The Prevailing Trend, the Dollar, and the Return of Volatility

Friday, February 12th, 2010

What does the fiscal crisis in Greece have to do with the price of commodities? Why would the Chinese step up their rhetoric of ditching reserve holdings in U.S. agencies, like Fannie and Freddie, and mortgage backed securities debt – Whom does it serve?

Why have emerging markets, commodities and commodities stocks, and equity markets in general, gotten a lashing?

Believe it or not, it’s all about achieving global equilibrium, and at the heart of this is the dollar.

Behind all of the market volatility in equities, commodities, and emerging markets in January, and the myriad of causes the financial media chalk up, are the prevailing trend, and the countervailing forces, that revolve around trading in the U.S. dollar.

Read the complete article here.

Source: Pierre Daillie (AdvisorAnalyst.com), GlobeAdvisor.com, February 11, 2010

Tags: Chalk, Commodities, Dollar, Emerging Markets, Fiscal Crisis, Global Equilibrium, Globeadvisor, Greece, Heart, Lashing, Market Volatility, Mortgage Backed Securities, Myriad, Prevailing Trend, Rhetoric, Stocks
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Sprott: Is it all just a Ponzi Scheme?

Thursday, December 31st, 2009

Eric Sprott, CEO, and David Franklin, Managing Director, Sprott Asset Management discuss the U.S. Government debt program in their latest instalment of Market Commentary, “Is it just a Ponzi Scheme?.”

Sprott believes the market will overwhelm the Fed’s money printing program, striking at the credibility of the dollar, and this will send the S&P500 below its March 9, 2009 low.

Via Bloomberg:

• The Standard & Poor’s 500 Index will collapse below its March lows as an expected rebound in economic growth fails to materialize, according to hedge fund manager Eric Sprott.
• The Toronto-based money manager, whose Sprott Hedge Fund returned about 496 percent in the past nine years as the S&P 500 lost 32 percent in Canadian dollar terms, said the index’s 66 percent rally since March 9 reflects investors misinterpreting economic data. He’s predicting the gauge will fall 40 percent to below 676.53, the 12-year low reached on March 9.
• “We’re in a bear market that will last 15 or 20 years, and we’ve had nine of them,” Sprott, chief executive officer of Sprott Asset Management LP, which oversees C$4.3 billion ($4.09 billion), said in an interview Dec. 18.
• Sprott said the Federal Reserve has kept bond yields and interest rates artificially low through its program to buy agency debt and mortgage-backed securities. The central bank expects the securities purchase program to finish by the end of March. Expiration of the program would reduce demand for fixed- income securities, forcing up bond yields and interest rates and hurting economic growth, Sprott said. (seeing how that plays out in 2010 will definitely be one of the most interesting development’s of the year)

You can dowload the whole letter, “Is it just a Ponzi Scheme?,” here.

Tags: Bear Market, Bond Yields, Canada, Chief Executive Officer, David Franklin, Debt Program, Dollar Terms, Economic Data, Eric Sprott, Government Debt, Income Securities, Instalment, Lows, Market Commentary, Money Manager, Money Printing, Mortgage Backed Securities, Ponzi Scheme, Printing Program, Sprott Asset Management, Sprott Hedge
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Marc Faber Bullish on Agriculture, Natural Gas, Indian Banks & Real Estate

Monday, December 21st, 2009

The following are highlights from part two of the three-part interview Dr. Marc Faber did on Indian television channel, December 19, 2009.

Dollar & Gold

The dollar has been weak, but in Europe, the ECB is also a money printer.  The euro has many problems as well as other currencies that have strenthened against the dollar.  This is one factor supporting the price of gold even though dollar has rallied.

Globally, we have about $7 trillion in foreign exchange reserves, up from one trillion in 1996, but the price of gold has not gone up seven times over that period of time.

Asian central banks, including Japan, hold 70% of the world’s foreign exchange reserve with less than 2% of their reserves in gold.  So, a lot of central banks will likely follow the Reserve Bank of India shifting some money into gold further supporting gold.

Key Bullish Commodities

Faber remains “very positive” about sugar, but believes there are two commodities right now that stand out in terms of being “incredibly depressed”:

1. Wheat - at its 200 years low, real inflation adjusted
2. Natural gas - “very cheap” right now

Though it is not very easy for individual investors to play in these commodities, Faber recommends essentially looking at all agriculture commodities. which have all come down, but not rallied as much as industrial commodities, such as copper and oil.

Best Way to Invest in India

The banks in the West are mostly over-leveraged with huge exposure in the residential and commercial real estate sectors.  In contrast, the Indian banks are “relatively sound”, as they did not play in the speculative CDO or the mortgage backed securities markets. With 700 million population and growing, India represents a hugh opportunity for the well-run banks.

Faber likes real estate in emerging economies, Asia and particularly, India. With an accelerated nation urbanization, and far less leverage, Faber sees a big opportunity in Indian real estate sector in the long run.

Note: Bloomberg reported that in a separate interview, Faber indicated Indian stocks could have a correction of 20% to 30% due to valuation.  Nevertheless, he remains upbeat about the long-term potential for India “because of the domestic consumption play.”  Banks, infrastructure and mining stocks are among sectors he favors.

Part 1:

Part 2:

Part 3:

Source: Indian TV via YouTube (here, here and here), December 19, 2009.

Tags: Agriculture Commodities, Asian Central Banks, Bank Of India, Cdo, Commercial Real Estate, Commodities, Dr Marc Faber, Emerging Economies, Emerging Markets, Exchange Reserve, Foreign Exchange Reserves, Gold, Gold Commodities, India, Indian Banks, Indian Television, Individual Investors, Industrial Commodities, Mortgage Backed Securities, oil, Price Of Gold, Real Estate Sectors, Reserve Bank Of India, Securities Markets, Television Channel, Well Run
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Words from the (Investment) Wise (Sept. 27, 2009)

Sunday, September 27th, 2009

After hitting its best levels of the year on Wednesday ahead of the Federal Open Market Committee’s (FOMC) communiqué, the S&P 500 Index ran into heavy weather on the realization that the Fed could start scaling back on emergency support of the economy. US equities dropped further later in the week on renewed concerns about the state of the troubled housing market and weaker-than-expected durable goods orders.

In addition to global stock markets declining, risky assets such as commodities, oil, gold and other precious metals all sold off as pundits worried about the winding down of quantitative easing puncturing the “liquidity rally”. Government and corporate bonds, as well as the Japanese yen, emerged as winners.

Hat tip: The Big Picture, September 23, 2009.

The FOMC maintained its loose monetary policy following its meeting on Wednesday. The statement said the committee expected to keep the Fed funds rate target in the 0% to 0.25% range “for an extended period”.

“The committee extended the time period over which it plans to purchase Fannie Mae and Freddie Mac debt and mortgage-backed securities. The remarks on current economic conditions were more optimistic than in August, and the FOMC now believes the recession is over. The Fed will keep monetary policy loose in the near term to support the recovery but is laying the groundwork for an eventual tightening,” said Moody’s Economy.com.

Although the US Dollar Index (+0.4%) closed a little higher on the week, the greenback hit a one-year low against the euro on Wednesday, with the Fed’s indication of keeping US interest rates at current levels for a while longer underscoring the dollar’s status as a carry-trade funding currency. (Click here for a short technical analysis of the outlook for the dollar by INO.com’s Adam Hewison.)

The past week’s performance of the major asset classes is summarized by the chart below - a set of numbers that shows risk aversion creeping back into financial markets.

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

The MSCI World Index (-1.4%) and MSCI Emerging Markets Index (-1.2%) both closed the week in the red, with the Shanghai Composite Index (-4.2%) one of the biggest losers among the major stock markets. After bucking the global weakness that prevailed during the week, Chile is now only 5.1% down from its July 2007 highs and could be one of the first markets to wipe out all the financial crisis losses.

The major US indices declined for three consecutive days (from Wednesday to Friday) and registered their first weekly drop since the last week of August. The year-to-date gains remain in positive territory and are as follows: Dow Jones Industrial Index +10.1%, S&P 500 Index +15.6%, Nasdaq Composite Index +32.6% and Russell 2000 Index +19.9%.

Click here or on the table below for a larger image.

Top performers in the stock markets this week were Latvia (+8.0%), Cyprus (+6.8%), Israel (+5.0%), Ukraine (+4.9%) and Saudi Arabia (+4.1%). At the bottom end of the performance rankings, countries included Luxembourg (‑8.7%), Ireland (-4.2%), China (-4.2%), Mexico (-4.0%) and South Africa (‑3.3%).

Of the 98 stock markets I keep on my radar screen, 44% recorded gains (last week 81%), 51% (15%) showed losses and 5% (4%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included Global X/InterBolsa FTSE Colombia 20 (GXG) (+6.0%), Market Vectors High-Yield Municipal (HYD) (+2.9%), iPath S&P 500 VIX Mid-Term Futures (VXZ) (+2.9%) and United States Natural Gas (UNG) (+2.8%).

At the bottom end of the performance rankings, ETFs included United States Gasoline (UGA) (-10.8%), United States Oil (USO) (-8.4%), United States 12 Month Oil (USL) (-8.3%) and iShares Dow Jones Home Construction (ITB) (‑8.3%).

Against the background of the International Monetary Fund’s approval of the sale of 403.3 metric tons of its gold and beggar-thy-neighbor currency devaluations, Richard Russell reminded us of the following quote from the Republican National Platform in 1932: “The Republican Party established and will continue to uphold the gold standard and will oppose any measure which will undermine the government’s credit or impair the integrity of our national currency. Relief by currency inflation is unsound in principle and dishonest in results.” Russell added: “My, how times have changed, and not always for the better.”

Other news is that the summit of G20 countries have agreed, inter alia, to plot a roadmap for the banking industry, align economic policy, ensure that tax havens comply with global standards and phase out subsidies for fossil fuels in the “medium term”.

Also, the Federal Deposit Insurance Corporation (FDIC) closed another bank on Friday, bringing the tally of US bank failures in 2009 to 95 (120 since the beginning of the recession). Meanwhile, according to The New York Times, regulators are considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the FDIC. This would enable the fund, which is running low on resources as a result of the myriad of bank failures, to continue to rescue the sickest banks … “You can’t make up stuff like this!,” commented Bill King (The King Report).

Next, a quick textual analysis of my week’s reading. Although “banks” still features prominently, the key words have started taking on a more normal pattern compared with the crisis-related words that have dominated the tag cloud for many months.

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based) are given in the table below. With the exception of the Shanghai Composite Index, which is trading below its 50-day moving average, all the indices are above their respective 50- and 200-day moving averages. The 50-day lines are also in all instances above the 200-day lines.

The August highs and September lows are also given in the table as these levels define a support area for a number of the indices.

Click here or on the table below for a larger image.

Kevin Lane, technical analyst of Fusion IQ said: “Yesterday’s [Wednesday] intraday sell-the-Fed-news price reversal of the S&P 500 stalled at the area (1,079 to 1,106) where the index really accelerated its 2008 sell-off. While we believe liquidity and buying power remain strong and thus pullbacks should be relatively shallow in nature, it doesn’t mean we can’t get a corrective wave of some magnitude before this sideline liquidity is redeployed. Additionally, quarter-end window dressing may keep stocks elevated or from slipping too much.

“However, we do believe putting new money to work in front of this more significant resistance level poses risks. Initial support below the current S&P levels comes into play near the 1,040 level (current 1,044). Secondary supports if 1,040 were to give way would come into play near 980/975 then 950.”

David Fuller (Fullermoney), making a successful recovery from heart surgery, said: “… it does look as if Wall Street and other stock markets under its influence have temporarily run out of upside momentum following a good run recently. Supply in the form of secondary offerings has increased. This coincides with understandable October jitters as investors recall last year’s meltdown.

“At this stage of the bull market cycle, a consolidation would have the benefit of preventing overheating. When a larger reaction eventually unfolds it is likely to be a providential buying opportunity rather that a repeat of last year’s harrowing decline - provided monetary conditions remain favorable.”

The S&P is at a level that should be reached in the third year of recovery from a recession, David Rosenberg, chief economist of Gluskin Sheff & Associates, told Bloomberg (via MoneyNews). “The fair multiple for earnings should be 12 or 13,” he said. “We’ve blown right through that.” (The S&P 500 is trading at a level equal to almost 20 times reported earnings from continuing operations, according to weekly data compiled by Bloomberg.)

The Bullish Percent Index shows the percentage of stocks that are currently in bullish mode as a result of point-and-figure buy signals. With the figure at 86.4%, this indicator conveys the message that the vast majority of stocks are in uptrends, but the line looks as if it might start turning down from a high level, which could spell at least a short-term top.

Source: StockCharts.com

As stated often before, share prices have moved too far ahead of economic reality. This calls for a cautious approach in anticipation of the market working off its overbought condition and fundamentals reasserting themselves. I will bide my time while the fundamentals play catch-up, especially as we could be seeing one of those occasional all-change signals in the short-term trends of a number of markets.

For more discussion on the economy and asset classes, see my recent posts “Bonds & equities: Expect a major shift“, “Chart of the Day: Dow Jones vs Monetary Base“, “Marc Faber video bonanza” and “David Rosenberg: Equity market est très expensif“. (And do make a point of listening to Donald Coxe’s webcast of September 25, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
A tentative global economic recovery has begun, according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Business expectations are strong that conditions will improve further later this year and early next. Sentiment is strongest in Asia and South America and among business service firms. European businesses and those that work in government are least upbeat. Pricing power is consistent with very low rates of inflation.”

Source: Moody’s Economy.com

The Business Confidence Survey’s results were confirmed by the Duke/CFO Magazine Global Business Outlook Survey of CFOs of 650 companies in the US and nearly 900 in Europe and Asia. According to the Survey, the economic outlook has improved since the last quarter; it appears that the Great Recession is ending and economies around the world are stabilizing. However, the analysis indicates that the recovery will be lethargic, with employment growth lagging behind the rest of the economy.

Source: Duke/CFO Magazine Global Business Outlook Survey, September 17, 2009.

As far as hard data are concerned, an index compiled by the Bureau for Economic Policy Analysis, a Dutch research institute, showed the volume of world trade rising by 3.5% in July after a revised increase of 1.6% in June - its fastest rise in more than five years, as reported by the Financial Times.

Also, according to China’s National Bureau of Statistics (via US Global Investors), as of the end of June 97% of the 151 million migrant workers in the country have landed a job, a significant improvement from early this year when more than 20 million migrant workers were reported as being unemployed.

A snapshot of the week’s US economic reports is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

Friday, September 25
• New homes sales - many encouraging details to report
• Aircraft orders bring down orders of durables in August

Thursday, September 24
• Sales of existing homes are stabilizing, although headline reading fell in August
• Initial jobless claims decline, but tally of unemployment insurance recipients advances
• Surveys point to subdued Eurozone recovery

Wednesday, September 23
• FOMC policy statement - nature of incoming data allows Fed to wait and watch

Monday, September 21
• Index of Leading Economic Indicators - confirms economic recovery is under way

The Fed mentioned in its quarterly flow-of-funds report that American households were $2 trillion richer on June 30 than they had been three months earlier - the first time in two years that household net worth had increased. “Household wealth rose in the second quarter at a 17% annual rate, or $2 trillion, to $53.1 trillion after falling at a 13% rate in the first quarter, the Fed said. It was the first time since the second quarter of 2007 that wealth had increased. Net worth is down $12.2 trillion from the peak in 2007, an indication of how much the collapse in stock prices and home prices has hurt,” said MarketWatch.

Source: Market Minds (via Bianco Research), September 24, 2009.

On the topic of wealth destruction, the chart below, courtesy of Chart of the Day, not only illustrates that house prices are currently 30% off their 2005 peak, but also that a home buyer who bought a median-priced single-family home at the 1979 peak has seen that home appreciate by a mere 4% over the ensuing three decades.

