abroad, particularly in the US, are falling, and might even fall by 15% to 20% this year but the amount is still huge at US$25 billion in 2008. One big problem is narcotics crime, which seems to be growing and causing confidence in the government to be eroded.

Mark Mobius

MEXICAN BANKING

Mexico’s population of 107 million is young, with 45% below the age of 19. But the population is getting older and the median age is expected to increase from 25 to 31 by 2020, so a more economically active population will develop. The population is currently under-banked. Credit to the private sector as a percent of GDP is only 14% in Mexico while it is about 70% in Chile. Foreign-owned banks dominate with BBVA and Santander of Spain.

Banamex is owned by Citibank of the US, Scotiabank and HSBC of the UK together control over 87% of all deposits, while locally-owned Banorte has the remaining 13%.

COMPANY VISITS

A major provider of wireless communications in Latin America:

A strong growth in subscribers was experienced in the fourth quarter of 2008. This effectively contributed to market share gains at the expense of operating margins. Management thesis remained the same: this was a phase to grow the client base, which would eventually contribute to incremental usage of both voice and data, expanding Average Revenue Per User (ARPU). The management believes that mobile penetration in the region will not be as significantly impacted as usage. The current 80% penetration should expand to 90% by 2010. The company expanded its subscriber base by 10.1 million in the fourth quarter of 2008, making it the best quarter ever, highlighting remarkable performances in Colombia, Brazil and Ecuador. In 2008, the company added 29.3 million subscribers, 2.3% more than a year before, totalling 182.7 million wireless subscribers and 3.8 million fixed lines, for a total of 186.6 million lines.

Mexico’s leading manufacturer and marketer of tissue products:

Management was optimistic that sale volumes could be maintained in 2009. An anticipated growth of 2%-3%, even with the economy shrinking 2%, was expected. Although raw material prices have come down, the devaluation of the Mexican peso against the US dollar absorbed those gains. Capacity utilisation rate is currently 93%. They increased prices for household goods by 8% in March and prices for infant products by 6% in April. They are analysing a project to generate their own energy with natural gas. The facility will also produce steam, which they can use in their bathroom tissue production. This makes the electricity generation much more efficient for them, potential savings total 15% of their electricity costs. A high and sustainable dividend yield, solid balance sheet, strong cash generation, conservative management, defensive nature and excellent profitability led us to maintain a positive view on the company.

Premier media group in Latin America:

The company has been diversifying into other segments in the media industry but still strongly relies on the TV broadcasting business unit, which comprises 50% of the group’s revenues. In this regard, the upfront sales season was lethargic since most corporate clients remained cautious about the short-term economic outlook, given the sluggish economic performance in Mexico and the US. The management expects its revenues to be more resilient than those of US companies due to the different nature of its client base. The company generates US$500 million in revenues on the back of its Pay TV, programming exports and publishing distribution in the US and Latin America. On the other hand, the company faces approximately US$700 million in US dollar-denominated costs, which leaves the company reasonably hedged, operationally.

The gaming segment has two businesses: lottery machines and the bingo parlours. The lottery machines have faced some problems as a result of the very strong competition from the government, which has 8,000 terminals versus the 5,000 terminals installed by the group. Business needs to triple before it can be profitable, and as a result, the company is now evaluating if they should continue with the lottery business. On the other hand, the bingo parlour is doing well. They have opened 13 branches in 2007 and should have ended 2008 with 19 centres. The company plans to open 8 to 10 centres annually until it reaches the 65 granted by the license. In 2009, sales are estimated to reach 1,500 million Mexican peso. The venture in Spain is doing extremely well in terms of market share on the back of exclusive content such as the broadcasting of football matches or F1 racing events. In revenue terms, however, improvements are needed.

OUTLOOK

Slowing growth and recession concerns has had an impact on stock markets globally. Mexico is no exception, especially due to its trade relations with the US economy. We are, however, satisfied with the developments we witnessed in Mexico and expect the companies there to recover once investor confidence returns and the macroeconomic situation improves.

Dr. Mark Mobius

Executive Chairman, Templeton Asset Management

Source: Citywire.co.uk

Tags: Auto Production, Dry Riverbed, Executive Chairman, Fiscal Package, Franklin Templeton, Government Income, Income Comes From, Industrialisation, Mark Mobius, Monterrey City, Nuevo Leon State, Oil Monopoly, Producing Company, Santa Catarina, Sierra Madre Oriental, Sierra Madre Oriental Mountain Range, Spectacular Mountain Views, State Population, Time Mexico, Unexpected Problems
Posted in Credit Markets, Markets | No Comments »

Mark Mobius: Riding the Chinese Ox

Tuesday, March 24th, 2009

Further to my recent articles on China (”China - better days ahead” and “China - rising to the occasion“), a few comments from Mark Mobius, executive chairman of Templeton Asset Management, have just arrived.

“On February 4, China and Chinese all over the world celebrated the entry into the Year of the Ox. We would prefer to call it the Year of the Bull because we believe that 2009 will be the year that the emerging stock markets should witness a substantial recovery and China should lead the way to that recovery.

“The investment prospects and long-term outlook for China are excellent for a number of reasons: (1) the Chinese leadership is intelligent, resourceful and enlightened, with an interest in maintaining growth with a better standard of living for all Chinese, (2) that leadership has the organizational skills and policies capable of ensuring that China continues to achieve the highest GDP growth of any major country in the world, (3) China has the financial resources to undertake this gargantuan task with the world’s largest store of foreign reserves and (4) China has one of the healthiest banking systems in the world and most individuals have little borrowings.

“Undoubtedly, China will not be able to achieve the double-digit growth of 2008 but it can certainly achieve high single-digit growth. In order to maintain growth, the government is undertaking a number of massive stimulation programs targeted at the domestic market, which is designed to replace export-led growth by the domestic market-led growth. The key driver therefore will be domestic consumption. The government is also taking measures to boost consumer spending by tax cuts and consumption coupons. Therefore, any sector related to domestic consumption will be favorable. China’s economic growth is expected to be driven predominantly by fiscal stimulus and monetary easing.

“Since September 15, 2008, the People’s Bank of China has cut lending interest rates by 216 basis points (2.16%) with additional cuts expected. In order to stimulate bank lending, the reserve requirement ratio for banks was lowered four times and loan quotas, which were designed in 2008 to restrain banks from lending, will probably be unofficially abandoned.

“Inflation eased to its lowest level in more than two years, with consumer prices increasing 1.0% y-o-y in January. With strong declines in inflation, policy makers in China have become more confident and have been cutting interest rates aggressively. One of the constraints to inflation has been the crunch in trade financing, which became a global problem, but as a result of new support from Beijing this problem seems to have eased.

“The Chinese currency, the renminbi, is currently undervalued on a price parity basis. There is thus pressure for it to strengthen against the US$. However, the Chinese are concerned about further erosion of export businesses and thus are proceeding cautiously regarding any further appreciation. Structurally, this would be a good opportunity for China to introduce further reforms on the opening of its capital account and currency convertibility. With the renminbi taking a bigger role in the international market, it could become another reserve currency after the US$ and euro.

“In November 2008, the government announced a stimulus package and should be able to spend up to RMB4 trillion (or US$586 billion) in new investment programs. The package is scheduled to be spent before the end of 2010 in ten key areas, including transport infrastructure, rural electricity and gas facilities, low-rent housing, agricultural subsidies and minimum income support.

“There are also other supplementary programs geared towards promoting incomes and consumption. Funding is certainly not a problem for the Chinese government as the government is in fiscal surplus and has the largest fiscal reserves, currently at US$1.95 trillion, in the world. Moreover, given the high savings rate and low loan-to-deposit ratio with the banking system, there is ample room for the government to raise debt.

[PduP: The Chinese FTSE Xinhua Bank Index has certainly been the best-performing banking sector of any country over the past few months as seen from its performance versus the S&P 500 Financial Index, although US financials have started making amends over the past two weeks.]

Source: Fullermoney

“There are now signs of recovery in the China economy with the government’s infrastructure projects beginning to have an impact and as the Purchasing Managers new orders index rebounds. The December PMI rebounded to 41.2, 2.4 percentage points higher than the previous month, which represents the first meaningful rebound since March 2008.

“The current 2009 GDP growth forecast for China is 7.4%. The fiscal stimulus and interest rate cuts are expected to have a continuous positive impact. Of particular interest is the rise in orders for infrastructure-related material and machinery orders. This reflects the effects of the government’s fiscal stimulus measures. There are indications that the slowdown in China’s industrial production growth is showing signs of recovery with new orders, input prices and even new export orders recovering from their lows. Moreover, stocks of major inputs and finished goods are stabilizing.

“There are, of course, risks in Chinese investing. Currently unemployment is on the rise and labor activism is increasing. Therefore there are risks of disruptions, which could impact stock prices. While the official unemployment rate was just 4%, it is believed the actual number could be as high as 10%, with most unemployed being migrant workers in the coastal areas and new college graduates. Compared to the last down-cycle, the government now has greater fiscal strength to handle the situation. Farm ownership reform and wider social security coverage will help ease the impact on social stability.