Source: Chart of the Day, September 25, 2009.

The US has lent, spent or guaranteed $11.6 trillion to bolster banks and fight the longest recession in 70 years, according to data compiled by Bloomberg.

“There’s not a lot of new job creation going on on Main Street, and the liquidity to the consumer and to small business is still contracting,” bank analyst Meredith Whitney said on CNBC (via MoneyNews). “It’s very difficult to get the engine moving without a lot of government support within that. So when you slowly wean government support, that’s going to be the test that I think everyone’s going to be watching starting in October.”

Richard Koo, author of Balance Sheet Recession and chief economist at Nomura Research Institute, said in an interview with Kate Welling at Welling@Weeden (via Dow Theory Letters): “In this type of recession, the economy will not enter self-sustaining growth until private sector balance sheets are repaired. Until the private sector is finished repairing its balance sheets, if the government tries to cut its spending, we’re going to fall into the same trap that Franklin Roosevelt fell into in 1937 (a crushing bear market) and Prime Minister Hashimoto fell into in 1997, exactly 70 years later.

“The economy will collapse again and the second collapse is usually far worse than the first collapse. And the reason is that, after the first collapse, people tend to blame themselves. They say, ‘I shouldn’t have played the bubble. I shouldn’t have borrowed money to invest - to speculate on these things.’ But a second collapse affects everyone, not just the bubble speculators, and it also suggests to the public that all the efforts to fight the downturn up to that point - all the monetary easing, the low interest rates, quantitative easing - they all failed and even fiscal policy failed. Once that kind of mindset sets in, it becomes ten times more difficult to get the economy going again.

“So the fact that Larry Summers was talking about ‘temporary’ fiscal stimulus had me very, very worried. That whole Larry Summers idea that one big injection of fiscal stimulus will get the US out of the recession, and everything will be fine thereafter, probably led to President Obama’s saying he’s going to cut his budget deficit in half in four years.”

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

Source: Yahoo Finance, September 25, 2009.

Click here for a summary of Wells Fargo Securities’ weekly economic and financial commentary.

US economic data reports for the week include the following:

Tuesday, September 29
• Case-Shiller Housing Price Index
• Consumer confidence

Wednesday, September 30
• ADP employment
• GDP - final
• Chicago PMI

Thursday, October 1
• Initial jobless claims
• Personal income and spending
• Construction spending
• ISM Index
• Pending home sales

Friday, October 2
• Employment data
• Factory orders

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

Source: Wall Street Journal Online, September 25, 2009.

“Genius may have its limitations, but stupidity is not thus handicapped,” said Elbert Hubbard, American writer and philosopher (hat tip: Charles Kirk - do make a point of visiting his excellent site). Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist readers of Investment Postcards to make sensible investment decisions to ensure sold wealth building over time.

For short comments - maximum 140 characters - on topical economic and market issues, web links and graphs, you can also follow me on Twitter by clicking here.

That’s the way it looks from Cape Town (where my bags are almost packed for my first visit to Dallas to attend friend John Mauldin’s 60^th birthday celebrations).

Source: Despair (hat tip: The Big Picture)

Bloomberg: G-20 unites again to curb bank pay, align economic policy
“Group of 20 leaders built on the common front they forged in fighting the financial crisis to chart a shared-path toward a more stable banking system and a stronger global economy.

“President Barack Obama and his counterparts ended their Pittsburgh meeting yesterday promising to ‘raise standards together’ to ensure banks restrain pay and build up capital buffers. They also established a peer-review process to monitor individual efforts to rebalance their economies and to hand emerging economies a greater say in managing world growth.

“‘There is much more work to be done, but we leave here today more confident and more united in the common effort of advancing security and prosperity for all of our people,’ Obama told reporters yesterday after hosting his first summit.

“A lot is at stake. While the international economy is showing signs of recovering from its worst recession since World War II, pockets of weakness remain, especially in the US and other industrial countries. Demand for US durable goods unexpectedly fell in August and loans to households and companies in Europe grew at the slowest pace on record, data showed yesterday.

“‘It’s going to be slow going,’ said former US Treasury Secretary Paul O’Neill, who once ran Alcoa Inc., the largest US producer of aluminum, from Pittsburgh and still lives in the city. ‘We’re getting a recovery but it won’t be fast.’

“The third summit of G-20 leaders in the past year plotted a roadmap for revamping the banking industry after the two previous meetings, in Washington and London, focused on fighting market turmoil and reverse the spiral into recession.

“‘Given this is the third meeting of these people in 10 months, the fact that they’ve gotten as much substantively done as they have is quite impressive,’ said Edwin Truman, a former adviser to Obama’s Treasury and a senior fellow at the Peterson Institute for International Economics in Washington.

“After recording $1.6 trillion in losses and writedowns, banks were told to avoid ‘multi-year guaranteed bonuses’ and a ’significant portion of variable compensation’ must be deferred, paid in stock, tied to performance and subjected to clawbacks if earnings flop. The G-20 stopped short of endorsing a French proposal to introduce specific caps on pay.

“Awards must also be curbed if they are “inconsistent with the maintenance of a sound capital base.” Regulators should be allowed to modify the compensation practices of key firms. Banks will also have to increase the quality and quantity of capital they hold by the end of 2012.

“The growing influence of emerging economies such as China and Brazil was marked by the agreement that the G-20 would supplant the G-8 as the guardian of the world economy.”

“The leaders agreed to phase out subsidies for fossil fuels in the ‘medium term,’ without setting a deadline. They also plan to intensify their monitoring of tax havens from next month to ensure economies follow through on promises to comply with global standards.”

Source: Simon Kennedy and Rich Miller, Bloomberg, September 26, 2009.

MoneyNews: Putin - US should scrap trade barriers
“Russian Prime Minister Vladimir Putin on Friday praised President Barack Obama’s decision to scrap plans for a missile defense system in Europe and urged the US to also cancel Cold War-era restrictions on trade with Russia.

“NATO Secretary-General Anders Fogh Rasmussen said the Western alliance and Russia should consider linking their defensive missile systems.

“He said NATO and Russia have a shared interest in combatting the proliferation of intercontinental ballistic missile technology in East Asia and the Middle East.

“‘If North Korea stays nuclear and if Iran becomes nuclear, some of their neighbors might feel compelled to follow their example,’ Fogh Rasmussen said.

“Obama’s predecessor, George W. Bush, had pushed to base elements of a missile defense system in Poland and the Czech Republic, saying it would help defend against a missile attack from Iran. But the Kremlin strenuously objected, fearing that the system would compromise Russia strategic nuclear capabilities or be used to eavesdrop on Russian military forces.

“Russian leaders in the past threatened to deploy short-range missiles to the Baltic exclave of Kaliningrad near Poland if the US moved ahead with the missile defense plan.

“On Friday, the Interfax news quoted an unnamed Russian military-diplomatic source as saying that such retaliatory measures would now be frozen and, possibly, fully canceled in response to Obama’s decision to scrap the missile defense shield.

“Russian president Dmitry Medvedev on Thursday praised the US decision to dump the missile defense plan as a ‘responsible move’.

Source: MoneyNews, September 18, 2009.

Ifo: Business Climate Survey - brighter outlook for Germany
“Appraisals of the business situation and outlook have improved. However, by far the greater number of firms still assesses the business situation as poor. Only with regard to the six-month business outlook is there now nearly a balance between pessimists and optimists. In light of the catastrophic developments over the past twelve months, this is good news.”

Source: Ifo, September 24, 2009.

Nigel Rendell (RBC Capital Markets): Softly ahead on CEE
“Central and eastern European markets have rallied strongly in the past six months but investors should still proceed with caution, says Nigel Rendell, senior emerging markets strategist at RBC Capital Markets.

“‘As capital has gradually returned to the region - through a combination of IMF rescue packages and portfolio flows - economies have started to show signs of bottoming out,’ he says.

“‘With the backstop of IMF funds for countries in severe financial difficulties, and the promise of precautionary credit lines to others, investors have returned to CEE.’

“But are the markets being too bullish and ignoring potential pitfalls? Mr Rendell outlines three main risks for the region.

“First, sustained recovery is highly dependent on a pick-up in western Europe. ‘Most CEE countries are small, open economies that rely on external demand to create economic growth.’

“Second, fiscal accounts in many CEE countries are in poor shape, with spiralling deficits that will require politically difficult tax rises and spending cuts to meet Maastricht budget criteria.

“Third, the Baltic states and Ukraine are still wild cards, where economic uncertainty and market volatility could feed through to the rest of CEE.

“‘Rather than break long established currency pegs, all three Baltic states have decided to go down the ‘internal devaluation’ route.

“‘We remain very doubtful whether this adjustment can work over the medium term.’”

Source: Nigel Rendell, RBC Capital Markets (via Financial Times), September 21, 2009.

The Wall Street Journal: FOMC - home buyers get a reprieve
“The Federal Reserve, in a move aimed at keeping interest rates low for home buyers through early next year, decided to extend and gradually phase out its purchase of mortgage-backed securities.

“The Fed’s action signals its belief that the economy, while in recovery, remains fragile and that housing, which has seen some improvement in recent months, has only started to pull out of its slump.

“‘We definitely need help from the government,’ says Lee Barrett, president of Century 21 Barrett, a real-estate brokerage firm in Las Vegas. ‘I don’t think the market can make it on its own.’ He also hopes Congress will extend tax credits for home buyers due to expire at the end of November.

“The central bank left its interest-rate target unchanged at zero to 0.25% and maintained its expectation that the federal-funds rate, or the rate banks charge each other for overnight loans, would remain low ‘for an extended period.’

“‘Economic activity has picked up following its severe downturn,’ the Federal Open Market Committee said Wednesday in a statement after a two-day meeting. Though conditions in financial markets and the housing sector have improved, household spending ‘remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit’, the Fed said.

“The Fed is about two-thirds of the way through its mortgage-purchase program, which was launched late last year to support mortgage lending, housing activity and broader credit markets. The central bank’s decision to complete the full $1.25 trillion in purchases of mortgage-backed securities - rather than ‘up to’ that amount, as it said in August - ended speculation that it might stop short, as a handful of policymakers have suggested. The Fed still plans to buy up to $200 billion in debt issued by Fannie Mae and Freddie Mac.”

Source: Sudeep Reddy and James Hagerty, The Wall Street Journal, September 24, 2009.

Bloomberg: Fed’s strategy reduces US bailout to $11.6 trillion
“The Federal Reserve decided to keep pumping $1.25 trillion of new money into the mortgage market to focus on rescuing the US economy as the financial system revives and banks ask for less help.

“The Fed is allowing some of the 10 support programs it created or expanded after the credit crisis began in August 2007 to expire or shrink. That caused the first decline in the amount of money the US has committed on behalf of taxpayers to end the recession, according to data compiled by Bloomberg.

“The central bank has purchased $694 billion of mortgage- backed securities since January and plans to spend $556 billion more by April 2010 to keep interest rates down. The debt-buying is the biggest program in the Fed’s arsenal.

“‘The first thing the Fed had to do was stop the bleeding in the banking system,’ said Richard Yamarone, director of economic research at Argus Research Corp. in New York. ‘Now that that seems to have been accomplished, they’re focusing on the economy by buying mortgage-backed securities.’

“The purchases were scheduled to stop at the end of December. The Federal Open Market Committee decided on September 23 to continue the program through the first quarter of next year and slow the pace of buying to ‘promote a smooth transition in markets’, the committee said in a statement. It also said the economy has ‘picked up’.

“The US has lent, spent or guaranteed $11.6 trillion to bolster banks and fight the longest recession in 70 years, according to data compiled by Bloomberg. That’s a 9.4% decline since March 31, when Bloomberg last calculated the total at $12.8 trillion.”

===========================================================
                                  --- Amounts (Billions)---
                                    Limit         Current
===========================================================
Total                            $11,563.65     $3,025.27
-----------------------------------------------------------
 Federal Reserve Total            $5,870.65     $1,590.11
  Primary Credit Discount           $110.74        $28.51
  Secondary Credit                    $1.00         $0.58
  Primary dealer and others         $147.00         $0.00
  ABCP Liquidity                    $145.89         $0.08
  AIG Credit                         $60.00        $38.81
  Commercial Paper program        $1,200.00        $42.44
  Maiden Lane (Bear Stearns assets)  $29.50        $26.19
  Maiden Lane II  (AIG assets)       $22.50        $14.66
  Maiden Lane III (AIG assets)       $30.00        $20.55
  Term Securities Lending            $75.00         $0.00
  Term Auction Facility             $375.00       $196.02
  Securities lending overnight       $10.42         $9.25
  Term Asset-Backed Loans (TALF)  $1,000.00        $41.88
  Currency Swaps/Other Assets       $606.00        $59.12
  GSE Debt Purchases                $200.00       $129.21
  GSE Mortgage-Backed Securities  $1,250.00       $693.60
  Citigroup Bailout Fed Portion     $220.40         $0.00
  Bank of America Bailout            $87.20         $0.00
  Commitment to Buy Treasuries      $300.00       $289.22
-----------------------------------------------------------
Treasury Total                    $2,909.50     $1,075.91
  TARP                              $700.00       $372.43
  Tax Break for Banks                $29.00        $29.00
  Stimulus Package (Bush)           $168.00       $168.00
  Stimulus II (Obama)               $787.00       $303.60
  Treasury Exchange Stabilization    $50.00         $0.00
  Student Loan Purchases             $60.00         $0.00
  Citigroup Bailout Treasury          $5.00         $0.00
  Bank of America Bailout Treasury    $7.50         $0.00
  Support for Fannie/Freddie        $400.00       $200.00
  Line of Credit for FDIC           $500.00         $0.00
  Treasury Commitment to TALF       $100.00         $0.00
  Treasury Commitment to PPIP       $100.00         $0.00
  Cash for Clunkers                   $3.00         $2.88
-----------------------------------------------------------
FDIC Total                        $2,477.50       $356.00
  Public-Private Investment (PPIP)$1,000.00          0.00
  Temporary Liquidity Guarantees* $1,400.00       $301.00
  Guaranteeing GE Debt               $65.00        $55.00
  Citigroup Bailout, FDIC Share      $10.00         $0.00
  Bank of America Bailout, FDIC Share $2.50         $0.00
-----------------------------------------------------------
HUD Total                           $306.00         $3.25
  Hope for Homeowners (FHA)         $300.00         $3.20
  Neighborhood Stabilization (FHA)    $6.00         $0.05
-----------------------------------------------------------
* The program has generated $9.3 billion in income,
according to the agency.

Glossary: ABCP — Asset-backed commercial paper AIG — American International Group Inc. FDIC — Federal Deposit Insurance Corp. FHA — Federal Housing Administration, a division of HUD GE — General Electric Co. GSE — Government-sponsored enterprises (Fannie Mae, Freddie Mac and Ginnie Mae) HUD — U.S. Department of Housing and Urban Development TARP — Troubled Asset Relief Program

Breakout of TARP funds:
===========================================================
                                  --- Amounts (Billions)---
                                     Outlay      Returned
===========================================================
Total                              $447.76        $75.33
-----------------------------------------------------------
Capital Purchase Program           $204.55        $70.56
General Motors, Chrysler            $79.97         $2.14
American International Group        $69.84         $0.00
Making Home Affordable Program      $23.40         $1.13
Targeted Investment Bank of America $20.00         $0.00
Targeted Investment Citigroup       $20.00         $0.00
Term Asset-Backed Loan (TALF)       $20.00         $0.00
Citigroup Bailout                    $5.00         $0.00
Auto Suppliers                       $5.00         $1.50

Source: Mark Pittman and Bob Ivry, Bloomberg, September 25, 2009.