[PduP: The risks are plentiful as pointed out in this report by George Friedman of Stratfor. However, the authorities are mindful of the declining world trade and are using their enormous firepower to counter the reduced exports.]

“The benefits, however, far outweigh the risks of investing in China and as the fastest growing major country in the world with the largest population, clearly China must be an investment destination for any intelligent investor.”

[PduP: In conclusion, an updated chart of the Chinese Shanghai Composite Index that seems to be mapping out a rather bullish pattern notwithstanding concerns about the command economy’s ability to successfully compensate for reduced global trade with domestic demand. Some may argue that the stock market is being manipulated, but such action, if true, can at most be a temporary phenomenon. Charts seldom lie over the longer term and with the Index above the 40-week (200-day) moving average and the rate of change (ROC) indicator (black line in the bottom section) on the weekly chart above zero, depicting a positive trend, the Chinese Ox (or should I say bull) appears to be in control.]

Source: Stockcharts.com

Source: Mark Mobius, Templeton Asset Management, February 2009.

Tags: Articles On China, Bank Of China, Banking Systems, China China, Chinese Leadership, Domestic Consumption, Double Digit Growth, Emerging Stock Markets, Executive Chairman, Fiscal Stimulus, Gargantuan Task, GDP Growth, Investment Prospects, Mark Mobius, Rising To The Occasion, S Largest Store, Substantial Recovery, Templeton Asset Management, Year Of The Bull, Year Of The Ox
Posted in Economy, Emerging Markets, Markets, Outlook | No Comments »

Video-Rama: Will Markets Bail You Out in ‘09?

Saturday, December 27th, 2008

Only four more trading sessions remain before we close the door on 2008 – and none too soon, many investors would say. But moving from ’08 to ’09 will unfortunately not dim the lights on the nature of the investment debate. Come Thursday next week, investors will not only be hung over from 2008’s market rout (and possibly the previous night’s festivities), but also still be grappling with the ramifications of the credit crisis for the global economy and financial markets, and in particular with the question of where to invest during 2009.

And this seems to be the theme of the video clips that have attracted my attention during the past few days (between Yule-tide activities), making up this “Video-o-rama” compilation.

The selection includes items varying from Scott Pettersen lamenting “Where’s MY bailout?” (first one up) to the three versions of “Hallelujah” currently on the singles charts (at the end of compilation). But it is not all about song – the likes of Donald Coxe, Marc Faber, Mohamed El-Erian, Gary Schilling, Paul Krugman, Mark Mobius and Byron Wien give us substantial food for thought as we wave the old year goodbye.

YouTube: Where’s MY bailout?

Source: Scott Pettersen, YouTube, December 22, 2008.

BNN: Conversation with BMO’s strategist Don Coxe

Source: BNN, December 23, 2008.

CNBC: Dr Doom – find value in first half “disaster”

Click here for the article.

Source: CNBC, December 23, 2008.

CNBC: Pimco’s El-Erian – back to basics for investors in 2009

Click here for the article.

Source: CNBC, December 22, 2008.

Barron’s: Have we seen the worst of this bear market?
“Have we seen the worst of this bear market? Top strategists and chief investment officers comment on whether the market has hit bottom yet.”

Source: Barron’s, December 20, 2008.

Bloomberg: Mark Mobius sees “beginning of next bull phase” in 2009
“Mark Mobius, executive chairman of Templeton Asset Management, talks with Bloomberg’s Francine Lacqua about the outlook for emerging markets in 2009.”

Source: Bloomberg (via Blinkx.com), December 19, 2008.

Tech Ticker: Get ready to scrimp and save, says economist Shilling
“Hoping for a quick return to the consumer spending habits of past quarter-century, when ‘financial discipline’ meant remembering to withdraw enough home equity to get a new SUV every two years? Forget about it, says Gary Shilling.”

Source: Henry Blodget, Tech Ticker, December 19, 2008.

Big Think: Paul Krugman on the return of depression economics
First of a multi-part conversation with Paul Krugman, Nobel Prize winner, author, economist, and Princeton professor, who is probably best known for his op-ed columns in the New York Times.

Source: Big Think, December 17, 2008.

Bloomberg: Fischer says worst of “real” recession “yet to come”
“Bank of Israel Governor Stanley Fischer talks with Bloomberg in Tel Aviv about the recession in the US and the response of the Federal Reserve. Fischer, 65, former first deputy managing director of the International Monetary Fund, also talks about the outlook for the Israeli economy and the IMF’s role in resolving the global financial crisis.”

Source: Bloomberg (via YouTube), December 21, 2008.

Marketplace: Quantitative easing
“Now the Federal Reserve has effectively cut the target lending rate to zero, it only has one more weapon in its arsenal. Quantitative easing. Senior editor Paddy Hirsch explains what this ‘nuclear option’ is, and what the Fed hopes it’ll do.”

Source: Marketplace, December 2008.

CNBC: Byron Wien – falling oil prices
“Thoughts on energy prices, with Byron Wien, Pequot Capital chief investment strategist.”

Source: CNBC, December 23, 2008.

Reuters: “Hallelujah” tops Christmas chart
“The top two spots in the Christmas singles chart were taken by covers of Leonard Cohen’s 1984 song ‘Hallelujah’, with ‘X Factor’ talent show winner Alexandra Burke’s new version beating Jeff Buckley’s 1994 cover on Sunday.

“Burke won this year’s series of the pop talent show that is one of ITV’s biggest ratings successes, and she is the fourth successive ‘X Factor’ winner to take the Christmas singles title.

“Cohen’s original version of ‘Hallelujah’ entered the chart at number 36, while the success of Buckley’s version was partly due to a campaign on social networking website Facebook among music fans upset at what they saw as the manufactured nature of Burke’s career.

“Buckley drowned in 1997, and achieved only modest sales though significant critical acclaim during his lifetime.”

First up is Jeff Buckley.

Next, Alexandra Burke.

Lastly, Leonard Cohen:

Source: David Milliken, Reuters, December 21, 2008.

Tags: Article Source, Bull Phase, Chief Investment Officers, Cnbc, Credit Crisis, Dim The Lights, Don Coxe, Donald Coxe, Dr Doom, Gary Schilling, Marc Faber, Mark Mobius, Mohamed El Erian, O Rama, Paul Krugman, Singles Charts, Substantial Food, Templeton Asset Management, Trading Sessions, Youtube
Posted in Credit Markets, Economy, Emerging Markets, Markets, Oil and Gas, Outlook | 1 Comment »

Words from the (investment) wise for the week that was (November 24 – 30, 2008)

Sunday, November 30th, 2008

We are very pleased to welcome Dr. Prieur du Plessis as an editorial contributor to GreenLightAdvisor.com. Prieur du Plessis has 25 years’ of global experience in professional investment research and portfolio management. More than 1,000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He has also published a book, Financial Basics: Investment. He also authors a well read blog Investment Postcards from Capetown.

Prieur is chief executive and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and other African countries.

Plexus is the South African partner of John Mauldin, author of the Thoughts from the Frontline e-letter, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index methodology in the Pan-African area.

The holiday-shortened Thanksgiving week brought investors an additional item to be thankful for when stock markets closed higher for five consecutive trading days - a rare winning streak last accomplished in July 2007. The S&P 500 Index gained 19.1% since the start of the rally on November 21 and 12.0% on the week, registering the largest weekly gain since 1974.

Source: Daryl Cagle

Worrisome economic reports were cast aside by equity bulls, arguing that the bad news had already been priced in. However, US Treasury Note yields were less sanguine and fell to its lowest level on record, pointing to deflation concerns and suggesting that investors remained skeptical about the government’s latest moves to help revive the ailing economy. Importantly, US three-month Treasury Bills were trading at a minuscule 0.03%, indicating that liquidity was still being hoarded.

President-elect Obama stressed the need for quick action to expedite an economic recovery and introduced his administration’s economic team, including former Federal Reserve Chairman Paul Volcker as head of a new White House Economic Recovery Advisory Board tasked to revive growth in the US. Involving the 81-year Volcker in this way is a smart move by Obama.

A catalyst for last week’s stock market recovery was the announcement on Monday of the US government’s rescue plan for Citigroup (C), including a direct $20 billion investment and $306 billion in asset guarantees.

With credit markets still not thawing after the introduction of various central bank liquidity facilities and capital injections, the Fed on Tuesday unveiled further steps aimed at lowering borrowing costs for consumers and home buyers. The Fed will buy $100 billion of debt from Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Home Loan Banks, and also purchase up to $500 billion of mortgage paper backed by the agencies. The Fed will furthermore lend $200 million to holders of key asset-backed securities regarding small business and consumer (auto, student, credit card) loans.

Source: The New York Times, November 25, 2008.

Commenting on the US government’s bailout actions and quoting from the Jerusalem Post, Bill King said: “There is one last thing that Hank, Ben and Geithner can do: ‘The country’s chief rabbis are calling for a mass prayer rally on Thursday in the hope that heavenly intervention will stem the global financial crisis.’”

Next, a tag cloud of the text of the dozens of articles I have devoured over the past week. This is a way of visualizing word frequencies at a glance. The usual suspects feature prominently, with “gold” attracting increasing attention.

Has the stock market reached a secular low or is it just bouncing off oversold levels? According to Fox Business Network, legendary investor Jim Rogers said: “We’re ready for a rally. I mean, the market in October and earlier this month has had a huge selling climax. I covered a lot of my shorts. Who knows if I’m right or not. But I expect the market to rally for some time. It may rally into next year. But … this is a false rally. It’s not going to be great. It’s not the end of the problems in America and it’s not the end of the bear market.”

A positive for the bulls is that the period post Thanksgiving through the end of the year has usually been a strong time for stocks. According to Jeffrey Hirsch (Stock Trader’s Almanac), “December is normally a banner month for stocks, ranking second [on the monthly calendar] for the Dow and S&P 500 and third for the Nasdaq.”

Should the bullish seasonal tendencies hold true on this occasion, possible first targets are the November 4 highs of 9,625 for the Dow (current level 8,829) and 1,006 for the S&P 500 (current level 896). This will also result in both indices clearing their 50-day moving averages.

“There is no doubt that time is needed for volatility to settle down before many will have the confidence to return to investing, but if one looks beyond the end of the year, 2009 will almost certainly be a better year for investors than 2008,” said David Fuller (Fullermoney) from London.

Although there is not yet conclusive evidence that we are leaving the corpse of the bear behind (especially with Q4 earnings disasters looming in January), it would appear that the nascent rally could have more steam left. (Also read my recent posts “Is the tide turning for stocks” and “Does the stock market rally have legs?“)

I am about to hit the road again - traveling to New York City - and blog posts will therefore take a back seat for the next week as I explore the Big Apple and meet with friends, blog readers and business associates in the cold weather and depressed economic climate.

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.

Economy “Global business sentiment is as dark as it has ever been, although the free fall in confidence may be over,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Pessimism is pervasive across the entire globe, with the only distinction being that Asian businesses are somewhat less nervous than elsewhere. Pricing pressures are falling rapidly, although they are not yet consistent with outright deflation.” The global economy is suffering a severe recession according to the results of the business confidence survey.

Economic indicators released in the US during the past week all pointed to a deepening recession. According to Briefing.com, Q3 GDP was revised down to -0.5% from -0.3%, durable orders slumped by 6.2%, existing home sales fell by 3.1%, new home sales dropped by 5.3%, personal spending declined by 1.0%, and weekly initial claims, while improved from the prior week, continued to register a reading above 500,000.

The Chicago Purchasing Managers Index came in at 33.8, the weakest number since the serious recession of 1982. “The national number due next Monday will be just as ugly, as durable goods were down far more than expected, by a negative 6.2%,” added John Mauldin (Thoughts from the Frontline).

Commenting on the outlook for interest rates, Asha Bangalore (Northern Trust) said: “Going forward, real GDP is expected to show a decline that is upward of 4.0% in the fourth quarter of 2008. The Fed is widely expected to lower the Federal funds rate to 0.5% on December 16.” However, the Fed’s quantitative easing approach to monetary policy now seems to be targeting the quantity of money rather than its price.

Elsewhere in the world, the People’s Bank of China (PBoC) slashed its benchmark interest rates by 108 basis points and also lowered the reserve requirement for banks. This move indicates that China will be joining the rest of the world in a marked economic slowdown.

For the upcoming week, the European Central Bank and the Bank of England are expected to reduce interest rates by 50 and 75 basis points respectively in the light of a deteriorating economic outlook.

Week’s economic reports Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

The Week's Numbers

Source: Yahoo Finance, November 28, 2008.

In addition to the Fed releasing its Beige Book (Wednesday) and interest rate decisions by the European Central Bank and the Bank of England (Thursday), next week’s US economic highlights, courtesy of Northern Trust, include the following:

1. ISM Manufacturing Survey (December 1): The consensus for the manufacturing ISM composite index is 38.4 versus 38.9 in October.

2. Employment Situation (December 5): Payroll employment in November is predicted to have dropped by 300,000 after 240,000 jobs were lost in October. The unemployment rate is expected to move up two notches to 6.7%. Consensus: Payrolls: -300,000 versus -240,000 in October, unemployment rate: 6.7% versus 6.5% in October.

3. Other reports: Construction spending (December 1), auto sales (December 2), ISM non-manufacturing, productivity and costs (December 3), and factory orders (December 4).

Markets The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, November 28, 2008.

Equities Global stock markets surged during the past week on the back of a combination of bargain hunting and short covering, albeit on light trading volume as a result of the Thanksgiving holiday in the US.

Both mature and emerging markets shared handsomely in the rally that commenced on November 21, as shown by the subsequent gains of the MSCI World Index (+15.7%) and the MSCI Emerging Markets Index (+13.5%). Notwithstanding the improvement, these indices are still down by 43.8% and 57.7% respectively for the year to date.

Click here or on the thumbnail below for a (delightfully green) market map, obtained from Finviz, providing a quick overview of last week’s performances of global stock markets (as reflected by the movements of ADR stocks).

The US stock markets all rallied sharply over the week as shown by the major index movements: Dow Jones Industrial Index +9.7 (YTD -33.5%), S&P 500 Index +12.0% (YTD -39.0%), Nasdaq Composite Index +10.9% (YTD ‑42.1%) and Russell 2000 Index +16.4% (YTD -38.2%).

The bar chart below, also from Finviz.com, shows the US sector performances over the week, and specifically how strongly financials and materials have recovered.

As far as industry groups are concerned, the automobile manufacturing group (+82%) was the top performer for the week. General Motors Corp (GM) and Ford Motor (F) rose by 71% and 88% respectively on the expectation that auto makers will receive a government bailout.

The homebuilding group (+59%) was the second-best performer on the prospect that the US government’s latest rescue package will result in lower mortgage rates and mortgage credit becoming more readily available.

Seven of the ten underperforming groups were from the three top-performing sectors for the year to date - consumer staples, health care and utilities. These sectors, which typically outperform in a declining market, tend to lag in a rising market such as the one experienced last week.

Interestingly, the percentage of S&P 500 stocks trading above their 50-day moving averages has increased from almost zero in October to 19% on Friday - a promising improvement.

I often get asked by readers about Richard Russell’s (Dow Theory Letters) latest views. This is what the old-timer said on Friday: “The big question now is whether the tide is in the early process of turning bullish. If so, we should be seeing a series of constructive, even bullish days. … I wonder whether my more aggressive subscribers shouldn’t jump the gun and maybe buy the Diamonds (DIA) at the opening on Monday.”

Fixed-interest instruments The ten-year US Treasury Note yield declined to its lowest level since records began in 1958, closing 25 basis points lower on the week at 2.93% after falling as low as 2.82% earlier on Friday.

In addition to economic and deflation worries, Treasuries also benefited from lower mortgage rates as a result of the Fed’s decision to buy GSE-insured mortgage paper. The 30-year fixed mortgage rate dropped by 25 basis points to 5.84%.

“The lower mortgage rates threaten to trigger a wave of mortgage refinancing, the prospect of which has pushed investors to hedge that risk by buying ten-year Treasury debt, a benchmark for mortgage rates,” reported the Financial Times“.

The UK ten-year Gilt yield dropped by 9 basis points to 3.78% and the German ten-year Bund yield fell by 12 basis points to 3.26%. Emerging-market bonds also performed well, with the JPMorgan EMBI Global Index gaining 5.1% during the week.

Although some progress has been made as a result of central banks’ liquidity facilities and capital injections, the credit markets are not yet thawing (see my “Credit Crisis Watch” of November 28). The TED and LIBOR-OIS spreads have tightened since the panic levels of October 10, whereas the CDX and iTraxx indices have also shown some improvement over the past few days. However, US Treasury Bills and high-yield spreads are still at crisis levels.

Currencies Most currencies rebounded against the US dollar during the past week as the greenback came under pressure as a result the Fed’s new measures to unclog the credit markets.

Over the week the US dollar lost ground against the euro (-0.8%), the British pound (-3.1%), the Swiss franc (-0.8%), the Japanese yen (-0.3%), the Canadian dollar (-2.4%), the Australian dollar (-3.7%) and the New Zealand dollar (-4.3).

The US currency also fell against emerging-market currencies such as the Brazilian real (‑7.7%), the Turkish lira (-6.0%) and the South African rand (-4.1%).

Interestingly, the Chinese renminbi (+6.9%) is the only major emerging-market currency that has appreciated against the US dollar over the year to date.

Commodities The Reuters/Jeffries CRB Index (+4.7%) closed higher by the end of the week - only its fifth positive week since commodities peaked early in July. Arguing against a more lasting reversal of fortune for commodities, the Baltic Dry Index - a benchmark for shipping major raw materials, including coal, iron ore and grain, and generally an excellent barometer of economic activity - declined by 14.5% to its lowest level since 1987.