MoneyNews: Richard Rahn - the growing debt bomb
“Assume you had put much of your savings into US government bonds and then you learned the following. In just the last eight months, the Congressional Budget Office estimates of the amount of additional federal debt to be held by the public grew by an astounding $4 trillion for the 2010-19 period; and that the amount of federal debt held by the public grew from $5.9 trillion to $7.5 trillion in just the last 12 months.

“In addition, you learned that the federal government (i.e. taxpayers) now owns (primarily through Fannie Mae and Freddie Mac) or insures (through the Federal Housing Administration and other government programs) about 80% of the $14.6 trillion of home mortgages outstanding in the United States. Last week, Congress passed a bill requiring all student loans be made by the federal government rather than banks, which means the taxpayers will be 100% liable for any student loan defaults.

“You also learned that the Federal Deposit Insurance Corp. is considering tapping its Treasury credit line for up to $500 billion. It needs to do this because of the high number of bank failures and because each bank account is insured by the government (i.e. taxpayers) up to $250,000. The president and many in Congress are calling for a roughly $1 trillion health care bill - paid for by additional debt and/or more taxes, which will further slow economic growth, eventually leading to even more debt.

“Finally, you also became aware of the following facts: Federal government expenditures are growing far faster than the economy, and thus the government is becoming a larger and larger share of gross domestic product. Obviously, this cannot continue forever because eventually the government would totally drive out the private sector.

“The entitlement programs (i.e. Social Security, Medicare, Medicaid, etc.) all continue to grow faster than the economy, and they will take more than 100% of all federal tax revenue this year, requiring that virtually all of the other government spending programs, including defense and interest payments on the debt, be funded by more borrowing.

“You are also aware that the government cannot tax its way out of the deficit situation, because increasing income tax rates on the upper income people will both slow the economy and cause them to find legal or illegal ways to avoid the tax increase, and the politicians have pledged to not increase taxes on those making less than $250,000, which includes all but a very few Americans.”

Click here for the full article.

Source: Richard Rahn, MoneyNews, September 22, 2009. (Richard Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.)

Bloomberg: Fed said to start talks with dealers on using reverse repos
“The Federal Reserve has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system the last two years, according to people with knowledge of the discussions.

“Central bank officials are discussing plans to use so-called reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, said the people, who declined to be identified because the talks are private. That’s where the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system.

“There’s no sense that policy makers intend to withdraw funds anytime soon, said the people. The central bank’s challenge is to decrease the cash without stunting the economy’s recovery and before it sparks inflation. Fed Chairman Ben Bernanke said in a July Wall Street Journal opinion article that reverse repos are one tool to accomplish that goal without raising interest rates.

“‘One thing the Fed has to figure out is if they can launch pilot programs without spooking the market and creating the perception that they are about to tighten,’ said Louis Crandall, chief economist at Wrightson ICAP, a Jersey City, New Jersey-based research firm that specializes in government finance. ‘They are discussing things like accounting issues, and updating the governing documents to the volume of reverse repos the dealer community could absorb.’

“Deborah Kilroe, a spokeswoman for the Federal Reserve Bank of New York, declined to comment about meetings with dealers. Total assets on the Fed’s balance sheet stand at $2.14 trillion, up more than a $1 trillion since the collapse of the subprime mortgage market in August 2007 triggered the worst global financial crisis since the Great Depression.”

Source: Liz Capo McCormick, Bloomberg, September 22, 2009.

MoneyNews: Whitney - end of government aid a big test
“Bank analyst Meredith Whitney remains bearish on the economy, particularly when it comes to jobs.

“‘There’s not a lot of new job creation going on on Main Street, and the liquidity to the consumer and to small business is still contracting,’ she said on CNBC.

“‘It’s very difficult to get the engine moving without a lot of government support within that. So when you slowly wean government support, that’s going to be the test that I think everyone’s going to be watching starting in October.’

“She questioned where new jobs will come from.

“‘Once companies become more productive do they go back and say I want to become less productive? … You have to have a revolutionary application to hire people,’ Whitney says.

“‘Surely if this country becomes massively protectionist we’ll build up manufacturing capabilities. Is that necessarily a good thing? No.’

“Half of the work force toils in small businesses, she notes. But, ‘there’s not a lot of free capital for small business innovation, small business period’.

“As for the banks, ‘they’re now doing everything they can to keep loans on the books and not write them down,’ she notes. ‘They’re extending and pretending with loans.’”

Source: Dan Weil, MoneyNews, September 21, 2009.

MoneyNews: Taylor - rates may rise early in 2010
“The Federal Reserve may hike up interest rates to combat inflation as early as the beginning of next year, says Stanford University Professor John Taylor.

“Interest rates have hovered at a very low target range of zero to 0.25% since December, as monetary policymakers have worked to get the country out of the recession.

“Lower lending rates can eventually lead to rising consumer prices.

“The government, meanwhile, has earmarked $787 billion in stimulus spending programs that should inflate the country’s budget deficit, which can also fuel inflation, Taylor told Bloomberg News.

“The Congressional Budget Office predicts the budget deficit will widen to $1.6 trillion this year.

“On top of low interest rates, the Federal Reserve balance sheet has ballooned by $1.2 trillion since the monetary authority bailed out organizations such as insurance giant AIG and took on other assets.

“‘The Fed’s balance sheet has just exploded. They’ve got to find a way to bring it down,’ Taylor said.

“Now, Obama administration officials say, the financial system is on the mend and it’s time for the government to start stepping aside.

“‘The financial system is showing very important signs of repair,’ Treasury Secretary Timothy Geithner said.

“Markets on the mend do not mean that the overall economy is very close to fully healing, he also cautioned.

“‘I would not want anyone to be left with the impression that we’re not still facing really substantial enormous challenges throughout the US financial system.’

“Geithner told Congress this week the government will soon roll back support for Wall Street rescue programs, a move that Taylor applauds.”

Source: Forrest Jones, MoneyNews, September 17, 2009.

Asha Bangalore (Northern Trust): Index of Leading Economic Indicators - confirms economic recovery is underway
“Chairman Bernanke noted last week that a recovery is most likely underway. Our forecast is for a 2.5% increase in real GDP during the third quarter, which is slightly lower than the market consensus. The advance estimate of real GDP for the third quarter will be published on October 29.

“The Index of Leading Economic Indicators rose 0.6% in August, the fifth consecutive monthly increase of the index. On a year-to-year basis, the index moved up 1.89%, the largest gain since May 2006. The July-August average translates to a 1.32% from the third quarter of 2008, the first increase since the first quarter of 2007. Historically, the year-to-year change in the LEI advanced one quarter has a strong positive correlation with the year-to-year change in real GDP.

“This evidence and other economic reports - ISM manufacturing survey, industrial productions index - support expectations that an economic recovery commenced in the third quarter of 2009.

“In August, the workweek held steady, jobless claims, orders of non-defense capital goods and real money supply declined. The remaining seven components - orders of durable consumer goods, supplier deliveries, building permits, interest rate spreads, index of consumer expectations and stock prices moved up. Effectively, there is a widespread improvement in economic conditions, which had been brought about by policy changes. The impact from monetary policy accommodation is evident. The possible impact from the $787 billion fiscal stimulus package will be available in 2010. By the end of fiscal year 2009, roughly 24% of the fiscal package will have been spent.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 21, 2009.

Asha Bangalore (Northern Trust): Aircraft orders bring down orders of durables
“The 42.2% drop in orders of new civilian aircraft in August after a robust 92.2% increase in the prior month led to the 2.4% drop in orders of durable goods in August vs. a 2.8% jump in July. Primary metals, machinery, and autos recorded gains in orders during August. Bookings of non-defense capital goods excluding aircraft fell 0.4% in August after a 1.3% decline in July.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 25, 2009.

Asha Bangalore (Northern Trust): Sales of existing homes are stabilizing
“Sales of all existing homes fell 2.7% to an annual rate of 5.1 million units during August, following a string of four monthly gains. Sales of new single-family homes fell 2.8% to an annual rate of 4.48 million units. The sales level of single-family existing homes is now up 10% from the record low of 4.050 million units in January. In the course of the economic recovery, all economic indicators inclusive of housing measures are likely to show small setbacks than post a straight upward trend.

“It is noteworthy that on a year-to-year basis, sales of all existing homes and single-family homes have risen for three straight months. The Fed’s policy statement on September 23 also pointed to improving conditions in the housing sector. The $8,000 first-time home buyer credit appears to have played a role in bringing about stability in the housing market. The new home sales report for August will be published on September 25.

“The median price of a single-family existing home fell 12.1% from a year ago to $177,500. The largest historical year-to-year drop of the median price of an existing single-family home was recorded in January 2009 (-17.5%)

“The seasonally adjusted inventory-sales ratio of existing single-family homes was an 8.1-month supply in August vs. 8.24-month supply in July. The cycle high reading occurred in November 2008.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 24, 2009.

Asha Bangalore (Northern Trust): New homes sales - many encouraging details
“Sales of new single-family homes increased slightly in August to an annual rate of 429,000 from 426,000 in July. Sales of new single-family homes have risen 30.4% from the record low of 329,000 units in January 2009.

“The most noteworthy aspect of the report is that sales of new homes held steady in August compared with the sales tally a year ago.

“The median price of a new single-family home stood at $195,700 in August, down 11.7% from a year ago. The largest drop in the median price occurred in February 2009 (-14.5%).

“The inventory of unsold new homes fell to 7.3-month supply in August vs. 7.6-month supply in July. The median inventory of unsold homes during 1963-2001 is 6-month supply. The $8,000 first-time home buyer tax credit and low mortgage rates have helped to stabilize sales of homes.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 25, 2009.

Eoin Treacy (Fullermoney): US Homebuilding Index leads Case/Shiller
“The overlay of the S&P500 Homebuilding Index with the Case/Shiller Composite-10 Index shows the sector topping out almost a year ahead of house prices. The sector lost downward momentum from January 2008 and has arguably been in a period of base formation since. It hit an important low in November, posted a consistent succession of higher reaction lows since and pushed above the 200-day moving average which has now also turned upwards.

“Given the sector’s lead over the Case/Shiller Index, it is plausible to assume that house prices have begun to bottom out. However, this is also likely to a lengthy process.”

Source: Eoin Treacy, Fullermoney, September 23, 2009.

Bloomberg: Housing crash to resume on 7 million foreclosures
“The crash in US home prices will probably resume because about 7 million properties that are likely to be seized by lenders have yet to hit the market, Amherst Securities Group analysts said.

“The ‘huge shadow inventory’, reflecting mortgages already being foreclosed upon or now delinquent and likely to be, compares with 1.27 million in 2005, the analysts led by Laurie Goodman wrote today in a report. Assuming no other homes are on the market, it would take 1.35 years to sell the properties based on the current pace of existing-home sales, they said.

“Helping to stoke speculation the housing slump has ended, an S&P/Case-Shiller Index for 20 US metropolitan areas showed the first month-over-month increases in values since 2006 in May and June, reducing the drop from the peak to 31%. Echoing other mortgage-bond analysts including those at Barclays Capital, Amherst cautioned that a change in the mix of foreclosure and traditional sales over different parts of the year lifted prices in the period, as the distressed share shrank.

“‘The favorable seasonals will disappear over the coming months, and the reality of a 7 million-unit housing overhang is likely to set in,’ they said.

“The amount of pending foreclosed-home supply has been boosted by more borrowers going into default, fewer being able to catch up once they do, and longer time periods to seize properties because of issues such as loan-modification efforts and changes to state laws, the New York-based analysts wrote.”

Source: Jody Shenn, Bloomberg, September 23, 2009.

Chart of the Day (Clusterstock): The Option ARM Armageddon
“The Option Arm Armageddon was supposed to strike in the spring of 2009. Across the country, option adjustable-rate mortgages (ARMs) were set to detonate and start a new wave of foreclosures.

“But it never happened. We made it well past when this chart from Credit Suisse showed the option ARMs were supposed to begin to hit. And the crisis didn’t come.

“Why not? Well, when interest rates dropped to historically low levels as the Fed fought the financial crisis, the wave of resets was held off. Unfortunately, low interest rates won’t last forever - they’ll now likely strike next year and continue well into 2011. Many borrowers who now have the option of making payments so low that they don’t even cover the interest are seeing their original loan balance grow, even as their home values continue to fall or remain flat.

“The chart below shows that the option ARM reset problem is comparable to the subprime problem, and will likely last for quite some time. Armageddon may have been forestalled but it hasn’t been overcome.”

Source: John Carney and Kamelia Angelova, Clusterstock - Business Insider, September 21, 2009.

The Huffington Post: Landmark decision promises massive relief for homeowners and trouble for banks
“A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership.

“The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose - on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new US residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.

“The development of ‘electronic’ mortgages managed by MERS went hand in hand with the ’securitization’ of mortgage loans - chopping them into pieces and selling them off to investors. In the heyday of mortgage securitizations, before investors got wise to their risks, lenders would slice up loans, bundle them into ‘financial products’ called ‘collateralized debt obligations’ (CDOs), ostensibly insure them against default by wrapping them in derivatives called ‘credit default swaps’, and sell them to pension funds, municipal funds, foreign investment funds, and so forth.

“There were many secured parties, and the pieces kept changing hands; but MERS supposedly kept track of all these changes electronically. MERS would register and record mortgage loans in its name, and it would bring foreclosure actions in its name. MERS not only facilitated the rapid turnover of mortgages and mortgage-backed securities, but it has served as a sort of ‘corporate shield’ that protects investors from claims by borrowers concerning predatory lending practices.”

Click here for the full article.

Source: The Huffington Post, September 25, 2009.

Bloomberg: Card defaults surge in August
“US credit-card defaults rose to a record in August and more losses may lie ahead as delinquencies climbed for the first time since March, according to Moody’s Investors Service.

“Write-offs rose to 11.49% from 10.52% in July, Moody’s said today in a report. Loans at least 30 days delinquent rose to 5.8% from 5.73%. ‘Early- stage’ delinquencies, or loans overdue 30 to 59 days, surged to 1.65%, from 1.41%, signaling higher losses in coming months. Banks typically write off loans after 180 days.

“Card issuers have struggled with rising defaults as the recession drove up unemployment to 9.7% and the impact of income tax refunds waned. Credit-card defaults typically track the US jobless rate since consumers tend to fall behind on payments when their income dries up.

“‘We continue to call for a recovery of the credit-card sector to begin once industry average charge-offs peak in mid-2010 between 12% and 13%,” said the Moody’s report, which predicted unemployment may reach 10.5%.”

Source: Peter Eichenbaum, Bloomberg, September 23, 2009.

MoneyNews: Wave of commercial property defaults ahead
“Once flourishing commercial property sales are expected to hit their lowest point in almost two decades this year, and analysts say the growing loan default rate may significantly lower gains in real estate investment shares.

“‘There’s no real way to sugarcoat it,’ Real Capital Analytics managing director Dan Fasulo told Bloomberg.

“‘A slowdown of this magnitude certainly hasn’t occurred since I’ve been in the business.’

“‘Some of the older folks in the industry I talk to said it has a similar feel to the early ’90s, when transaction activity went to basically zero.’

“The volume of office sales in the second quarter was 97% less than the market’s peak in the first three months of 2007, according to Real Capital, whose data indicates that only about $16 billion of sales for office buildings will complete by year’s end.

“Moreover, fewer transactions make it more difficult for buyers and sellers to agree on prices, which in turn makes lenders less able to find the comparable transactions they need in order to evaluate loan worthiness.

“Returns on office investments this year have been running almost 1% higher than for moderate-risk long-term corporate bonds.

“Most commercial property mortgages made within the last few years are headed for default, says real estate financier Ethan Penner.

“‘For anything originated after 2005, the chances of those loans going into default are very high,’ Penner told The Dallas Morning News.

“‘A large majority of the loans originated in this period will ultimately go into default.’”

Source: Julie Crawshaw, MoneyNews, September 17, 2009.

Financial Times: European property groups face debt time-bomb
“European commercial property owners face a wave of complex debt refinancings and restructurings that pose a threat to the sector, according to bankers and industry groups.

“Senior bankers and industry representatives in the UK used a meeting with the Bank of England in the summer to highlight the problems caused by billions of pounds worth of debt that needs to be refinanced or has breached banking agreements.

“They are particularly concerned about the amount of European debt packaged in complex bonds, known as commercial mortgage-backed securities (CMBS), where restructuring has proved especially difficult and highlighted this issue to the Bank for the first time.

“The group, which includes senior bankers and representatives from the British Property Federation, the Royal Institution of Chartered Surveyors and the Investment Property Forum, believes the CMBS market remains important to the property sector.

“It discussed with the Bank whether a central bank guarantee could be used to underpin the debt issued, or whether the real estate investment trust market could be used by banks to offload their loans.

“There is mounting concern among industry professionals about how to restructure or refinance the $2,100 billion of European commercial property loans, in particular the $200 billion in CMBS.

“A report from the UK industry group that met with the Bank highlighted that the UK commercial property sector could be in negative equity until 2017 and undercapitalised by up to £120 billion ($195 billion) based on current conservative banking refinancing terms.

“Close to £43 billion of loans to the commercial property sector are due for repayment this year alone, according to De Montfort University research.

“Half of the outstanding European CMBS market needs to be repaid in 2011 and 2012, and CMBS in default have already proved difficult to restructure.

“‘The amount of outstanding CMBS that need to be refinanced poses an absolutely huge problem, which is waiting to hit the market,’ said Edmund O’Kelly, head of real estate restructuring at KPMG. ‘A lot of the technology for creating the structures was imported from the US, but they have never been tested in Europe. Restructuring CMBS is unchartered territory.’”

Source: Anousha Sakoui and Daniel Thomas, Financial Times, September 20, 2009.

Financial Times: Financial groups hit by surge in loan losses
“The US financial sector’s losses on large loans exploded over the past year, exceeding the combined losses since 2001, with hedge funds and other members of the ’shadow banking system’ hit the hardest, official figures revealed on Thursday.

“Regulators’ annual review of ’shared national credits’ - loans larger than $20 million shared by three or more federally regulated institutions - highlighted the toll taken by the crisis on financial groups outside the traditional banking sector.

“More than one in three dollars lent by non-bank institutions such as hedge funds, securitisation vehicles and pension funds, went sour, according to the figures, compared with 11.5% for US banks.

“The results will increase fears that, in spite of a recovery in the shares and balance sheets of many banks, the epicentre of the crisis has moved to the hedge funds and investors that gorged on cheap credit in the run-up to the turmoil.

“The importance of these non-bank institutions was underlined by the review’s finding that they held 47% of problem loans, in spite of accounting for only 21.2% of the total loan pool.

“Overall, the US financial sector’s losses on loans in early 2009 reached a record of $53 billion, almost triple the previous high in 2002.

“The number of loans edging into the danger zone has also surged.

“Some 15% of the $2,900 billion SNC portfolio was classified as ’substandard’ - the second of the four categories used by regulators - and worse, up from 5.8% in 2008.

“The pace at which loans got into serious trouble accelerated significantly. The dollar volume classed as ‘doubtful’ or loss-making increased 14-fold over the past year to $110 billion. ‘Doubtful’ loans are so weak that collection or liquidation is highly improbable.”

Source: Sarah O’Connor and Francesco Guerrera, Financial Times, September 25, 2009.

Financial Times: Liquidation of CDOs aids banks
“Billions of dollars’ worth of the complex securities at the heart of the financial crisis are being liquidated, enabling banks, insurance companies and other investors to clear toxic assets from their books.

“Market participants say the unwinding is occurring in the market for collateralised debt obligations (CDOs), complex securities backed by the payments on mortgages, corporate loans and other debt.

“Hundreds of billions of dollars of CDOs have defaulted, but the structures can only be liquidated if the underlying collateral can be sold. In recent weeks, more investors have been buying the underlying assets at deep discounts, leading to increased trade and boosting prices for some existing CDOs.

“‘There has been a significant increase in the amount of CDO liquidations,’ said Vishwanath Tirupattur, analyst at Morgan Stanley. ‘The rally across asset classes has given investors an incentive to liquidate.’

“CDOs were one of the main vehicles through which risky US mortgages were repackaged and sold to investors around the world. Much of their value was wiped out amid a wave of defaults on subprime mortgages. The inability to sell or unwind complex securities such as CDOs was one of the prime problems of the financial crisis. Now, the option to sell these so-called toxic assets is re-emerging. ‘For a long time it may have made sense for investors to liquidate CDOs, but this was not possible when there was no market for the underlying collateral,’ said Ed O’Connell, partner at Jones Day.

“The recent rally has been particularly marked for CDOs backed by corporate bonds and loans. Of the more than $500 billion of CDOs backed by asset-backed securities sold in the boom years, $350 billion have already experienced an ‘event of default’.

“Once that happens, the holders of the top tranches, those once rated triple A, can opt to liquidate the CDO. This involves selling off the collateral. CDOs backed by corporate loans are now trading at levels last seen nearly a year ago, shortly after the bankruptcy of Lehman Brothers. Morgan Stanley estimates about $123 billion of these defaulted CDOs have been liquidated.”

Source: Aline van Duyn, Financial Times, September 21, 2009.

Financial Times: BofA to pay $425 million over toxic assets
“Bank of America agreed late on Monday to pay $425 million to federal regulators to extricate itself from an agreement struck last December to protect the bank against $118 billion worth of toxic assets, most of which came from Merrill Lynch.

“The decision to pay the money to the US Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation brings an end to one of BofA’s financial entanglements with its overseers at a time when the bank is also trying to pay back $45 billion in funds to the troubled asset relief programme.

“The loss-protection agreement was part of a deal struck in December after Ken Lewis, BofA chief executive, told Hank Paulson, the then Treasury secretary, that he wanted to invoke a ‘material adverse change’ clause to abort his planned acquisition of Merrill Lynch.

“Mr Paulson, along with Ben Bernanke, the Federal Reserve chairman, encouraged Mr Lewis to proceed with the deal, and provided $20 billion in funds, on top of the $25 billion already earmarked for BofA and Merrill, to make sure the transaction was consummated. On top of the money, the regulators gave BofA a guarantee on $118 billion worth of troubled assets.

“BofA did not formally sign a contract for the ringfence protection and in May decided against entering into the insurance programme. For the past three months, the bank has been in negotiations with federal officials to determine the fair value of the perceived insurance provided by the guarantee.

“Meanwhile, the US Securities and Exchange Commission said it would consider adding charges to its lawsuit against BofA for allegedly failing to give investors details on executive bonuses.”

Source: Greg Farrell, Financial Times, September 22, 2009.

MoneyNews: Foreigners snapping up Treasuries, still
“While foreign investors such as China have threatened for months to dump Treasuries they are instead grabbing every last one they can get their hands on.

“Foreigners have purchased 43.1% of the $1.41 trillion of Treasury notes and bonds issued so far this year, compared with 27.1% of the $527 billion issued at this point in 2008, government figures show, Bloomberg reports.

“The Merrill Lynch Treasury Master Index of US securities returned 1.18% in the third quarter after the worst first half on record. Demand at Treasury auctions from the investor group, which includes central banks, surged to record heights.

“China is the biggest foreign owner of Treasuries, making net purchases of $24.1 billion in July and raising the country’s Treasury holdings 3.1% to $800.5 billion, the latest official data show.

“China’s Treasuries kitty has gained 10% this year, after a 52% jump last year.

“‘The interest rate on long-term Treasury bonds is at a very low level by historical standards,’ David Dollar, the Treasury Department’s economic and financial emissary to China said at a recent conference. ‘That says that the market has confidence the U.S. will get the fiscal problem under control.’”

Source: Dan Weil, MoneyNews, September 24, 2009.

Bespoke: International equity market snapshot
“Below we provide our unique trading range charts for major country indices. For each index, the light blue shading represents between one standard deviation above and below the 50-day moving average. When the price is within this trading range, it is considered to be in ‘neutral’ territory. The red zone represents between one and two standard deviations above the index’s 50-day moving average. Moves into or above the red zone are considered ‘overbought’. Moves into the green zone (more than one standard deviation below the 50-DMA) are considered ‘oversold’.

“With the exception of a few Asian countries, most indices are trading into overbought territory. China’s Shanghai Composite is the only index trading below its 50-day moving average. Australia, Brazil, South Korea, Taiwan, the UK, and the US look to be the most overbought of the bunch. After trading in perpetual downtrends for nearly all of 2008 and the first few months of 2009, most countries have now been trading in solid uptrends for five months now, with only a brief pullback here and there. Brazil, China, Hong Kong, India, Malaysia, Mexico, Singapore, Sweden, Spain, South Korea, and Taiwan have all taken out their 52-week highs in recent months, while the rest still have a bit further to go.”

Source: Bespoke, September 21, 2009.

Bespoke: Investors get back $18.31 trilion
“Below we highlight the total market capitalization of stocks both globally and in the US. At its peak in 2007, total world market cap was $62.57 trillion. By the lows this March, world market cap had dropped to $25.6 trillion! That’s a loss of $36.97 trillion in stocks globally. Since the March lows, however, world market cap has risen $18.31 trillion back up to $43.9 trillion.

“In the US, market cap has risen $4.88 trillion from its low of $8.09 trillion in March. The peak in total US stock market value was $19.14 trillion in 2007, and the current value of all US stocks is $12.97 trillion. The US accounts for 29.5% of total stock market value in the world.”

Source: Bespoke, September 21, 2009.

David Fuller (Fullermoney): Riding the stock market bull
“I maintain that we are still in the comparatively early stages of the second psychological perception stage of a bull market, characterized by the ‘wall of worry’. This stage is often longer than its predecessor - disbelief during the base building phase, or the final euphoria during an accelerated peak. Today, many investors are still nervous, not least as we have yet to pass the anniversary of last October’s low, when most of today’s leaders bottomed.

“Today, I am not more bullish than earlier in the year when China and other favorites were so clearly leading the base formation development and completion stage. After all, the low hanging fruit in terms of valuation bargains has already been harvested. Nevertheless, momentum bull phases should not be underestimated, especially when interest rates remain low and monetary policy is still accommodative. Also, the earnings growth phase of this bull cycle lies ahead of us and this will be more robust in Asia than most other regions of the globe.

“As investors we need to remember that due to the human element, markets are much more volatile than changes in underlying fundamentals. Over the last year we have seen astonishing fundamental changes and even more dramatic price moves. We are moving into a period when fundamental surprises should be mainly to the upside, not least due to year-on-year comparisons for 4Q 2009 and 1Q 2010. Once again, this should favour Asia, export and some consumer stocks excepted.

“Meanwhile, investors will recall that even bullish momentum moves are sometimes punctuated by sudden reactions and consolidations. These may be triggered by a temporary news item or they may be random. It is difficult to time setbacks in an overall bullish environment although they are usually proceeded by overextensions relative to a mean such as the 200-day moving average. Mean reversions within an overall upward trend … are usually buying opportunities.

“The next significant danger period for investors is unlikely to arrive until a few months after leading central banks have clearly signaled their intent to tighten monetary policy. Today, we hear plenty of discussion as to when this might occur but policies remain accommodative.”

Source: David Fuller, Fullermoney, September 22, 2009.

Eoin Treacy (Fullermoney): Monetary conditions remain accommodative
“Interest rates have fallen about as low as they can go in the US and Japan and are only slightly higher in the UK and Europe. Most countries are now signalling that their next move will be upwards. However, this is not an immediate threat and central banks are only beginning to examine how stimulus can responsibly be removed. The process by which central banks are bailing out their respective financial sectors via the yield curve has been a tailwind for most stock and commodity markets.

“If we examine spreads between 10yr and 2yr yields across a range of countries a very similar pattern emerges. Spreads in the US, Eurozone, Canada and Switzerland are all close to historic highs. The corresponding spread for the UK is at new 17-year highs and continues to advance.

“These spreads clearly illustrate the loose monetary conditions permeating the global economy. These extraordinarily loose conditions will not last interminably and the current strong tailwind provided to risk assets will decrease over time. However, it will not turn into a significant headwind until the next time these spreads invert, with moves below 0%. When this occurs, it will be a warning that we are in the latter stages of what remains likely to be a multi-year stock market advance.

“No significant uptrend unfolds in a straight line. We can expect occasional corrections along the way. However, as long as monetary conditions remain accommodative, these are likely to be good medium-term buying opportunities.”

Source: Eoin Treacy, Fullermoney, September 24, 2009.

MoneyNews: Rosenberg - stocks vastly overvalued
“Economist David Rosenberg says the stock market has way overdone it on the upside.

“The Standard & Poor’s 500 Index has soared 60% from its March low.

“The S&P is at a level that should be reached in the third year of recovery from a recession, Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto, told Bloomberg.

“‘The market is being really fueled here by technicals and momentum,’ the former chief North American economist for Merrill Lynch said.

“‘It has overshot the fundamentals. I’m a little nervous, at least over the near-term.’

“Earnings for companies in the S&P 500 Index have fallen for a record eight straight quarters and will probably plunge 22% in the current period before growing 62% in the final three months of 2009, according to the average estimate of analysts surveyed by Bloomberg.

“Stock prices have surged to levels equal to almost 20 times reported earnings from continuing operations, the highest level in five years, according to weekly data compiled by Bloomberg.

“‘The fair multiple for earnings should be 12 or 13,’ Rosenberg said. ‘We’ve blown right through that.’

“Rosenberg isn’t the only bear.

“‘We think the market … is due for a pullback or setback only because it’s gone so far and economic growth cannot go so far,’ says Bill Gross, chief investment officer at bond giant Pimco, told CNBC.”

Source: Dan Weil, MoneyNews, September 22, 2009.

MoneyNews: Odey - stock market bubble forming
“Stock markets are now ‘entering a bubble phase’ which could last until the end of the year, says high-profile hedge fund manager Crispin Odey.

“Odey, founding partner at Odey Asset Management and one of the first investors to call a possible bull market early this year, said quantitative easing had fuelled the bubble but said real assets still appeared cheap compared with cash and government bonds, prompting investors to rush in.

“‘At some point the quantitative easing will have to come to an end but until it does this bull market is sponsored by HMG (Her Majesty’s Government) and everyone should enjoy it,’ the London-based manager said in a note to clients.”

Source: MoneyNews, September 22, 2009.

MoneyNews: Faber - choose stocks over bonds, cash
“Investment guru Marc Faber sees stocks outperforming cash and bonds as the Federal Reserve’s massive monetary stimulus props up the US economy.

“‘I think that he (Ben Bernanke) will print (money) like never before in history.’ As a result, the Standard & Poor’s 500 Index can rise as high as 1,250 in a year, up 17% from midday Wednesday, Faber told Bloomberg.

“‘Where there is inflation in the system as defined by money supply growth and credit growth, you have currency weakness. Stocks can easily go higher. If you print the money, they can go anywhere.’

“But the growing US debt burden isn’t pretty, he points out. ‘You just postpone the problem until the ultimate crisis happens. And that will happen one day. I don’t know whether it will be tomorrow or in three years, five years, 10 years. But the next crisis will bring down the entire capitalist system.’”

Source: Dan Weil, MoneyNews, September 24, 2009.

CNBC: Bill gross bearish on stocks
“Bill Gross, of Pimco; Robert Doll, of BlackRock; and Daniel Tishman, of Tishman Construction, share their market insight.”

Source: CNBC, September 21, 2009.