The graph below shows the movements of various commodities over the past week, indicating an improvement across the whole complex as a weak US dollar pushed prices higher.

Gold bullion (+3.4%) remained in favor with investors as a result of a solid supply/demand situation, store-of-value considerations and a positive-looking chart (see below). A research report from Citigroup, as reported by the Telegraph, said gold could rise above $2,000 within two years. Platinum (+6.9%) and silver (+7.6%) - massive underperformers since March - were also in demand last week.

In the aftermath of Thanksgiving, may I remind you of the following old stock market adage: “The bears have Thanksgiving and the bulls have Christmas.” Let’s hope for an early Christmas! Meanwhile, the news items and words from the investment wise below will hopefully assist in steering our portfolios on a profitable course.

That’s the way it looks from Cape Town.

Hat tip: Mish (via Live Leak)

Big Think: Beyond the crisis - conversation with Larry Summers, George Soros and Robert Merton

Source: Big Think, November 2008.

PBS News Hour: Taleb, the risk maverick “Interview with Nassim Nicholas Taleb, famous economist and author of ‚The Black Swan’ and Dr. Mandelbrot, professor of Mathematics. Both say that the present economy is more serious than the Great Depression, and the economy during the American Revolution.”

Source: PBS News Hour (via YouTube), October 22, 2008.

IDD magazine: John Bogle - great expectations “John Bogle founded the Vanguard Mutual Fund Group in 1974. He served as its chairman and chief executive until 1996 and remained on as senior chairman until 2000.

“Recently, he wrote ‘Enough: True Measures of Money, Business and Life’, which was published by John Wylie & Sons.

“To call it a business book - a how-to or memoir - would be too simplistic. In fact, it is far from the typical business book because it offers some interesting life lessons on dealing with people, especially clients and customers.

“Bogle spoke with IDD last week, offering his thoughts on long-term investing and how it may come back - as opposed to rapid-fire maneuvers in and out of a company’s shares - and his thoughts on PE fund managers as well as hedge funds. Not surprisingly, they are not positive.

“As Bogle sees it ‘we have made Wall Street too much of a casino. It is totally dominated by speculation … we are engaged in an orgy of speculation the likes of which has never been seen in the history of this country.’

“His rule of thumb for investors: your bond position should equal your age. ‘I’m about 80% bonds. I started 65% about 15 years ago,’ says Bogle.

“Following are excerpts from the interview:

“IDD: How do you think the credit crisis will play out?

“BOGLE: The market can’t bail itself out of this mess. Wall Street has a lot to answer for to Main Street and yet Main Street, which is really where the tax base is, is going to have to bail out Wall Street for Wall Street’s errors. And that is, of course, a tragedy - an economic tragedy. But I am persuaded because I respect people like Larry Summers, I certainly respect Ben Bernanke. I am not so sure about Hank Paulson. I suppose I respect him in a way, but his issue is that he is an investment banker. So it should come as no surprise to anybody that he looks at these things from an investment banker’s perspective. How else can he look at them? It [the bailout] has to happen. I think it is too bad it has to happen, but I think we ought to get ready for building a better financial system, which means building a smaller financial system because what is going on Wall Street is a casino and our croupier has raked too much off of the table before we get paid.

“IDD: When you say our financial system gets smaller, what do you mean by that?

“BOGLE: Revenues will be less for a whole bunch of reasons. First, they are never going to be allowed - with the government being part owners of them - to have 35-to-1 leverage. Number two, we’re going to have better disclosure about what is on that balance sheet. When you think about it, if you are leveraged 35 to 1 and all your assets are Treasury bills I don’t see that as much of a problem. The problem is that none of them are Treasury bills. They are toxic mortgages and we need much better disclosure of that. The third thing is that they are going to have to be content with less revenues.”

Click here for the full article.

Source: Aleksandrs Rozens, IDD magazine, November 17, 2008.

Spiegel Online: George Soros - “The economy fell off the cliff” “George Soros, 78, has made billions as a hedge-fund manager and investor. Spiegel spoke with him about the current financial crisis, how he expects President-elect Barack Obama to respond to the economic disaster and the responsibilities borne by speculators.

“SPIEGEL: Mr. Soros, in spite of massive interventions by governments and federal banks the financial crisis is getting worse. The stock markets are in free fall, millions of people could lose their jobs. More and more companies are in trouble, from General Motors in Detroit to BASF in Ludwigshafen. Have you ever seen anything like it?

“Soros: Never. I find the present situation dramatic and overwhelming. In my latest book ‘The New Paradigm for Financial Markets: The Credit Crisis of 2008′ I predicted the worst financial crisis since the 1930s. But to tell you the truth: I did not actually anticipate that it would get as bad as it did. It has gone beyond my wildest imagination.

“‘I find the present situation dramatic and overwhelming.’

“SPIEGEL: What are your fears for the coming months?

“Soros: I think that the dark comes before dawn. The financial markets are under great pressure because of the lack of leadership during the transition period. In the next two months, the markets will experience maximum pressure. Then we will see some initiatives from the Obama administration. How long the crisis lasts will depend on the success of these measures.

“SPIEGEL: The markets don’t seem to have much confidence in the new president - in stark contrast to the enthusiasm in the population. Since Election Day on November 4, stocks have fallen by almost 20%.

“Soros: I have great hopes for Barack Obama. But at the time of the election the financial community had not yet fully grasped the magnitude of the economic decline. They did not anticipate that the default of Lehman Brothers would cause cardiac arrest in the markets. The economy fell off the cliff, you begin to see mangled bodies lying at the bottom.”

Click here for the full article.

Source: Spiegel Online, November 24, 2008.

The New York Times: Paulson on new moves in rescue plan “CNBC coverage of opening remarks by Treasury Secretary Henry Paulson in a news conference describing new steps to ease credit markets.”

Click here for the article.

Source: The New York Times, November 25, 2008.

Asha Bangalore (Northern Trust): Fed institutes two more programs to support working of financial markets “The Federal Reserve announced the creation of Term Asset-Backed Securities Loan Facility (TALF) in conjunction with the Treasury. The program that will involve the Federal Reserve Bank of New York lending up to $200 billion to holders of AAA-rated asset backed securities ‘backed by newly and recently originated consumer and small business loans’.

“The US Treasury Department, under the Emergency Economic Stabilization Act of 2008, will provide $20 billion of credit protection to the Federal Reserve Bank of New York for these non-recourse loans. The loans will involve a haircut based on the asset class and there is fee for participation.

“This new program is designed to address problems in the auto, student, credit card, and Small Business Administration guaranteed loans. Loans to consumers have become scarce because securitization of consumer loans has come to a standstill. Funding these loans should result in a resumption of the working of these markets. A date and details are being worked out.

“The Fed also announced it will start purchasing Government Sponsored Enterprises (GSE) - Fannie Mae, Freddie Mac, and Federal Home Loan Banks - this week. Spreads of these securities vis-à-vis Treasury securities have widened sharply in recent days. Purchases of $100 billion in GSE direct obligations and $500 of Mortgage Backed Securities will be undertaken under this program. The objective of this action is to increase the availability of credit for purchases of homes.

“These actions will raise reserves in the banking system and increase the size of the Fed’s balance sheet. The sum of today’s action is $800 billion. The Fed’s balance sheet as of November 25, 2008 had ballooned to 2.19 trillion from $995.57 billion as of September 17, 2008.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 25, 2008.

Bloomberg: US pledges top $7.7 trillion to ease frozen credit “The US government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

“The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

“When Congress approved the TARP on October 3, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.

“Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.

“The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun October 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started October 14.

“William Poole, former president of the Federal Reserve Bank of St. Louis, said the two programs are unlikely to lose money. The bigger risk comes from rescuing companies perceived as ‘too big to fail’, he said.”

Source: Mark Pittman and Bob Ivry, Bloomberg, November 24, 2008.

Barry Ritholtz (The Big Picture): Big bailouts, bigger bucks “Whenever I discussed the current bailout situation with people, I find they have a hard time comprehending the actual numbers involved. That became a problem while doing the research for the Bailout Nation book. I needed some way to put this into proper historical perspective.

“If we add in the Citi bailout, the total cost now exceeds $4.6165 trillion. People have a hard time conceptualizing very large numbers, so let’s give this some context. The current Credit Crisis bailout is now the largest outlay in American history.

“Jim Bianco of Bianco Research crunched the inflation adjusted numbers. The bailout has cost more than all of these big budget government expenditures combined:

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion • Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion • Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion • S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion • Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion • The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est) • Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion • Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion • NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion

“That is $686 billion less than the cost of the credit crisis thus far. The only single American event in history that even comes close to matching the cost of the credit crisis is World War II: Original Cost: $288 billion, Inflation Adjusted Cost: $3.6 trillion. The $4.6165 trillion dollars committed so far is about a trillion dollars ($979 billion dollars) greater than the entire cost of World War II borne by the United States: $3.6 trillion, adjusted for inflation (original cost was $288 billion).