Richard Russell (Dow Theory Letters): Stock market rally is tired
“I’m studying the daily chart of the Dow below. RSI appears to have hit the overbought area (70) and has turned down from there. MACD has three declining tops with the blue histograms about to turn negative. The thin red line above volume has been steadily declining, indicating a contracting of volume as the Dow climbed. All this gives me food for thought. The rally is tired. But far more important, is the rally topping out? We should know over the coming two or three weeks.”

Source: Richard Russell, Dow Theory Letters, September 24, 2009.

Chart of the Day (Clusterstock): Investor sentiment rebound could be a bearish sign
“42% of individual investors are bullish right now, according to most recent sentiment data from the American Association of Individual Investors (AAII). While investor sentiment has changed dramatically since March, we’re still only moderately above the long-term average of 39%.

“The problem is that professional investors are likely to be more optimistic than AAII’s investor sentiment, since they became optimistic earlier in the game this year. Overall bullish sentiment could thus be higher once you combine individual investors with these pros.

“The market could be approaching a tricky stage whereby one has to gauge the potential for new bulls to be disappointed versus that for further bears or fence-sitters to capitulate. Given the uncertain times, even moderately above-average bullishness, shown below, could signal a short-term sentiment peak.”

Source: Vincent Fernando and Joe Weisenthal, Clusterstock - Business Insider, September 22, 2009.

Bespoke: S&P 500 net new highs
“The S&P 500 closed at another high for 2009 today, but it still remains well below its 52-week high of 1,255 (September 22, 2008). As the market has rallied, we have been watching the number of stocks in the index making new 52-week highs for confirmation of the rally. Even though the number has been relatively low, with each new high in the S&P 500, the number of stocks making new highs has increased. Today [Tuesday], however, was an exception. Even though the S&P 500 closed at a new high for the year, only 5% of the stocks in the index hit a 52-week high. This is down from last week’s peak of 7.6% when the S&P 500 was at similar levels. Given that it has only been one day, we wouldn’t read too much into this indicator yet, but it certainly warrants watching.”

Source: Bespoke, September 22, 2009.

Bespoke: Polar opposites - equities vs US dollar
“While the inverse relationship between the dollar and stocks is well documented, the recent intraday movements of the two assets takes it to another level. The chart below shows the intraday chart of the S&P 500 over the last two days compared to the US Dollar Index on an inverse scale. In other words, a rising red line indicates dollar weakness while a falling red line indicates dollar strength. As shown in the chart, since the Fed’s rate announcement yesterday, the dollar’s strength has been in exact lockstep with the weakness in equities. Over the last two trading days, the S&P 500’s correlation to the US dollar index has been -0.97. You can’t get much more negatively correlated than that!”

Source: Bespoke, September 24, 2009.

John Normand (JPMorgan): This is not a currency crisis
“The latest sell-off in the dollar has prompted renewed talk of reserve diversification - but this is not the stuff a currency crisis is made of, says John Normand, global head of FX strategy at JPMorgan.

“‘Quantifying reserve diversification is financial alchemy - often attempted and never successful,’ he says. ‘But there is decent circumstantial evidence that this process has accelerated since June.’

“Mr Normand notes that global foreign exchange reserves are growing at $100 billion a month, while official purchases of US assets are running near $50 billion. ‘This sort of divergence is unusual in an environment where rate spreads between the US and the rest of the world are stable,’ he says.

“Mr Normand points out that official investors are still sizeable net buyers of US assets, even if the dollar share of total reserve recycling appears to be declining.

“‘We could pander to the dollar-crisis camp and claim that this divergence marks the beginning of the end for the dollar and US asset markets where foreign ownership dominates, but that course would be too easy,’ he says. ‘It would also be wrong.

“‘The dollar crisis scenario still looks low-probability for the next three to six months since the US manages to attract a high absolute level of official financing, even though the US’s relative share of global reserves may be declining.’”

Source: John Normand, JPMorgan (via Financial Times), September 22, 2009.

Ambrose Evans-Pritchard (Telegraph): HSBC bids farewell to dollar supremacy
“‘The dollar looks awfully like sterling after the First World War,’ said David Bloom, the bank’s currency chief.

“‘The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK - debt is racing up to 100% of GDP,’ he said

“Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia’s ‘mercantilist mindset’ of recent decades is about to be broken by the spectre of an inflation spiral.

“The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.

“A monetary policy of near zero rates - further juiced by quantitative easing - is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.

“What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt.

“The Fed’s super-loose policy is turning the dollar into the key funding currency for the next phase of the global ‘carry trade’, taking over the role of Japan during its period of emergency stimulus.

“Mr Bloom said regional currencies would emerge as the anchor for their smaller trading partners, with China, Brazil, or South Africa substituting the role of the US. Australia is already linking its fortunes to China through commodity ties.”

Source: Ambrose Evans-Pritchard, Telegraph, September 20, 2009.

Yahoo Finance: IMF approves sale of some of its gold
“The International Monetary Fund approved on Friday the sale of a limited amount of its gold to help provide loans to poor countries and shore up its finances.

“The fund’s executive board said it decided to sell ‘a volume strictly limited to 403.3 metric tons’ - one-eighth of its holdings - in a way that does not disrupt the sale of gold in commodity markets, which already were expecting the sale and discounted the IMF decision.

“The IMF, a 186-nation Washington-based lending organization, is the third-largest official holder of gold in the world, with 3,217 metric tons, after the United States and Germany.

“The board said the IMF could sell its gold directly to its members’ central banks if any were interested or it could put the gold on the open market in phases.

“China, India and Russia have indicated interest in such purchases as a way of reducing their position in dollar-denominated securities and increasing their role in IMF operations. These countries and other developing nations have complained the IMF is dominated by the United States, its largest shareholder, and European nations.

“If the gold is sold on the open market, the IMF said it would inform these markets before any sale begins and report regularly to the public on the progress of gold sales.

“The IMF said it also would coordinate its sales with major central banks, who agreed last month on ceilings of gold sales amounting to 400 tons annually and 2,000 tons in total over five years.

“‘Hence, on-market sales by the fund will not add to the announced volume of official sales,’ the IMF said.

“The head of the IMF, Dominique Strauss-Kahn, expressed satisfaction with the board’s decision.

“‘I am delighted the executive board has given its overwhelming backing to a strictly limited sale of fund gold to put the finances of the IMF on sound, long-term footing and enable us to step up much-needed concessional lending to the poorest countries,’ he said.”

Source: Harry Dunphy, Yahoo Finance, September 18, 2009.

James Lord (Capital Economics): Baltic fall reflects China demand
“The recent sharp fall in the Baltic Dry Index is in part due to an increase in shipping capacity, but primarily reflects waning demand for commodities - especially in China, says James Lord at Capital Economics.

“‘The BDI, which has almost halved since the start of June, reflects the cost of hiring a bulk cargo ship and as such is often seen as an indicator of the health of the global economy.

“‘But we think the BDI’s drop is due to conditions specific to the shipping industry and to China’s reduced commodity stockpiling,’ Mr Lord says.

“He notes that orders for new ships rose sharply during the boom years for the global economy - and as it takes up to two years to build these craft, many have only recently become available for lease.

“‘However, the supply of new ships began to rise in January - well before the recent correction in shipping costs,’ he says. ‘We therefore believe the main driver of the recent BDI decline has been falling Chinese stockpiling of commodities.’

“Mr Lord says the global upswing may continue to underpin commodity prices for a while even though Chinese demand has tapered off. ‘However, commodity markets have already priced in a strong recovery. We expect global growth to slow in the second half of 2010 - and as such we see commodity prices falling next year.

“‘Indeed, the recent fall in the BDI may be an early warning sign.’”

Source: James Lord, Capital Economics (via Financial Times), September 24, 2009.

Bespoke: DOE US crude oil inventories
“In this morning’s [Wednesday] weekly energy inventory report from the Department of Energy, crude oil stockpiles are expected to show a decrease of 1,400 barrels of oil. In the chart below, we compare the current inventory levels with the overall average since 1984. Even though oil is up more than 60% this year, inventory levels remain well above their long-term average. Just to get back to average, we would need to see a decline of nearly 15 million barrels.”

Source: Bespoke, September 23, 2009.

Financial Times: New Zealand climbs out of recession
“The New Zealand economy grew in the second quarter for the first time since the end of 2007 marking the end of a prolonged recession.

“Gross domestic product rose by 0.1% in the June quarter - after five consecutive quarters of contraction.

“The quarterly rise surprised the market which was expecting a 0.1% contraction. News that the nation was emerging from a recession pushed the New Zealand currency to a 2009 high of 72.85 US cents.

“According to Helen Kevans, economist with JPMorgan, second quarter GDP growth would have been much stronger had inventories not dropped so sharply. The NZ$1.1 billion (US$792 million) plunge in inventories in June was the largest on record and took 2.3 percentage points away from GDP growth.

“Demand for exports was met with existing stock, according to Statistics New Zealand, but lower imports and a fall in manufacturing were also responsible for the dramatic fall. But Ms Kevans says the run down of inventories is positive for GDP growth in coming quarters as businesses will need to replenish stock as global demand picks up

“Export volumes rose 4.7% thanks to a surge in shipments of dairy products, forestry and logging. Import volumes dropped 3.8%.

“Although inventories were a drag on economic growth in the June quarter there were some encouraging signs. Household spending was up 0.4% on the back of record low interest rates, heavy discounting among the nations retailers, strong migration flows, and signs of recovery in the domestic housing market.

“Gross fixed capital formation rose 0.1% buoyed by investment in ‘other’ fixed assets, while investment in residential building remained weak as expected. Business investment was surprisingly firm, rising 1.3% despite credit constraints and tighter lending standards.”

Source: Elizabeth Fry, Financial Times, September 23, 2009.

Tags: BRIC, Canada, Carry Trade, Commodities, Corporate Bonds, Durable Goods Orders, Emergency Support, Emerging Markets, ETF, Fannie Mae, Fannie Mae And Freddie Mac, Fed Funds Rate, Federal Open Market Committee, Fomc, Global Stock Markets, Gold, Heavy Weather, India, Japanese Yen, Mortgage Backed Securities, oil, Open Market Committee, precious metals, Rate Target, Risk Aversion, Risky Assets, Set Of Numbers, Us Dollar Index
Posted in Emerging Markets, Gold, Markets | No Comments »

FOMC Policy Statement – nature of incoming data allow Fed to wait and watch

Friday, September 25th, 2009

This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The tone of the policy statement and details are largely close to expectations. The federal funds rate was left unchanged at 0%-0.25%. The statement reiterates Chairman Bernanke’s opinion that an economic recovery is underway, representing a significant departure from the August policy statement which noted that “economic activity is leveling out.” The outlook for inflation remains favorable in the Fed’s opinion due to “substantial slack” in the economy. In addition, the stability of longer-term inflation expectations was cited to rule out the case of an inflationary threat.

The last paragraph of the Fed policy statement is devoted to the outlook of monetary policy. The Fed left the stance unchanged to read as follows: “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The translation here is that Fed is on hold for several months.

The plan to buy mortgage-backed securities of $1.25 trillion is extended to the first quarter of 2010 from the end of 2009. The target amount has not been changed; to date, the Fed has bought two-thirds of the planned amount. The Fed’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. To date, the Fed has purchased 94% of the target.

In the effort to make Fed communication transparent and accessible, I humbly request that this long-winded sentence, which has appeared in the April, June, August, and September statements, be more succinct next time around:

“Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.”

Source: Asha Bangalore, Northern Trust Daily, September 23, 2009.

* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

Tags: August And September, Bangalore, Bernanke, Economic Activity, Economic Conditions, Economic Recovery, Fed Policy, Federal Funds Rate, Financial Markets And Institutions, Incoming Data, Inflation Expectations, Monetary Policy, Mortgage Backed Securities, Northern Trust Company, Policy Actions, Slack, Target Range, Term Inflation, Treasury Securities, Trillion
Posted in Markets | No Comments »

Paulson & Co. Accumulating All Things Gold

Wednesday, May 20th, 2009

MarketFolly.com has been diligently tracking the activities of 35+ hedge fund managers, and one of the most notable of these has been John Paulson (no relation to Treasury secretary), founder of Paulson & Company, the King of the “Subprime Meltdown.”

According to SEC filings covered below, Paulson has recently accumulated some very large positions in gold and gold producers.

Many have been critical of hedge funds and their activities over the past year, particularly in the financial sector, and Paulson, a target, has unapologetically, but humbly, faced the markets’ scorn for profiting so triumphantly off the subprime and credit crisis of the last 2 years.

What is worth noting is that in the early days of Paulson’s bets against the housing and financials market, which he began accumulating years before the crisis unfolded, is that he faced the professional burden of being early, and grappling with both his partners, as well as the agony of the rising housing market’s ability to outlast and wrest away, the convictions of the majority of those who said it couldn’t last.

Fittingly, below is the graphic from the end of 2007, which shows how successful Paulson and Company was already, well before the credit crisis and last year’s collapse in financial markets.

(click image to enlarge)

Here we quote MarketFolly.com, its analysis of Paulson’s SEC filings:

The second hedge fund in our series is Paulson & Co ran by John Paulson. His hedge fund has generated massive returns over the past two years, as he bet against financials and all things subprime. One of his funds was even up 589%. And, in the first part of 2009, he had also profited by shorting UK banks. Although Paulson is obviously one of the main brains behind the operation, there are also many talented individuals there. Unfortunately for Paulson, one of his co-portfolio managers has left to start his own fund, and we’ll be keeping an eye on that. At the end of 2008, Paulson’s Advantage Plus fund ended the year +37.58%, as detailed in our year end 2008 hedge fund performance post. For more information on how Paulson performed in 2008, be sure to check out their year end letter & report.

Paulson began shorting collateralized debt obligations and buying credit default swaps back in 2005 as he had conviction in his bet. His Credit Opportunities fund launched in 2006 with $150 million aimed to short subprime mortgage backed securities. This fund enjoyed immediate success, causing him to launch the Credit Opportunities II fund. At the end of 2007, the Opportunities fund was up 590% and his Opportunities II fund was up 353%. Such sterling performance led Paulson’s hedge funds to be the #1 and #4 funds as ranked in Barron’s hedge fund rankings (top 100). Paulson’s funds earned this distinction due to their solid 3 year annualized performance metrics. Additionally, Paulson sits at #3 on Alpha’s hedge fund rankings list for 2009, which is compiled based on assets under management (aum).

Obviously, such great performance has led to many other accolades for Paulson on a personal level. Recently, Paulson graced Forbes’ billionaire list, but that one is almost a no-brainer. More notably, he was among the top 25 highest paid hedge fund managers of 2008. In terms of recent portfolio performance, Paulson’s Advantage Plus Fund returned 4.8% through April as noted in our round up of hedge fund performance numbers.