“I estimate that by the time we get through 2010, the final bill may scale up to as much as $10 trillion dollars …”

Source: Barry Ritholtz, The Big Picture, November 25, 2008.

Casey’s Charts: Budgeting your future “The October statement of the US Treasury Department revealed that the federal deficit has reached the largest level on record. Over the last twelve months, the US government spent $618 billion dollars more than it was able to collect.

“The deficit is already enormous and with all signs pointing towards even greater government spending, the implications are astounding. Casey Research Chief Economist Bud Conrad predicts that next year’s budget deficit will be closer to the tune of $1.5 trillion!”

Source: Casey’s Charts, November 21, 2008.

Breitbart: IMF chief economist - worst of financial crisis yet to come “The IMF’s chief economist has warned that the global financial crisis is set to worsen and that the situation will not improve until 2010, a report said Saturday. Olivier Blanchard also warned that the institution does not have the funds to solve every economic problem.

“‘The worst is yet to come,’ Blanchard said in an interview with the Finanz und Wirtschaft newspaper, adding that ‘a lot of time is needed before the situation becomes normal.’

“He said economic growth would not kick in until 2010 and it will take another year before the global financial situation became normal again.

“The International Monetary Fund on Friday promised to help Latvia deal with its economic crisis after it assisted Iceland, Hungary, Ukraine, Serbia and Pakistan.

“But Blanchard said the IMF was not able to solve all financial issues, in particular problems of liquidity.

“Withdrawals of capital leading to problems of liquidity ‘can be so significant that the IMF alone cannot counter them’, he said, adding that massive withdrawals of investments from emerging countries could represent ‘hundreds of billions of dollars. We do not have this money. We never had it,’ he said.”

Source: Breitbart, November 22, 2008.

The Wall Street Journal: Obama names his economic team “Looking to hit the ground running on January 20 and restore confidence, President-elect Barack Obama seals up his economic appointments.”

Source: The Wall Street Journal, November 24, 2008.

Bloomberg: Obama names Volker to head panel on reviving economy “President-elect Barack Obama named former Federal Reserve Chairman Paul Volcker to head a new White House economic board that will propose ways to revive growth as the US grapples with an ‘economic crisis of historic proportions’.

“‘At this defining moment for our nation, the old ways of thinking and acting just won’t do,’ Obama said at a news conference in Chicago, his third in as many days.

“Volcker, 81, will be chairman of the President’s Economic Recovery Advisory Board. The panel’s top staff official will be Austan Goolsbee, a University of Chicago economist who will also be a member of the president’s Council of Economic Advisers.

“The panel, which will include experts from outside government, will meet about once a month and periodically brief Obama with advice on how to shore up financial markets. Volcker’s position will be part-time.

“‘Sometimes policymaking in Washington can become too insular,’ Obama said. ‘The walls of the echo chamber can sometimes keep out fresh voices and new ways of thinking, and those who serve in Washington don’t always have a ground-level sense of which programs and policies are working.’

“Volcker, who throttled the economy to crush inflation in the 1980s, was an adviser to Obama during the presidential campaign. He was a candidate for Treasury secretary, a job that went to Federal Reserve Bank of New York President Timothy Geithner.

“‘He is one of the most independent-thinking guys you could find and brings massive reputation,’ Ethan Harris, co-head of US economic research at Barclays Capital in New York, said before today’s announcement.”

Source: Kim Chipman and Catherine Dodge, Bloomberg, November 26, 2008.

ABC News: Summers to be top white house economic adviser at NEC “ABC News has learned that President-elect Obama has decided to name former Treasury Secretary Larry Summers the director of the National Economic Council, essentially the president’s senior economic adviser.

“Part of the Executive Office of the President, the NEC was created for the purpose of advising the President on matters related to US and global economic policy. The NEC has four functions, by executive order: ensuring that programs and policy decisions are consistent with the President’s economic goals, monitoring the implementation of the President’s economic policy agenda, coordinating policy-making for domestic and international economic issues, and coordinating economic policy advice for the President.

“Summers was the 71st Secretary of the Treasury, serving from July 1999 until the end of the Clinton administration in January 2001, having previously served as undersecretary for international affairs and deputy secretary of the Treasury. He also served as chief economist of the World Bank.

“At the Treasury Department in the 1990s, Summers worked closely with Tim Geithner, the man Obama intends to nominate to be the next Secretary of the Treasury. The two are said to have an excellent working relationship.

“Some Democrats say that Obama and Summers have an understanding that when current Federal Reserve Chairman Ben Bernanke’s term expires in 2010, Obama will name Summers to take his place.”

Source: ABC News, November 22, 2008.

Fox Business: Wilbur Ross on the next Treasury Secretary

Source: Fox Business, November 21, 2008.

Richard Russell (Dow Theory Letters): “Inflate or die, which one will it be?” “Suddenly, the whole investment world believes in deflation. The TIPS (inflation adjusted government bonds) have collapsed, commodities have crashed, gold goes nowhere, bonds remain near their highs, the dollar remains strong.

“Meanwhile, Bernanke and Paulson are battling the forces of deflation with all the ammunition at their command. I believe Fed chief Bernanke will fight deflation with the last dollar available at the Fed. Paulson will give the US Treasury away before he gives in to deflation and economic contraction.

“How will we know whether Bernanke-Paulson are winning their desperate anti-deflation battle? If they are winning, the dollar and bonds will head down and gold will head higher. If they are losing the battle, the Dow will break below 7,470 and the bear market will continue to eat away at US stocks and the US economy.

“What we are witnessing now is the single greatest economic battle of the century. ‘Inflate or die’, which one will it be?

“Remember, Bernanke’s worst nightmare is dealing with out-of-control deflation. The Fed can halt inflation by pushing up interest rates, but in the case of deflation, the Fed can be helpless. And I ask myself, what happens if Bernanke finds that he is losing the battle against deflation? In that case, we are all survivors. I’ve been there before - during the 1930s. I survived then, and I’ll survive now, and so will my subscribers.

“If Bernanke and Paulson are winning the anti-deflation battle, I believe the first ‘signal’ would be rising gold. So far, it appears to me that gold is undecided. Gold corrected down to the 717 area, then rallied above 800, and now appears to be in the process of testing the 800 level. It would be a plus for gold if December gold can hold above 800. Gold has never been a more important barometer for the future.”

Source: Richard Russell, Dow Theory Letters, November 26, 2008.

Asha Bangalore (Northern Trust): Q3 GDP preliminary estimate “Real gross domestic product declined at an annual average rate of 0.5% in the third quarter of 2008, slightly weaker than the advance estimate of a 0.3% drop. Going forward, real GDP is expected to show a decline that is upward of 4.0% in the fourth quarter of 2008. The Fed is widely expected to lower the Federal funds rate to 0.50% on December 16, 2008.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 25, 2008.

Barry Ritholtz (The Big Picture): ECRI leading indicators fall to lowest level ever “One of the questions I seem to be getting all the time is ‘when is this recession going to end?’ To answer that, I turned to Lakshman Achuthan of the Economic Cycle Research Institute (ECRI). Their leading versus coincident chart provides insight into that question.

“The cyclical turns in the leading occur before the coincident - they seem to diverge now and then, and that can be telling. The current story they tell is clearly one of a quickly worsening recession with no end in sight.”

Source: Barry Ritholtz, The Big Picture, November 26, 2008.

Wachovia: US economy in recession mode “Economic problems began to show up in our model in the fourth quarter of last year as the recession probability rose sharply to 75%, and since then the probability has remained high. While the official recession call will come from the National Bureau of Economic Research sometime next year, for decision-makers the operational guideline is a recession outlook today.”

Source: Wachovia, November 24, 2008.

Asha Bangalore (Northern Trust): Durable goods orders show widespread weakness “The 6.2% drop in orders of durable goods reflects widespread weakness in bookings of durable factory goods.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 26, 2008.

Breitbart: First-ever decline in online retail spending “Online retail spending fell four percent in the first weeks of November from the same period last year, the first ever such decline in e-commerce spending, online researcher comScore reported on Tuesday.

“The Reston, Virginia-based company said 8.2 billion dollars was spent online during the first 23 days of November, four percent less than during the same period last year, when 8.5 billion dollars was spent online.

“ComScore forecast that online retail spending for the November-December holiday period will be flat versus year ago, significantly lower than last year’s growth rate of 19 percent.

“‘With consumer confidence low and disposable income tight, the first weeks of November have been very disappointing, with online retail spending declining versus year ago,’ said comScore chairman Gian Fulgoni.”

Source: Breitbart, November 25, 2008.

Asha Bangalore (Northern Trust): Weakness in consumer spending most likely to persist “Nominal consumer spending fell 1.0% in October, while inflation adjusted consumer spending dropped 0.5%. Inflation adjusted consumer spending has declined for five straight months, the longest string of declines since the 1981-82 recession. Based on October data and conservative assumptions about November and December, consumer spending is most likely to post a 4.0% drop in the fourth quarter after a 3.7% decline in the third quarter.