The following were their long equity, note, and options holdings as of March 31st, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Some New Positions(Brand new positions that they initiated in the last quarter):

SPDR Gold Trust (GLD)
Gold Fields (GFI)
Gold Miners ETF (GDX)
Anglogold Ashanti (AU)
Capital One Financial (COF)
JPMorgan Chase (JPM)
Petro-Canada (PCZ)
Schering Plough (SGP)
Wyeth (WYE)

Some Increased Positions (A few positions they already owned but added shares to)

St Jude Medical (STJ): Increased by 134%
Peoples United Financial (PBCT): Increased by 12%
Kinross Gold (KGC): Increased by 8%

Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)

Rohm & Haas (ROH): Reduced by 11.5%

Removed Positions (Positions they sold out of completely)

BCE (BCE)
Genentech (DNA)
Istar Financial (SFI)
Merrill Lynch (MER)
NRG Energy (NRG)
National Citty (NCC - inactive, acquired by PNC)
Northern Trust (NTRS)
Teva Pharma (TEVA)
Time Warner Cable (TWX)
Tronox (TRXAQ)
UST (UST)
ProShares Ultrashort Financial (SKF)
Wachovia (WB)
Wells Fargo (WFC)

Top 15 Holdings (by % of portfolio)

1. SPDR Gold Trust (GLD): 30.37% of portfolio
2. Wyeth (WYE): 13.96% of portfolio
3. Rohm & Haas (ROH): 13.44% of portfolio
4. Boston Scientific (BSX): 8.4% of portfolio
5. Gold Miners ETF (GDX): 6.81% of portfolio
6. Kinross Gold (KGC): 5.87% of portfolio
7. Philip Morris International (PM): 3.42% of portfolio
8. Petro-Canada (PCZ): 2.96% of portfolio
9. Schering Plough (SGP): 2.26% of portfolio
10. Mirant (MIR): 2.22% of portfolio
11. Gold Fields (GFI): 2.21% of portfolio
12. JPMorgan Chase (JPM): 1.65% of portfolio
13. Anglogold Ashanti (AU): 1.15% of portfolio
14. St Jude Medical (STJ): 0.91% of portfolio
15. Embarq (EQ): 0.81% of portfolio

The first major move that everyone will be talking about is Paulson’s big entrance into gold. His position in the Gold Trust (GLD) is brand new and is brought up to a whopping 30% of his portfolio. Now, there are indeed a few caveats with this move: Paulson & Co have said themselves that they have done so as a hedge, as they now own well over 8% of this exchange traded fund (ETF). Their hedge funds have a share class that is denominated in gold (instead of in US dollars or Euros). Still though, that’s quite a large hedge to have. Not to mention, Paulson also has a copious amount of gold miners now littered throughout his equity portfolio. Previously, we had posted up when he started his large stake in Anglogold Ashanti. Now though, he has boosted his stake in Kinross Gold (KGC) and he has also started new positions in Gold Fields (GFI) and the Gold Miner ETF (GDX). Gold is clearly the name of the game for Paulson at present. And, such a massive position in gold and gold miners has to be for more than merely a hedge.

One other thing to consider with Paulson’s portfolio is that these holdings listed above are only his long equity holdings. The main reason why we bring this up is because the holdings above represent only a piece of his overall portfolio pie. Many of the positions above are merger arbitrage and event driven positions. While his gold stakes may be a large part of the assets disclosed in this filing, they are not quite as big when you compare them to his total assets under management. So, keep that in mind.

As many are already aware, Paulson bet against subprime and made a ton of money. As such, a lot of his holdings are in other markets. And, since the SEC only requires funds to disclose their equity, options, and note/bond positions, there is much of Paulson’s portfolio left unseen. Besides any omitted positions in mortgage backed securities or other markets, we also do not get to see Paulson’s shorts. The only short positions we can ever see in these filings (as per SEC regulations) are via positions in put options. And, Paulson does not have any such positions.

Another major move Paulson made last quarter was to buy a new stake in Wyeth (WYE). They brought their new WYE position all the way up to their #2 holding, which will turn a few heads. Aside from those major moves, Paulson also still retains the rest of his merger arbitrage style positions in Boston Scientific and Rohm & Haas, which we’ve covered previously. Additionally, Paulson still holds a position in Mirant (MIR), whom he filed a 13G on back in January.

We also noticed that Paulson essentially swapped out of Merrill Lynch, Northern Trust, Wells Fargo, and Wachovia in favor of Capital One and JP Morgan Chase. While this move is intriguing, it is fairly insignificant (at least at this time). All his financial positions are relatively tiny to his overall portfolio, with JPMorgan being the largest at only 1.65% of their portfolio, which is not saying much. We’ll have to monitor this development going forward to see if Paulson is getting constructive here, or mainly using these as proxies for something else in the shorter-term.

Assets from the collective holdings reported to the SEC via 13F filing increased from $6 billion last quarter up to $9.36 billion this quarter. Overall, Paulson is a great fund to keep an eye on simply because they nailed the crisis and have a solid track record. However, much of his portfolio is not present in these 13F filings, so take everything with a grain of salt. If you want to keep an eye on someone else who had worked with Paulson in betting against subprime, then check out our recent piece on Kyle Bass of Hayman Capital, where we divulge his latest prediction.

Source: MarketFolly.com, May 19, 2009

Tags: Agony, Amp Company, Assets Under Management, Brainer, Brains, Canada, Collapse, Collateralized Debt Obligations, Credit Crisis, Credit Default Swaps, Credit Opportunities, ETF, Financial Markets, Financial Sector, Forbes Billionaire List, Gold Producers, Hedge Fund Managers, Hedge Fund Performance, Hedge Funds, Highest Paid Hedge Fund Managers, Housing Market, Massive Returns, Mortgage Backed Securities, Opportunities Fund, Paulson, Performance Metrics, Personal Level, Portfolio Managers, Sec Filings, Sterling Performance, Subprime Meltdown, Talented Individuals, Target, Treasury Secretary, Uk Banks
Posted in Gold, Markets | No Comments »

Words from the (investment) wise for the week that was (March 23 – 29, 2009)

Sunday, March 29th, 2009

Following Fed Chairman Ben Bernanke’s “money printing” announcement of last week, the action stayed on Capitol Hill with Treasury Secretary Timothy Geithner detailing his Public Private Investment Program (PPIP) as well the initial salvo on “new rules of the game” for the US’s broken system of financial regulation.

The US Treasury on Monday morning announced its highly-anticipated Private Public Investment Program (PPIP), rekindling investors’ hopes that the worst might be over for the beleaguered banking sector and the global economy is close to a bottom.

Up to $1.0 trillion will be spent in an attempt to support the balance sheets of financial institutions by removing toxic assets - mostly mortgage-backed securities. The Treasury plans to invest between $75 billion to $100 billion from its existing Troubled Asset Relief Program (TARP), and also to establish a separate initiative that will use the Fed’s Term Asset-backed Securities Lending Facility (TALF) and Federal Deposit Insurance Corporation (FDIC) funding to finance the PPIP.

Source: About.com

In reaction to the Obama administration’s plan, global stock markets extended their gains and the US dollar reclaimed a stronger footing, but government bonds suffered from indigestion on issuance worries and the haven appeal of commodities waned. The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.

Stock markets, led by financials, surged on the unveiling of the Treasury’s plan to deal with troubled assets, adding to the gains of the rally that commenced on March 10 (see table below). The Dow Jones Industrial Index moved up 497 points (+6.8%) on Monday, its fifth largest one-day point gain and 23^rd biggest one-day percentage gain on record.

Although stocks succumbed to profit-taking towards Friday’s close, indices nevertheless managed to register a third straight week of gains - only the third time since the bear market began 78 weeks ago. With two trading days to go, March has the potential of producing the third best monthly return for the broad market since 1950.

Elsewhere in the world stocks also performed strongly, with the MSCI World Index gaining 4.4% (YTD -10.4%) and the MSCI Emerging Markets Index ahead by 6.9% (YTD +4.3%). These indices have risen by 19.8% and 21.8% respectively since the low of March 9. Returns ranged from top-performers Peru (+17.4%), India (+12.6%) and Hong Kong (+10.0%) to Uganda (-5.7%), Côte d’Ivoire (-4.7%) and Bangladesh (-4.4%), which are still languishing in the red.

The Shanghai Composite Index (+3.9%) had another good week and remains at the top of the field for the year to date with a 30.1% gain in US dollar terms. (Click here to access a complete list of global stock market movements, in local currency terms, as supplied by Emeginvest.)

Emerging markets are showing mature markets a clean pair of heels, as can be seen from the rising trend line of the MSCI Emerging Markets Index relative to the Dow Jones World Index since late October. The fact that developing countries are now outperforming the developed ones is a sign that global investors are beginning to take more risk - a necessary ingredient for stock markets in general to improve further.

Source: StockCharts.com

As far as US exchange-traded funds (ETFs) are concerned, John Nyaradi (Wall Street Sector Selector) reports that the strongest funds this week were Claymore/MAC Global Solar Energy (TAN) (+32.1%), Market Vectors Solar Energy (KWT) (+25.8%) and iShares Dow Jones US Home Construction (ITB) (+20.8%). On the other end of the performance scale United States Natural Gas (UNG) (-12.6%), PowerShares DB Agriculture Fund (DBA) (‑4.6%) and iShares Silver Trust (SLV) (-3.4%) performed poorly.

Among the ten US economic groups, the Financial Select Sector SPDR (XLF) (+12.3%) led the way, with defensive funds such as Health Care Select Sector SPDR (XLV) (+3.0) and Utilities Select Sector SPDR (XLU) (+1.8%) falling behind, as one would expect in a rising market.

In the coming week, as reported by the New York Times, the US administration is likely to extend more short-term aid to General Motors and Chrysler, but impose a strict deadline for bondholders and union workers to make concessions that would help the ailing automakers become viable businesses and avert bankruptcy.

Also on the agenda next week, is the summit of the Group of 20 in London - a “make or break event”, according to George Soros (via Reuters). In addition to the one-time increase of the IMF’s resources, there ought to be substantial annual special drawing rights (SDR) issues, say $250 billion, as long as the global recession lasts, he said. SDRs are an international reserve asset created by the IMF in 1969 that has the potential to act as a super-sovereign reserve currency.

Next, a quick textual analysis of my week’s reading. No surprises here with key words such as “banks”, “market”, “assets” and “plan” featuring prominently.

The nagging question remains: is the stock market rally for real, or is it just an upward correction in a bigger bear market? The worrying aspect is the rapidity with which the price increases have occurred. To gauge just how “violent” it has been, Mark Hulbert (MarketWatch) compared the rally since the March 9 lows to a composite of the stock market’s behavior over the first two weeks of all bull markets since 1900. The graph below indicates that the market is perhaps in need of catching its breath.

Regarding specific “targets”, Adam Hewison of INO.com prepared a short technical analysis presentation dealing with key levels. Click here to view the clip. As shown in the table below, the 50-day moving averages have been cleared for all the major US indices and the early January highs (not shown) are the next targets. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to endure.

Kevin Lane, technical analyst of Fusion IQ, said: “We think the S&P 500 can still rally up to the 850-860 in the near term on the heels of the unwinding of the deeply oversold conditions, the large piles of sideline liquidity, and additional money managers are allocating to stocks so as not fall too far behind their benchmarks. At the aforementioned S&P 500 level some more aggressive profit-taking is likely to ensue and it may be a good time to take some chips off the table (i.e. lock in some profits). We would then look to reallocate on the next aggressive pullback.”

The graph below shows the percentage of S&P 500 stocks trading above their 50-day moving averages. Altogether 66% of the stocks are currently trading above their 50-day lines. This is getting close to the 80% (overbought) level seen at prior peaks during this bear market.

Source: StockCharts.com

Short-term movements aside, more bulls are coming to the fore by the day. According to Bloomberg, Mark Mobius, executive chairman of Templeton Asset Management, said the next bull market rally has begun. Also, Barton Biggs, the former chief global strategist for Morgan Stanley who now runs New York-based hedge fund Traxis Partners, last week predicted the S&P 500 may jump by 30%-50%. Similarly, Jeff Saut, strategist at Raymond James, argued that the “odds are pretty good stocks have seen their lows”.

From across the pond, London-based David Fuller (Fullermoney) said: “I feel that it is a defining rally …. increasing evidence that the bear market mostly ended last November. However, while Wall Street is the big elephant in the room, casting a large shadow in terms of influence, it is certainly not the leader. Fullermoney themes, led by Asian emerging markets and South American resources markets, definitely bottomed out in October and November. Many have also gone on to complete base formations.

“In the short-term, stock markets are technically overbought so we can expect a pause and consolidation. However, if the S&P 500 Index can hold onto approximately half of its gains from this month’s lows, this would provide further evidence of recovery potential for the medium to longer term.”

On the other hand, Richard Russell (Dow Theory Letters), who has been studying markets since the 1950s, remains bearish: “The most helpful insights I’ve received during the course of this bear market are the Lowry’s statistics and comments. From the latest Lowry’s statistics I can see that although the Buying Power Index (demand) has risen sharply, the Selling Pressure Index (supply) has given ground rather grudgingly. Normally, if we were at the start of a new bull market, Selling Pressure should be collapsing. It is not.

“The conclusion is that there remains a surprising amount of Selling Pressure (supply) for this bear market advance to wade through. This is typical bear market rally action. Normally, prior to the start of a new bull market there will be an extended period in which the Selling Pressure Index slumps, indicating that sellers have exhausted their desire to sell. The inference is that we are experiencing a purely technical situation …”

One of the great concerns for the stock market rally is that the credit markets, the target of the rescue operations, are still far from “normal”. This was again seen during the past week when the US 30-day Treasury Bills dipped below zero on Thursday.

I believe stock markets are in a bottoming phase, but that this may take a while to play out. This is not a juncture at which one should go all-out bullish or bearish. Taking one step at a time, the next hurdle is the release of potentially ugly earnings and guidance announcements in April. By then a clearer picture should also start emerging on the results of the Fed’s medicine and whether credit markets are thawing and confidence is beginning to improve.

For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Risk appetite rekindled on hope of better days“, “Stock markets: Keep an eye on confidence measures” and “Technical Talk: Stocks nearing short-term resistance“. (And do make a point of listening to Donald Coxe’s webcast of March 20, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
“Global businesses remain remarkably pessimistic. Businesses say that sales fell sharply last week to a new record low and pricing power continues to evaporate as close to one third of businesses say they are cutting prices for their goods and services,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com.

According to RGE Monitor, the World Trade Organization said the collapse in global demand would drive trade volumes down by 9% in 2009 - the biggest contraction since World War II. Trade in developed countries would fall by 10% while in developing countries it would shrink by 2-3%. The fall in global trade in 2009 will be the first negative annual decline since 1982 led by the contraction in global growth, slump in manufacturing activity and capex, and crunch in trade finance. This might be exacerbated by growing protectionist measures around the world.

European business confidence has never been as dark and is near record lows, as indicated by the March Ifo Business Survey for Germany.

On a light-hearted note, the Financial Times reported last week that lingerie sales in Britain were looking better than the retail sector as a whole. One CEO in the industry told the FT that couples were staying home more and women were investing in “adventurous apparel” to cheer themselves up during the economic downturn. (Hat tip: US Global Investors - Weekly Investor Alert.)

A snapshot of the week’s US economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

March 27, 2009
• Consumer spending in Q1 most likely to show an increase

March 26, 2009
• Minor Q4 GDP revisions, corporate profits plunge
• Jobless claims - persistent upward trend remains in place

March 25, 2009
• New home sales - notable pickup in sales, but more is necessary
• Durable goods orders - glimmer of strength emerges but it is tentative

March 24, 2009
• Home prices - meaningful turnaround?

March 23, 2009
• Treasury’s Public-Private Investment Program - aims to unclog credit markets and promote credit extensions
• Existing home sales advance - noteworthy for several reasons

The past week witnessed a trend of better-than-feared economic reports. Of the twelve reports released, only three were weaker than the consensus forecast. Bespoke said: “While none of these reports can be classified as ‘good’, the fact that they are beating expectations is a positive sign. The next test will come this week when we get the first look at reports for the month of March. Will the relative strength follow through, or was the recent string of reports just an aberration?”

“We’ve passed the period where every indicator is plummeting, and that’s good news,” said Nariman Behravesh, chief economist at IHS Global Insight (via The Wall Street Journal). “We may not be exactly at the turning point, but we’re getting pretty close to it.”

Source: The Wall Street Journal, March 28, 2009.

What are the policy actions required in the US and abroad to lead to a recovery of the global economy and prevent an L-shaped global near-depression? Nouriel Roubini (RGE Monitor) summarized the following steps:

• Much more massive unorthodox monetary policy easing;
• Much more fiscal stimulus;
• Resolution of the banking crisis via a takeover of insolvent institutions and recapitalization and removal of toxic assets from the solvent but illiquid and undercapitalized ones;
• Actions to reduce the credit crunch and restore credit growth to creditworthy firms and households;
• Direct reduction - rather than restretching - of the debt burden of insolvent households;
• Tripling of IMF resources and financial help to emerging-market economies that are at risk of a liquidity crisis or a broader financial crisis; and
• Other measures of regulatory forbearance to reduce the procyclicality of the credit cycle (appropriate changes to mark-to-market, reduction in capital adequacy ratios, reduction of the countercyclical role of downgrades by rating agencies).

“Avoiding the L is possible, but it will require much more coherent and aggressive policy actions in the US, China and all over the world,” concluded Roubini.

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

Source: Yahoo Finance, March 27, 2009.

In addition to an interest rate announcement by the European Central Bank (Tuesday, April 2), the US economic highlights for the week include the following:

Source: Northern Trust

Click here for a summary of Wachovia’s weekly economic and financial commentary.

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, March 27, 2009.

Lau-Tzu said: “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” Wise words indeed, but hopefully the “Words from the Wise” reviews will assist Investment Postcards readers with their research to cast some light on the lie of the investment land.

That’s the way it looks from Cape Town (where I am about to embark on a long-haul flight to New York and San Diego).

Source: Walt Handelsman

CNBC: Geithner & toxic assets
“Treasury Secretary Timothy Geithner discusses his plan to deal with financial institutions’ toxic assets, with CNBC’s Erin Burnett.”

Part 1

Part 2

Source: CNBC, March 23, 2009.

CEP News: US Treasury unveils PIPP
“The US Treasury announced Monday morning it will spend up to $1.0 trillion in a bid to provide support to the balance sheets of financial institutions and support the ‘toxic debt’ market, which includes mostly mortgage-backed securities.

“The US Treasury will invest between $75 billion to $100 billion from its existing Troubled Asset Relief Program, and it plans to set up a separate initiative which will use the Federal Reserve’s Term Assets Backed Securities Lending Facility and FDIC funding to finance the highly anticipated Private Public Investment Program (PPIP).

“Five different private public funds will bid on toxic assets and sell them to the broader public. Meanwhile, the Federal Deposit Insurance Corporation will guarantee private-sector loans for these purchases, while the US Government will invest side by side with private equity using taxpayer capital.

“In a press conference following the official announcement, Treasury Secretary Timothy Geithner said he expects significant interest from the private sector, a sentiment which was confirmed by PIMCO’s Bill Gross following the announcement.

“Geithner said that while there is no doubt that the US government is taking risk with the PPIP, the taxpayer stands to make substantial returns on the investments. He also said that the Treasury should be able to implement the PPIP quickly.”

Source: CEP News, March 23, 2009.

BCA Research: Some hope for the US bank sector
“The Public-Private Investment Program (PPIP) is a significant positive step forward in restructuring the troubled US banking sector.

“The Treasury confirmed earlier this week its intention to remove toxic ‘legacy’ assets from bank balance sheets in order to improve the health of financial institutions and restore the flow of credit throughout the economy.

“Perhaps the most nagging issue facing policymakers in their efforts to solve the credit crisis has been what price to pay banks for their toxic assets. Too low a price would prompt further significant writedowns and could lead to additional bank failures. Too high a price would cheat taxpayers and reinforce previous bad investment decisions. The Treasury’s plan attempts to solve the issue by creating a public-private partnership, which determines asset prices using an auction process, while at the same time ensuring adequate financing (backed by the FDIC) and allowing the taxpayer to share in some of the upside.

“The plan does not directly support home prices, but it may stem the slide in real estate assets held by the banks. Even if the purchase of legacy assets leads to further writedowns, the government stands ready to contribute additional equity capital through its Capital Assistance Program (CAP) to maintain the bank as a going concern. Thus, creeping nationalization remains a possibility for those banks with a high proportion of legacy assets. Bank bonds, however, would seem to be well supported under this plan.”

Source: BCA Research, March 25, 2009.

The Wall Street Journal: Will the removal of assets make them any less toxic?
“Barrons Bob O’Brien talks about how the government will try to help the ailing economy by helping banks with toxic assets. This raises many questions including whether government help will chill public-private initiative.”

Source: The Wall Street Journal, March 23, 2008.

Nouriel Roubini (RGE Monitor): Obama’s toxic-asset plan shows promise
“So to clarify my view point: I see the Geithner plan as being relevant to banks that are solvent. For those that are found - after stress tests - to be insolvent I see as the proper solution to nationalize them and clean them up to prepare them for reprivatization.

“The stress test should do a triage between banks that are illiquid and undercapitalized but solvent given the provision of capital and liquidity and those that, under a reasonable stress scenario are effectively insolvent.

“Those that are insolvent should be nationalized.

“Those that are solvent will still have many toxic assets that need to be disposed of; and the Geithner plan provides a way to properly dispose of the toxic assets of solvent banks.

“So my partial support of the Geithner plan - with all the appropriate caveats - is consistent with the complementary idea of nationalizing the insolvent financial institutions. The bad assets of insolvent banks that are nationalized could be separated from the good assets and then worked out by the government; or they could be sold to private investors through an auction mechanism along the lines of the Geithner plan; or they could be sold - together with the good assets - to the investors purchasing a privatized bank that was temporarily privatized (along the lines of the Indy Mac deal where the investors purchasing the bank received a government guarantee on the bad assets after a first loss).”

Source: Nouriel Roubini, RGE Monitor, March 24, 2009.

Tech Ticker (Yahoo Finance): James Galbraith - Geithner plan “extremely dangerous”, banks “massively corrupted”
“Professor James Galbraith didn’t pull any punches on TechTicker this. He hates the Geithner plan, calling it ‘extremely dangerous’. He says the banks may game the plan to bid up the prices for their own crap assets and that getting bad assets off their books won’t get them lending again. Like Paul Krugman, Galbraith thinks the FDIC should just put the banks into receivership and have the banks’ subordinated bondholders pick up some of the cost of restructuring them.”

Part 1: Getting crap assets off bank books won’t save economy

“Aaron Task, TechTicker: Like it or not, many people seem to be resigned to the idea there’s no alternative to the public-private investment fund scheme Treasury Secretary Geithner detailed this morning.

“That’s hogwash, says University of Texas professor James Galbraith, author of The Predatory State. Of course there’s an alternative: FDIC receivership of insolvent banks.

“So why isn’t the Obama administration pushing for FDIC receivership? ‘Political influence of big banks,’ the economist says.”

Part 2: Massive corruption

Source: Tech Ticker, Yahoo Finance, March 23, 2009.

Bloomberg: Nobel Prize winners clash on prospects of Geithner’s plan
“Treasury Secretary Timothy Geithner has a good chance of succeeding with his plan to cleanse banks of toxic assets, says Michael Spence, co-winner of the 2001 Nobel Prize in economics. Paul Krugman, the newest laureate, is so sure Geithner will fail that he’s full of ‘despair’.

“Even winners of the highest awards in economics can’t always be right. Which prediction proves correct depends in part on whether private investors can be enticed to bid on as much as $1 trillion of illiquid loans and securities that banks are now stuck with.

“‘This program is crucially dependent on the private sector as participants and price setters,” said Spence, who shared the Nobel Prize with George Akerlof and Joseph Stiglitz for a theory that found some government intervention can make markets more efficient. ‘It could work,’ Spence said in a telephone interview yesterday.

“That’s not an opinion shared by 2008 Nobel laureate Krugman. ‘The real problem with this plan is that it won’t work,’ Krugman, said in his New York Times opinion column yesterday.

“Geithner appears to be going back to the ‘cash for trash’ approach of his predecessor as Treasury Secretary, Henry Paulson, Krugman said. ‘This is more than disappointing. In fact, it fills me with a sense of despair.’

“Instead of financing the purchase of illiquid assets, the government should guarantee many bank debts, take control of ‘insolvent’ firms and clean up their books, similar to what Sweden did in the 1990s, Krugman said.

“While Spence, a Stanford University professor and former business-school dean, has more confidence in Geithner, even he isn’t positive the Treasury secretary can pull it off.

“The Treasury plan ‘is a little complex to implement,’ Spence said. ‘I assume the Treasury has done its homework, and has people lined up’ to commit private capital to Geithner’s public-private partnerships, he said.

“Stiglitz, speaking at a conference in Hong Kong today, said the plan ‘risks a major increase in our national debt.’

“‘You can take the bad assets off the banks, but where are they going to go?’ said Stiglitz, who served as chairman of former President Bill Clinton’s Council of Economic Advisers. ‘The one place for them to go is to the taxpayers.’”

Source: Scott Lanman and Vivien Lou Chen, Bloomberg, March 24, 2009.

Bill King (The King Report): TAPS - creating a derivative on derivatives
“Geithner’s plan effectively creates ‘calls’ on banks’ toxic assets. The US taxpayer will underwrite losses in this program. The call premium will be the private equity risk; the buyer gets the upside appreciation. The taxpayer provides the funding/leverage.

“Bill Gross sees private investor risk of 4% to 5%. This is the call premium for the toxic assets.

“Let’s think through this plan and the probable consequences.

“Everyone knows that solons are trying to engineer massive asset inflation. So if we are running a bank why would we sell any asset that has a chance to reflate?

“We would only sell assets that we deem hopeless. Are there enough private equity patsies to buy calls on assets that we deem have a low probability of increasing substantively in value?

“Most call buyers do not intend or wish to own the underlying assets. They are interested in a levered gain. So even if the toxic assets are inflated enough in value to produce a gain for the ‘call’ buyers, what patsies will appear as a dumping ground for the call buyers?

“Geithner’s toxic asset scheme is a repo with a call option. And unless end-user patsies appear at some point, the toxic assets will return to sender and the US taxpayer.

“We are in this mess due to excess derivatives and leverage. Ironically or absurdly, Geither’s toxic asset plan & solution (TAPS) creates a derivative on derivatives (toxic paper) and increases the leverage on levered toxic assets! You can’t make up stuff like this.

“Unfortunately for solons their expediency just delays the inevitable negatives. Solons have created extremely positive expectation for the TAPS. If the scheme does not go exceptionally well, the consequences will not be pretty … BTW, $1 trillion is not nearly enough.

“The first TAPS auction will probably go well because solons will exert intense pressure on the community to play nice. Entities that are already adjuncts of the Fed or Treasury, like PIMCO and Black Rock, will be subjected to enormous pressure to stand and deliver.”

Source: Bill King, The King Report, March 24, 2009.

CEP News: FDIC’s Bair says some US banks could be beyond help
“Federal Deposit and Insurance Corporation (FDIC) head Sheila Bair said Monday that some US financial institutions may be beyond help from US government agencies, and some banks will close.

“In a conference call with reporters, Bair touted the US Treasury’s plan introduced this morning to remove toxic assets from banks’ balance sheets.

“The public/private partnership to buy these assets and resell them to the public won’t necessarily be a 50/50 split, she said.

“Bair said the highest priority will be given to high-risk real estate loans, because the problems are with these assets.

“She said the most difficult part of the program will be to price the assets properly, but that government agencies will find the best possible structure to do so, adding that she expects the program will be profitable.”

Source: CEP News, March 24, 2009.

The New York Times: Battles over reform plan lie ahead
“Outlining a far-reaching proposal on Thursday to rebuild the nation’s broken system of financial regulation, the Treasury secretary, Timothy F. Geithner, fired the opening salvo in what is likely to be a marathon battle.

“‘Our system failed in fundamental ways,’ Mr. Geithner told the House Financial Services Committee. ‘To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.’

“On the surface, both the lawmakers who listened to the Treasury secretary and the financial industry’s lobbying groups made it sound as if they completely agreed with Mr. Geithner’s call for what he described as ‘better, smarter tougher regulation.’

“But in fact industry groups are already mobilizing to block restrictions they oppose and win new protections they have wanted for years. Even though Mr. Geithner carefully avoided specific details, laying out mostly broad principles for overhauling the system, financial industry groups are identifying issues they plan to pursue and lining up well-connected lobbyists and publicists to help make their cases.

“If history is any guide, Mr. Geithner’s proposals will start an equally intense battle among the regulatory agencies themselves - including the alphabet soup of banking regulators, the Securities and Exchange Commission and the Federal Reserve - to stay in business and enhance their authority.

“Hedge funds and private equity funds, which have been almost entirely unregulated, would have to register with the SEC and tell it about their risk-management practices. Many financial derivative instruments, like credit-default swaps, would come under supervision for the first time.

“Mr. Geithner’s most specific proposal, which Democratic lawmakers hope to pass in the next few weeks, would allow the federal government to seize control of troubled institutions whose collapse or bankruptcy might jeopardize the broader financial system.”

Source: Edmund Andrews, The New York Times, March 26, 2009.

CNBC: JPMorgan’s Dimon on meeting with Obama
“Jamie Dimon, CEO of JPMorgan, sits down for an exclusive interview with CNBC’s Erin Burnett. Dimon discusses the meeting he and other bank CEOs had with President Obama.”

Source: CNBC, March 27, 2009.

News N Economics: Real money supply: surging in some countries, not so much in others
“The Fed’s recent and extreme policies have made people nervous about inflation. They should be, but just not right now. Key central banks recently added hydrogen to their engines in the form of quantitative easing, causing high-powered money to surge. However, the multiplier is collapsing, and therefore, the new base is simply a measure to keep the money supply afloat. Some economies, though, are showing worrisome trends in their money growth rates.

“The chart below illustrates the 6-month annualized growth rate of the broad measure of real money in the US, the UK, Japan, and the Eurozone. In spite of the massive surge in the US monetary base, 231% over the last 6 months, the real US money supply grew just 22.6% over that same period. Can you imagine what would have happened had the Fed not eased so substantially? Troublesome deflation. The money multiplier is collapsing as banks hoard cash and consumers and firms pull back.

“Furthermore, like the Fed, the Bank of England (BoE) is engaged in quantitative easing, resulting in a similar 6-month money growth rate, 22.8%. The ECB and the Bank of Japan (BoJ) are still increasing their broader measures of real money on a 6-month basis, but at a much slower rate. Admittedly, the BoJ is engaging in alternative policy measures, but the ECB and the BoJ are not pulling out all of the ‘easing stops’ as are the Fed and the BoE.”

Source: Rebecca Wilder, News N Economics, March 24, 2009.

Reuters: Soros - G20 a “make or break” event for markets
“The Group of 20 nations meeting next week is a ‘make or break event’ for the global markets, investor George Soros said on Wednesday.

“‘Unless it comes up with practical measures to support the countries at the periphery of the global financial system, markets are going to suffer another sinking spell just as they did on February 10, 2009, when the authorities failed to produce practical measures to recapitalize the United States banking system,’ Soros said in testimony to the Senate Foreign Relations Committee.

“Soros said President Barack Obama could help make the G20 meeting a success by raising a possible solution that would involve increasing the amount that developing countries - from Eastern Europe to Africa - can effectively borrow from the International Monetary Fund.

“The urgent task of re-inflating the global economy has to be carried out mainly by the IMF, ‘imperfect and beleaguered as it is, because it is the only institution available,’ Soros said.

“While the IMF’s resources were likely to be doubled at the G20 meeting of big developed and developing countries, that would not provide a systemic solution for the developing world, Soros said.

“But a systemic solution was readily available in the form of special drawing rights (SDRs), an international reserve asset created by the IMF in 1969 that has the potential to act as a super-sovereign reserve currency.

“In addition to the one-time increase of the IMF’s resources, there ought to be substantial annual SDR issues, say $250 billion, as long as the global recession lasts, he said.”

Source: Reuters, March 25, 2009.

Asha Bangalore (Northern Trust): Minor Q4 GDP revisions, corporate profits plunge
“Real GDP is estimated to have dropped at an annual rate of 6.3% in the fourth quarter of 2008. This is virtually unchanged from the earlier estimate of a 6.2% drop of real GDP. In 2008, real GDP increased 1.1% after a 2.03% increase in 2007.