“The 0.3% increase in personal income during October follows a 0.1% gain in September that was affected by hurricanes. Personal saving as a percent of disposable income was 2.4% in October compared with 1.0% in September. A small upward drift in personal saving is emerging.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 26, 2008.

Standard & Poor’s: S&P/Case-Shiller - national trend of home price declines continues “Data through September 2008, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, shows continued broad based declines in the prices of existing single family homes across the United States, a trend that prevailed since 2007.

“The decline in the S&P/Case-Shiller US National Home Price remained in double digits, posting a record 16.6% decline in the third quarter of 2008 versus the third quarter of 2007. This has increased from the annual declines of 15.1% and 14.0%, reported for the 2nd and 1st quarters of the year, respectively.

“‘The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s.”

Source: Standard & Poor’s, November 25, 2008.

The Wall Street Journal: US agrees to rescue struggling Citigroup “The federal government agreed Sunday night to rescue Citigroup by helping to absorb potentially hundreds of billions of dollars in losses on toxic assets on its balance sheet and injecting fresh capital into the troubled financial giant.

“The agreement marks a new phase in government efforts to stabilize US banks and securities firms. After injecting nearly $300 billion of capital into financial institutions, federal officials now appear to be willing to help shoulder bad assets, on a targeted basis, from specific institutions.

“Citigroup is one of the world’s best-known banking brands, with more than 200 million customer accounts in 106 countries. Its plunging stock price threatened to spook customers and imperil the bank.

“If the government’s rescue plan is a success, it could help bring stability to the entire financial system. If it doesn’t, even deeper doubts about the industry’s future could spread.

“Under the plan, Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses in that portfolio. After that, three government agencies - the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. - will take on any additional losses, though Citigroup could have to share a small portion of additional losses.

“The plan would essentially put the government in the position of insuring a slice of Citigroup’s balance sheet. That means taxpayers will be on the hook if Citigroup’s massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour.

“In exchange for that protection, Citigroup will give the government warrants to buy shares in the company.

“In addition, the Treasury Department also will inject $20 billion of fresh capital into Citigroup. That comes on top of the $25 billion infusion that Citigroup recently received as part of the broader US banking-industry bailout.”

Source: David Enrich, Carrick Mollenkamp, Matthias Rieker, Damian Paletta and Jon Hilsenrath, The Wall Street Journal, November 24, 2008.

Paul Kedrosky (Infectious Greed): Citigroup - bad bank to create bad bank incubator “I know it isn’t precisely what this headline means - ‘bad bank’ is a euphemism in bailout circles for walling off from one another functional and non-functional parts of banks - but I still like this from the WSJ today.

“To my way of thinking, if we’re interested in creating bad banks, it’s worth knowing that Citi is a veritable ‘bad bank’ incubator.”

Source: Paul Kedrosky, Infectious Greed, November 23, 2008.

CNBC: Mobuis - attraction of Treasurys will wane with lower yields “Despite continued woes in the US economy, the greenback has seen an unexpected surge against currencies around the world. As investors become ever more risk averse, emerging markets are bearing the brunt of a flight to safety.

“But Mark Mobius, executive chairman of Templeton Asset Management, sees a reversal around the corner.

“‘As everyone is rushing into US Treasurys, they need US dollars to do that and have therefore sold everything in sight,’ Mobius told CNBC. ‘This is why emerging markets have gone down, why commodities have gone down as everyone is moving into dollars.’

“But Mobius said that ‘as US Treasury rates go down to 1% or below you will see the attraction of US Treasurys waning’.

“Mobius also believes that emerging markets have learnt a bitter lesson since the Asian Crisis of 1997-1998. ‘One big lesson was ‘don’t borrow in a currency you are not earning in’,’ he said.

“Emerging markets have also curtailed lending and built up foreign reserves, which they can call upon in almost ‘a reversal of 1997 where the emerging markets were debtors, they are now the creditors’, he added.

“But the surge in the greenback has taken a lot of investors by surprise, Mobius said.

“Having learned from the Asian crisis, companies hedged currencies and ‘ironically these hedges have really worked against them in some cases … as they are over-hedged and it went against them as they were expecting the dollar to go weaker and it went the other way,’ he said.”

Source: CNBC, November 20, 2008.

Bespoke: GSE mortgage spreads tighten “The Fed’s actions this morning [Tuesday] have certainly helped to thaw the credit markets so far. As shown below, spreads between 10-year Fannie Mae bonds and the 10-year US Treasury tightened significantly today. While they are certainly moving in the right direction, even after today’s record decline, spreads are still higher today than they were just a little more than two weeks ago.”

Source: Bespoke, November 25, 2008.

Bespoke: 30-Year fixed mortgage rates falling back “Talk of the 30-year fixed mortgage rate falling back below 6% filled the airwaves yesterday [Tuesday], so below we provide a two-year chart of the rate. Even as the Fed funds rate has fallen from 5.5% to 1%, mortgage rates have failed to decline along with it, which hasn’t done much to help the struggling housing market. Economists and investors are hoping that the Fed’s actions yesterday will start pushing mortgage rates lower. This will help ease the credit crisis as banks will become more willing to lend, providing better interest rates for potential homebuyers. 5.81% is better than the 6.4% seen at the start of the month, but the rate could still stand to drop quite a bit.”

Source: Bespoke, November 26, 2008.

Frank Holmes (US Global Investors): Stock market reversal is near “According to research from Thomas Weisel, the S&P 500 has been a ‘Buy’ since that index closed at 800 last Friday, based on its probability models. They say a verification could come in early December, when monthly liquidity figures come out - if there is extreme positive liquidity to accompany the technical ‘Buy’ signal, history shows that on average there’s a six-month price rally of 18.5%.

“Our oscillator tells us that, statistically speaking, the S&P 500 is extremely oversold and thus due for a reversal toward the mean. The chart above shows that the S&P 500 is now down about four standard deviations over 60 trading days, which is a far more dramatic decline than we saw in 1998, when Russia endured a currency crisis and the collapse of the hedge fund Long-Term Capital Management threatened the global financial sector, and in 2001 after the September 11 terror attacks.

“The possible turnaround that we are seeing is not wishful thinking, but it’s not a sure thing, either. Our confidence grows with every positive data point indicating that a reversal is near, and we will continue watching for these indicators …”

Source: Frank Holmes, US Global Investors - Weekly Investor Alert, November 28, 2008.

Eoin Treacy (Fullermoney): Start thinking about stocks to buy “Angst, fear and anxiety are all related emotions which come to the fore when we feel under pressure and begin to doubt our abilities as investors. However, when we see a market fall such as that of the last few months, we have to rein in the temptation to succumb to such emotions. It will prove more profitable over the medium to longer-term, to turn objective about the opportunities we are being presented with sooner rather than later.

“This does not mean one piles into the market with every spare unit of currency right now, but it is a time to begin to think about the shares one wants to own in a recovery environment. From a value perspective there are a number of instruments which have been hit particularly hard and somewhat unjustifiably by the credit / solvency crisis.

“We now need to begin to think more about recovery potential rather than further potential losses. Stocks and corporate bonds are no longer expensive, some are downright cheap. We have not reached the deep value levels seen in the past, but these need not necessarily appear at the numerical low for the market, if they appear at all. However, one looks at the market, given the extent of the fall, this is not a time to become increasingly bearish, but is one in which to make provisions and possible purchases for a recovery scenario.”

Source: Eoin Treacy, Fullermoney, November 27, 2008.

David Fuller (Fullermoney): Watch developments in US rather than invest there “I believe that America’s problems of debt and deficits are worse than for many other countries. More importantly, I will be guided by price charts, which reflect the collective decisions and views of everyone else. In terms of investment appropriateness, my current view is that I would rather watch developments in the US than invest there.

“The credit / solvency crisis is clearly America’s biggest problem at this time. This is not necessarily true for all other countries, although all are obviously affected to a greater or lesser degree by developments in the USA. I suggest that the West’s credit / solvency crisis was only the second biggest problem for Asia’s developing economies.

“Asia’s biggest recent problem, I maintain, was inflation, not least from previously soaring energy and food prices. That crisis, which in comparison was the USA’s second biggest problem, has largely disappeared today. I suspect commodity inflation will not re-emerge for at least the next year or two, subject to supply, global GDP and the USD.

“Consequently, I believe that developing Asia would be in an excellent position for recovery, were it not for the West’s ongoing credit / solvency crisis. Therefore, the worse the USA’s problems become, the more this will be a drag on Asia’s own recovery. Conversely, if the USA somehow avoids a destructive deflation, Asia should still bounce back more quickly.

“I will invest accordingly.”

Source: David Fuller, Fullermoney, November 26, 2008.

Jeffrey Saut (Raymond James): Geithner gotcha “We still think October 10 represented the capitulation ‘lows’. As Barron’s notes, ‘For a bullish spin, though a weak one, the market has not made a significantly lower low since October 10. The word ’significantly’ is important because some major market indexes, including the Nasdaq, have indeed been setting new lows. But the trend, if we can call it that, has been more sideways than decidedly down.

“A better, but still weak, bullish angle comes from trading volume, or the amount of money committed to either the bull or bear side each day. All of the higher volume days that have occurred since October 10 have come on days when prices rose. Theoretically, when prices are going up and volume increases, it means that investors are chasing the market higher. That’s a sure sign of demand. Subsequent declines occurred with lower volume, so we can conclude that the desire to sell was not quite as strong as it was before October 10.”

Source: Jeffrey Saut, Raymond James, November 24, 2008.

Bespoke: Analysts at their least bullish levels ever “While Wall Street analysts are typically known for being overly optimistic, based on at least one measure, they have never been less bullish. According to Bloomberg statistics that track analyst buy, sell, and hold ratings, only 36% of all ratings are currently buys. As the chart below shows, this is the lowest level since at least 1997, and significantly lower than the 75% level we saw in 1997 and 2000. However, since the Spitzer crackdown on Wall Street research and the bursting of the tech bubble, analysts have grown increasingly shy about putting a buy rating on a stock they cover.”

Source: Bespoke, November 25, 2008.

Bespoke: Q3 and Q4 sector earnings growth “With about 96% of S&P 500 companies having reported third quarter earnings, current EPS growth numbers for the quarter should be very close to what the final tally will read. As shown below, four sectors have had negative year over year growth in the third quarter, while six have had positive growth. Financials and consumer discretionary were once again the sectors that brought down the index as a whole. Financials have seen earnings decline by 129.7% in Q3 ‘08 versus Q3 ‘07. Consumer discretionary has seen earnings decline by 41.4%. Telecom and utilities are the two other sectors with negative Q3 earnings growth, and the S&P 500 as a whole currently stands at -18.4%. The energy sector has had by far the largest earnings growth at 57.4% versus the third quarter of 2007. Consumer staples ranks second behind energy at 10.9%, followed by health care, materials, technology, and industrials.

“So what does the fourth quarter look like? Analysts are expecting the S&P 500 to actually show positive year over year earnings growth in the fourth quarter of 4%. This is because the financial sector is expected to show growth of 64.2% due to the fact that Q4 ‘07 was so bad. Utilities, health care, and consumer staples are the other three sectors expected to see earnings growth, while consumer discretionary, materials, energy, telecom, technology and industrials are expected to see earnings declines.”

Source: Bespoke, November 23, 2008.

Naked Capitalism: Cheery chart - no corporate profits for two years during depression “In case you are starting to look to past crises for clues as to how our financial mess might play out, here is a Great Depression factoid (from Levy Forecast, November 2008):

“Note that the report itself argues that the US will have a ‘contained’ depression, with deep recession conditions for a protracted period and an anemic recovery. It does not believe the zero operating profits pattern of the Great Depression will be repeated.”

Source: Naked Capitalism, November 23, 2008.

Bloomberg: Hambro sees “great entry points” for commodity stocks “Evy Hambro, who manages the world’s largest mining and gold funds at BlackRock, talks with Bloomberg about the outlook for commodities and mining stocks.”

Source: Bloomberg, November 21, 2008.

Bloomberg: Marc Faber says gold is most precious asset

Source: Bloomberg, November 25, 2008.

Ambrose Evans-Pritchard (Telegraph): Citigroup says gold could rise above $2,000 next year “The bank said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before.

“This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

“‘They are throwing the kitchen sink at this,’ said Tom Fitzpatrick, the bank’s chief technical strategist.

“‘The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.

“‘Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don’t think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes,” he said.

“‘This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised.”

“Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. ‘If true, this is a very material change,’ he said.

“Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months - reverting to is historical role as a safe-haven store of value and a de facto currency.”

Source: Ambrose Evans-Pritchard, Telegraph, November 27, 2008.

James Turk (GoldMoney): Scenario for gold is bullish “Gold soared $50 this past Friday. It began the day at $748 and was trading at $800 when the day ended.

“It is rare for gold to achieve such a huge one-day gain. In fact, I checked my records for the past twenty years and found only one other instance when gold climbed $50 or more in a day. Interestingly, the other occurrence was on September 17, 2008, barely two months ago. That rally also took gold back above $800.

“That these two rallies - unique and rare in their magnitude - occurred so near to one another is significant. Is there a message from these two events? Yes, indeed!

“Gold itself is telling us two things. First, there is an enormous short position in gold. Huge rallies occur for a reason, and short covering is always a factor. In order to limit their losses, shorts will bid up the market in a desperate attempt to cover their position. The rule of thumb is straightforward - the bigger the short position, then the bigger the rally.

“Second, and more importantly, these huge rallies are signaling that gold under $800 is too cheap. A higher price is needed to bring supply and demand back into balance.

“There is other, more than ample evidence to support this same conclusion. The demand for physical metal remains strong.

“Friday’s trading action adds to the growing body of evidence that the correction in gold that began after making a new record high in March above $1,020 is ending. The low in gold in all likelihood is probably in place. The $700 level has been tested and re-tested, and the huge rallies launched from prices below $800 mean that other attempts to take gold into the $700s will be met with good demand.

“Gold remains in a bull market, and so does silver. National currencies are in a bear market. Get ready for the next leg in the precious metal’s ongoing bull market.”

Source: James Turk, GoldMoney, November 24, 2008.

The Australian: Perth Mint suspends orders amid rush to buy bullion “Fears of the unknown long-term effects from the global financial crisis have sparked a new gold rush.

“With retail and wholesale clients around the world stocking up on the precious metal, the Perth Mint has been forced to suspend orders.

“As the World Gold Council reported that the dollar demand for gold reached a quarterly record of $US32 billion in the third quarter, industry insiders said the race to secure physical gold had reached an intensity that had never been witnessed before.

“Perth Mint sales and marketing director Ron Currie said the unprecedented demand had forced the Mint to cease orders until January, with staff working seven days a week, 24-hour days, over three shifts to meet orders.

“He said Europe was leading the demand, with Russia, Ukraine, Middle East and US all buying - making up 80% of its sales.

“‘We have never seen this before and are working right at capacity. And we are seeing it from clients in the shop buying one ounce, right up to 30,000 ounces from overseas clients,’ Mr Currie said.”

Source: Sarah-Jane Tasker, The Australian, November 22, 2008.

Mike Wittner (Société Générale): Oil prices susceptible to further deleveraging “Unless oil prices melt down again this week, Opec will not cut production at this weekend’s informal meeting in Cairo and instead will wait until the cartel’s gathering in December to reduce output quotas by 1 million to 1.5 million barrels a day, says Mike Wittner, global head of oil research at Société Générale.

“Mr Wittner says that Opec simply does not have enough information on the effectiveness of the production cuts that it has already made, or sufficient feedback from its customers, to proceed with further reductions in output. ‘We see (a decision to maintain current production quotas) as a 60-40 probability and the outcome of the meeting could easily be affected by price action this week,’ says Mr Wittner, who notes that signals from Opec have been mixed so far.

“Mr Wittner says tanker tracking data suggest there has been a ‘very significant cut’ in Opec’s oil production in November, down 1.2 million barrels a day compared with October.

“But SocGen says fundamentals will be perceived to be weak until the market becomes convinced Opec has cut supplies, given that a tanker requires six weeks to travel from the Persian Gulf to the US. Only then will November’s cuts appear in lower crude imports and stocks, which is what the market wants to see.

“‘Oil prices will remain susceptible to further deleveraging (by hedge funds) and caution remains the order of the day,’ concludes Mr Wittner.”

Source: Mike Wittner, Société Générale (via Financial Times), November 25, 2008.

Financial Times: EU’s stimulus plan met with doubts “The European Union’s proposal on Wednesday for a €200 billion economic stimulus plan for the bloc was met by immediate doubts on whether member states would back the measures aimed at avoiding a deeper recession.

“The proposal envisages that about €170 billion would be contributed by the bloc’s 27 member states through tax and infrastructure plans. The European Commission and the European Investment Bank would provide the remaining €30 billion, partly through the accelerated pay-out of selected spending programmes.

“The package, which is larger than expected, represents about 1.5% of the EU’s gross domestic product. It needs to be reviewed by EU finance ministers next week and by government leaders in mid-December.

“Economists and politicians quickly questioned whether all member states would step up as required or whether individual governments’ responses would diverge from the Commission’s suggested measures.

“Analysts at Capital Economics, the consultants, said: ‘The proposed boost has yet to be agreed by member states and would sadly not do enough to bring European economies out of the gloom for some time anyway.’

“Business Europe, the main business lobby group in Brussels, agreed with the proposals but said a ‘clear commitment from EU member states’ was needed to implement stimulus packages of at least 1.2% of GDP.”

Source: Nikki Tait, Financial Times, November 26, 2008.

BBC News: Boost for Spanish and Italian economies “Spain and Italy have announced plans worth billions of euros to kick-start their economies.

“Italy approved an 80 billion euro emergency package that included tax breaks for poorer families, public works projects and mortgage relief.

“Spain unveiled an 11 billion euro plan aimed at creating 300,000 jobs.

“The announcements are the latest in a series of attempts by EU governments to shore up their economies as the financial crisis bites.

“Italian Prime Minister Silvio Berlusconi called on to Italians to keep on spending. ‘We have helped citizens, the less well off, so that they can continue to consume,’ he said. ‘The intensity and duration of the crisis depends on all of us.’

“Spain’s Prime Minister, Jose Luis Rodriguez Zapatero, said the money will be mainly invested in infrastructure and public works.

“Spain’s unemployment reached 12.8% in October - the highest in the eurozone.”

Source: BBC News, November 28, 2008.

BBC News: German business confidence dives “Business confidence in Germany fell in November to the lowest level since 1993, according to the key Ifo economic climate index. The index, based on a poll of 7,000 companies, has dropped for six consecutive months, the Munich-based Ifo institute said.

“The index stands now at 85.8, down 4.4 points from October.

“‘The downturn has worsened and will now have an impact on the labour market,’ Ifo said in a statement.

“Germany’s exports have been hard hit by falling demand worldwide, with some auto makers seeking state help to maintain production.

“On Friday another key indicator, the Markit purchasing managers’ index, revealed that business activity in the 15 countries sharing the euro had fallen in November to a ten-year low.”

Sources: BBC News, November 24, 2008 and Victoria Marklew, Northern Trust - Daily Global Commentary, November 24, 2008.

Financial Times: Eurozone set for rate cut of at least 50bp “Eurozone official interest rates are almost certain to be slashed again next week by at least half a percentage point after a survey on Thursday showed the region facing its worst downturn since the recession of the early 1990s.

“Economic confidence in the 15-country region crashed this month to its lowest point since August 1993, the European Commission reported. With inflation also falling rapidly, the European Central Bank has not sought to stop financial markets assuming its main interest rate will be cut next Thursday from 3.25% to 2.75% or below.

“Public ECB comments show the bank remains cautious about the pace of cuts, pointing to a half-point reduction next week - the same as in October and this month. But economic news has been consistently gloomier than expected, strengthening the case for a larger cut.”

Source: Ralph Atkins, Financial Times, November 27, 2008.

Financial Times: UK tax hit to fund £20 billion fiscal stimulus “Taxpayers face six years of austerity, paying for the consequences of recession and a £20 billion fiscal stimulus unveiled on Monday by Alistair Darling as he detailed the most dismal Budget outlook seen since 1993.

“National insurance contributions for both employees and employers will rise by 0.5%. Those earning more than £100,000 will pay more income tax - with those on £150,000 facing a new higher tax rate of 45% - and public spending faces its biggest squeeze for 15 years - although all these measures will not kick in until 2011, well after the next election. The tax clawback would leave someone earning £150,000 paying an extra £3,040 in tax.

“Mr Darling detailed the planned tax rises and spending restraint as he sought to show the City and foreign investors that Britain had a clear plan to restore prudence to the public finances after truly shocking forecasts for public borrowing in the next two years.

“Public borrowing will hit a record level of £118 billion in 2009-10 and will fall to a level the government considers prudent only in 2015-16, far later than City forecasts had expected.

“Government debt will blast through the current 40% of national income limit, racing to 57% in 2012-13, when it will top the £1,000 billion mark for the first time.

“Britain’s output will continue to fall until the second half of next year, the chancellor added, as he presented a gloomy forecast with the recession mitigated only in part by the fiscal boost delivered predominantly through a 2.5 percentage point cut in value added tax from next week and lasting until the end of 2009.

“Over the next year, the cut in the VAT rate to 15% will be augmented by £2.5 billion of additional capital expenditure projects brought forward from 2010-11, a £60 payment to every pensioner, an earlier increase in child benefit and a deferral in the planned increases in vehicle excise duties.

“Mr Darling also used the crisis to stage a series of tactical retreats from earlier decisions, announcing a rethink of his plans to reform air passenger taxes and an exemption from tax for the dividends of UK companies’ foreign subsidiaries.

“Together the Treasury assumes the £20 billion package - about 1% of national income for a little over a year - will prevent the economy sinking by a further 0.5%, although Mr Darling’s forecast was for a contraction of 0.75% to 1.25% in 2009.”

Source: Chris Giles and George Parker, Financial Times, November 24, 2008.

James Pressler (Northern Trust): China - getting serious about the slowing economy “The People’s Bank of China (PBoC) slashed its benchmark one-year loan and deposit rates by 108 basis points apiece today [Wednesday], reducing them to 5.58% and 2.52%, respectively. This dramatic move comes well after the industrialized economies coordinated a major monetary easing - most central banks have already turned their attention toward liquidity concerns and an eventual global recession. Only three months ago, Beijing had a proactive mindset, thinking about economic stimulus to compensate for the post-Games lull and a general slowdown in global production. The first question that comes to our mind is why does the government suddenly seem to be lagging in its response?

“One fact worth noting is that the immediate economic impact on the Chinese economy has not been as clear-cut as in the industrialized countries. The Olympic Games threw in plenty of distractions and had widespread effects on economic indicators. Retail sales were positively impacted from the many tourists flooding into the country, but conversely, industrial production fell off as many factories closed in response to temporary anti-pollution measures. The conclusion of numerous infrastructure projects shifted flows of goods and inputs, and plenty of other one-off factors added a lot of noise to China’s economic statistics. Only after the Games passed and some of those factors fell from the calculations did a clearer picture emerge, and the trends are not promising. Industrial production continues to fall, and monthly export growth is showing signs of weakness.

“To be fair, the PBoC issued minor rate cuts over the past three months, and the government did offer a supplementary fiscal stimulus package. Today’s more dramatic move suggests that PBoC officials are now firmly convinced that China will be joining the rest of the world in a significant economic slowdown. Some forecasts recently suggested that after GDP growth of nearly 12% in 2007, the economy could slow to below 10% this year and perhaps 7.5% in 2009. While the growth rate itself is still enviable, officials in Beijing realize all too well that a deceleration of over four percentage points will not go unnoticed, and they will likely be taking more action before the year is up.”

Source: James Pressler, Northern Trust - Daily Global Commentary, November 26, 2008.

Bloomberg: China reserves to pass $2 trillion; Russia’s fall “China’s foreign-exchange reserves may top $2 trillion for the first time by the end of this year, giving the world’s most-populous nation more firepower to stimulate its economy during a global recession.

“China’s holdings increased 25% in the first nine months of the year to stand at $1.906 trillion on September 30. Reserves shrank in Japan and Russia, the nations with the second- and third-largest stockpiles. Russia drained a quarter of its currency and gold assets in less than four months to prop up the ruble, which has dropped 14% since June 30.”

Source: Lee J. Miller and Zhang Dingmin, Bloomberg, November 28, 2008.

Breitbart: Analysts - India economy will be OK despite attacks “The terror attacks that rocked India’s financial capital may depress stocks, dampen tourism and slow new investment, but are unlikely to inflict long-term damage on the nation’s economy, analysts and business people said Thursday.

“‘This is a challenge for the government to maintain law and order in the country,’ said Takahira Ogawa, director of sovereign ratings at Standard & Poor’s in Singapore. ‘At this stage, I don’t think there will be any major impact on the macroeconomic or fiscal position of the government.’

“The attacks, which began Wednesday night when gunmen invaded two posh hotels, a restaurant and several other sites in downtown Mumbai, came as India was struggling to contain fallout from the global financial crisis.

“Foreign investors have already pulled $13.5 billion out of the nation’s stock market this year, driving the benchmark Sensex index down 57% and punishing the rupee. Liquidity has dried up, economic growth is slowing and people are spending less money.

“The attacks are ‘a challenge to the economic resurgence in India’, said Habil Khorakiwala, chairman of Wockhardt, an Indian pharmaceutical company.

“‘The targets identified clearly demonstrate that the intention is to create panic and shatter the confidence in the minds of investors in India and global investors coming to India,’ he said in a statement. ‘This war has to be fought together by all across, to protect the safety of Indian people, for economic resurgence and growth of the Indian nation.’”

Source: Breitbart, November 27, 2008.

BBC News: Saudi Arabia cuts interest rate “Saudi Arabia has cut a key interest rate and taken steps to encourage lending as it faces the slowdown. The central bank reduced the repo interest rate from 4% to 3%, in an attempt to boost liquidity. It also reduced the cash reserve requirements for banks, seen as a way to improve the availability of credit.

“The move came a day after the benchmark Tadawul All Share Index fell to its lowest level in five years, hit by the global slowdown and falling oil prices. The index shed 9.2% on Saturday, the start of its trading week. Since the start of the year the index is down more than 60%.

“The Gulf region has been hard hit by a huge fall in oil prices, a key export. Oil prices are around two thirds lower than they were in July when they hit a record above $147 a barrel.”

Source: BBC News, November 23, 2008.

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