“On a Q4-to-Q4 basis, the 0.85% drop in real GDP in the fourth quarter is the first decline in real GDP since the 1990-91 recession. The economy is expected to post another sharp quarterly reduction in real GDP in the first quarter of 2009 (-6.1%), with these two quarterly declines chalking up to be the weakest quarters of the current recession.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 26, 2009.

Asha Bangalore (Northern Trust): Consumer spending in Q1 most likely to show increase
“Contrary to our earlier expectations, consumer spending in the first quarter is most likely to show an increase. The sharp upward revision of inflation adjusted consumer spending in January (+0.7% versus +0.4% in the original report) is the main reason for this revision. Nominal consumer spending moved up 0.2% in February after a 1.0% increase in January. However, after adjusting for inflation, consumer spending fell 0.2% in February. A conservative assumption for March results in an overall increase of consumer spending in the first quarter of 2009 of roughly 0.6%-0.8%. This in turn will result in a modification of the headline GDP forecast, which we are working on as of this writing.

“The near term trend of consumer spending is most likely to be weak owing to the severe declines in payroll employment.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 27, 2009.

Asha Bangalore (Northern Trust): Durable goods orders - glimmer of strength emerges
“Orders of durable goods increased 3.4% in February after a downwardly revised drop in January of 7.3% (originally estimated as a 4.5% decline). The 35.3% increase in orders of defense items and the 6.6% jump in bookings of non-defense capital goods excluding aircraft stand out in the report. Orders of aircraft (-28.9%) and autos (-0.6%) dropped but that of machinery (+13.5%), computers (+5.6%), and appliances rose (+1.6%) during February. The main message is that the pickup in orders of durables is significant but consistent monthly gains will be necessary to declare that the factory sector has pulled out of the current doldrums.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 25, 2009.

Asha Bangalore (Northern Trust): New home sales - notable pickup but more is necessary
“Sales of new homes rose 4.7% to an annual rate of 337,000, following an upward revision of sales in January and December. On a regional basis, sales of new homes increased in the South (+9.7%) and West (+6.6%) but fell in the Northeast (-3.3%) and Midwest (-9.1%). The fact that sales advanced in February is noteworthy but additional monthly gains will be necessary to reduce the inventory of unsold new homes and bring about stability in this sector.

“Sales of new single-family homes are down 43.8% in February from a year ago, after a 47.7% plunge in January. Sales of new homes have dropped 75.7% from the peak in July 2005. The trough for new home sales appears to be January 2009, for now.

“The median price of a new single-family home declined 18.1% from a year ago in February, the largest year-to-year drop on record. The median price of a new single-family home has fallen 23.5% from the peak in March 2007, also the largest peak-to-trough decline on record.

“Additional declines in prices of new homes are nearly certain given the large inventory of unsold new homes. The good news is that the inventory unsold homes fell slightly to a 12.2-month mark from the record high of 12.9 months in January.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 25, 2009.

CEP News: Fed’s Rosengren says programs will lower consumer, business loan costs
“Recent actions by the Federal Reserve should help lower the cost of credit to consumers and businesses, according to Boston Fed President Eric Rosengren speaking before the House Financial Services Committee on Monday.

“While credit availability continues to be a significant source of concern for the Federal Reserve, the Fed has ‘acted proactively and creatively to address these concerns,’ said the central banker.”

Source: Erik Kevin Franco, CEP News, March 23, 2009.

Zillow: Federal Reserve announcement drives mortgage rate drop
“Driven by the news that the Federal Reserve plans to spend an additional $750 billion to buy mortgage-backed securities, the weekly average rate borrowers were quoted on Zillow Mortgage Marketplace for thirty-year mortgages fell to 5.06%, down from 5.21% the week prior, according to the Zillow Mortgage Rate Monitor.”

Source: Zillow, March 24, 2009.

Financial Times: Ron Paul - believer in small government predicts 15-year depression
“Pension trustees and insurance company portfolio managers look away now. Your increased commitment to government bond holdings in recent times is about to blow up spectacularly.

“At least, that is the view of Ron Paul, the US congressman who ran against John McCain in last year’s Republican Party presidential nomination.

“His is a minority view. Yields on government bonds worldwide have been falling fast over the past few months and in the UK, the commencement of ‘quantitative easing’ this month sent bond prices soaring.

“But the credibility of both western governments and their currencies is waning, and has been ever since the gold standard was abandoned in 1971, says Mr Paul. And that means even ‘safe’ investments are far from safe, he claims.

“‘People will start to abandon the dollar as current and past economic policies create a steep rise in interest rates,’ Mr Paul says.

“‘If you are in Treasuries, you will need to be watchful and nimble to time your escape.’

“Unfortunately, cashing out will not protect the value of investments, he insists, because ‘fiat’ currencies will all decline over the coming years as measures to try to haul the world economy out of recession fail. ‘The current stimulus measures are making things a lot worse,’ says Mr Paul.

“‘The US government just won’t allow the correction the economy needs.’ He cites the mini-depression of 1921, which lasted just a year largely because insolvent companies were allowed to fail. ‘No one remembers that one. They’ll remember this one, because it will last 15 years.’”

“And don’t even mention shares to Mr Paul: ‘The last place you want to be is in the stock market,’ he says. ‘It may not bottom out for 10 years - just look at Japan.’”

Click here for the full article.

Source: Phil Davis, Financial Times, March 22, 2009.

Financial Times: Credit market concerns
“While equities responded strongly to the Treasury’s plan to get bad loans off banks’ balance sheets, the rally in credit markets was more muted, says FT’s Aline van Duyn.”

Source: Aline van Duyn, Financial Times, March 24, 2009.

Bespoke: S&P 500 sector breadth measures
“The S&P 500 is currently trading 3.73% above its 50-day moving average, while the average stock in the index is 5.34% above its 50-day. This is a positive breadth measure. Below we provide the same analysis for the ten S&P 500 sectors.

“As shown, the Energy sector has the most positive breadth with a difference of +4.58% between the average stock’s distance from its 50-day versus the sector’s distance from its 50-day. Consumer Discretionary ranks 2nd, followed by Technology and Telecom.

“On the negative side, the Financial sector as a whole is trading 10.12% above its 50-day, while the average stock in the sector is 5.06% abvoe its 50-day. Only two sectors remain below their 50-days after this significant market rally and they are both defensive in nature - Health Care and Utilities.”

Source: Bespoke, March 26, 2009.

Bespoke: Sector trading ranges - nearing overbought levels
“In the chart below, we highlight the current levels of each S&P 500 sector with respect to their normal trading ranges. Red shading indicates that the sector is overbought (with dark red indicating extreme overbought levels), while green shading is indicative of an oversold reading.

“Over the last week, the S&P 500 and each of its sectors have moved closer to overbought levels. There are currently four overbought sectors, no oversold sectors, and six sectors in neutral territory. Given the Nasdaq’s brief push into positive YTD territory yesterday, it’s no surprise that the Technology sector is the most overbought one in the market. Health Care, on the other hand, is the furthest from overbought levels. It is currently attempting to recover from the sell off that took place in late February after the release of the Obama budget plan.

“Over the coming weeks, it would not be surprising to see investors rotate out of the tech sector, which is nearing extreme overbought territory, and into the less extended Health Care sector.”

Source: Bespoke, March 27, 2009.

Bloomberg: Mobius says stocks at beginning of a bull market rally
“The next bull market rally has begun and there are bargains in every emerging market following a record slump in stocks, Templeton Asset Management’s Mark Mobius said.”

Click here for the article.

Source: Bloomberg, March 23, 2009.

Bloomberg: Roubini - stocks will drop as banks go “belly up”
“US stocks will fall and the government will nationalize more banks as the economy contracts through the end of 2009, said Nouriel Roubini, the New York University professor who predicted last year’s economic crisis.

“‘The stock market is a bit ahead of the real macroeconomic and financial news,’ Roubini, a professor at NYU’s Stern School of Business and the chairman of consulting firm Roubini Global Economics, said in an interview with Bloomberg Television in London today. ‘We’ll have some major banks going belly up that will need to be taken over.’

“The global equity rebound in March that sent the Standard & Poor’s 500 Index to its best monthly advance in 17 years is a ‘bear-market rally’ and US Treasury yields will ‘remain relatively low’ as investors flock to the safest assets, Roubini said. Treasury Secretary Timothy Geithner’s new plan to remove toxic debt from financial companies won’t be enough for insolvent banks, he said.

“Roubini’s outlook contrasts with predictions this week from Templeton Asset Management’s Mark Mobius and Traxis Partners’ Barton Biggs, who said that equities are poised to rally as government efforts to revive the economy and banking system begin to work. Investors are ‘way too optimistic’ about the prospects for a recovery in the economy and earnings, Roubini said.”

Source: Michael Patterson and Maithreyi Seetharaman, Bloomberg, March 26, 2009.

MarketWatch: Keeping hope alive - bear market rally or new bull market?
“Is it possible to have too much of a good thing? Mae West didn’t think so, though I have it on reliable authority that she wasn’t talking about the stock market.

“And when it comes to rallies off of market lows, it is indeed possible for stocks to overdo it. That at least is the argument being made by at some of the investment newsletter editors I monitor.

“According to them, bear market rallies are almost by their very nature powerful and impressive. If we were to endow the bear market with intent, we would say that the very purpose of a rally is to draw as many gullible investors back into the market before the next leg down commences.

“… whatever else you say about the rally that began two weeks ago, it has indeed been ‘violent’ and has occurred with ‘amazing rapidity’.

“To gauge just how violent and rapid it has been, I compared the rally since March 9 to a composite of the stock market’s behavior over the first two weeks of all bull markets since 1900.

“To come up with a list of those bull markets, I followed the lead of Ned Davis Research, the institutional research firm. For them, a bull market requires one of three conditions to hold: (1) at least a 30% rise in the Dow Jones Industrial Average in 50 calendar days, (2) at least a 13% rise in the Dow in 155 calendar days, or (3) at least a 30% reversal in the Value Line Geometric Index.

“Since the beginning of 1900, according to the research firm, there have been by this set of criteria no fewer than 34 bull markets.

“It turns out that the recent rally has been markedly more powerful than the average beginning of prior bull markets. Over the last two weeks, for example, the Dow has gained 18.8%. The Dow’s average gain over the first two weeks of past bull markets, in contrast, has been 8.4%, or less than half as much.

“In fact, of the 34 bull markets identified by Ned Davis Research, only one of them produced a greater gain in its first two weeks than in the recent rally. That was the one that began on November 13, 1929, and is hardly one that the bulls would want to brag about. That bull market lasted just five months and led to an increase of just 48% in the Dow - making it one of the most modest of bull markets in the sample, despite have one of the most impressive returns in its first two weeks.

“These historical comparisons don’t automatically mean that the market’s strength over the last two weeks is just a bear market rally, of course. But those comparisons do highlight the possibility that the recent rally, impressive as it otherwise is, will in the end prove to be just a bear market rally.”

Source: Mark Hulbert, MarketWatch, March 24, 2009.

Jeffrey Saut (Raymond James): Bear market rally or something more?
“In recent weeks, copper, steel, and energy prices have crept higher. Additionally, building permits and housing starts have come in better than expected. Meanwhile, tax refunds are up 13.3% when compared to this time last year, which is probably why retail sales have stabilized despite rising unemployment.

“Only time will tell, but it feels like the economic deterioration is no longer accelerating? Could it be that the huge increase in money supply, negative real interest rates (inflation adjusted rates) and the reintermediation we have been speaking about are beginning to have a positive impact on the economy?

“The stock market might just be sensing that, having leaped off of a generational oversold condition into a 20%, ten-session, upside stampede that produced four 90% upside days (March 10th, 12th, 17th, and 18th) within a two week period. Such enthusiastic buying has tended to be associated with the start of new bull markets. Yet as the Lowry’s service notes, ‘Our 2002 study of 90% days showed that the start of new bull markets are typically identified by a single 90% upside day, representing a rush of enthusiastic buyers which typically calms down after the first dramatic day. On rare occasions, two 90% upside days have been recorded in the first 30 days of a new bull market.’

“While we are cautious, we remain hopeful and continue to favor the upside until proven wrong, which is why we are still ‘long’ various indexes and have selectively been accumulating stocks.”

Source: Jeffrey Saut, Raymond James, March 23, 2008.

Richard Russell (Dow Theory Letters): Get used to bear market rallies
“Moving on to the stock market, subscribers will have to get used to bear market action. In bear markets, counter-intuitively much of the time is spent with stocks rising, due to the frequent upward correction. For instance, during the horrendous 1929-32 bear markets there were no less than nine 15% rallies, the average lasting 15 days.

“During the 1937 to 1942 bear market, there were nine rallies of 15% or more with the average correction lasting 82 days

“During the 1946 to 1949 bear market there were two 15 % or more rallies averaging 57 days each.

“During the recent 2000 to 2002 bear market there were three 15% or more rallies averaging 5 days each.

“From November 2009 to January 2009 there were two rallies, one short and one longer one that stopped just short of 15%.

“So we have to get used to rallies in the bear market. One difficulty in dealing with bear rallies is that they can end as suddenly as they started. This is because bear market rallies don’t end with a period of distribution. The buying just stops, and down they go. This is opposite to bull market advances that usually terminate after a period of deliberate distribution.”

Source: Richard Russell, Dow Theory Letters, March 24, 2009.

David Fuller (Fullermoney): Don’t look to Wall Street for the lead
“The US stock market is the big elephant in the room, casting a long shadow, but it seldom leads market moves. New bull markets are led by emerging economies, subject to governance, with their better valuations near the lows, competitive currencies, superior GDP growth prospects and comparatively thin markets. … growing list of market indices which bottomed in October and November, and have now broken up out of their trading ranges during the current rally. This is very bullish action and the way new uptrends commence.

“Many other stock market indices tested their lows established last year and found good support near those levels, evidenced by their persistent rallies towards the upper-middle of their ranges. This is consistent with base formation development. Lastly, most of the stock markets that clearly broke beneath last year’s lows earlier this month have not maintained those downward breaks. Further rallies by these indices would also confirm base development.

“Long-dated government bond markets are no longer performing. Everyone knows that their yields are not attractive for any economic environment other than a deflationary depression. Some of the money currently in bonds came from stock markets and will return to equities as confidence improves. Corporate bonds are performing and they are a lead indicator for equities.

“Copper is leading industrial commodities higher, as it did in 2003.

“Lastly, the US dollar and yen in particular are weakening against yield / resources currencies such as the Australian and New Zealand dollars. This indicates that carry trade deleveraging has not only ended but is also reversing.

“Returning to global stock markets, I maintain that the bear market mostly ended in October and November. The January to early-March sell-off looks like a successful test of support from last year’s lows for most non-Western stock markets.

“I do have some remaining concern over Wall Street and its leash effect. However, technology is a leading indicator and the tech-heavy Nasdaq 100 Index did not break downwards. The S&P 500 Index did not maintain its break beneath the November low and is pushing above psychological resistance at 800. A move above 880 would, in my view, confirm a significant downside failure and resumption of the yearend base formation development.

“Interestingly, stock markets have been extending this month’s rally against a background of short-term overbought indicators. This indicates that bears are being squeezed and that bulls are emboldened. I have previously mentioned that a significant rally would be indicated by its persistence. We now have some distance between current levels and the early-March lows, which should provide a cushion of support during the next consolidation.

“In conclusion, if the bear market is not continuing, the new bull market is already underway, although most people do not yet realise it. However this will not be fully confirmed, as I have said before, until the majority of stock markets are trading above rising 200-day moving averages. Moreover, even though the balance of technical evidence increasingly suggests that a new bull market is gradually commencing, this does not mean that all of the developing bases can support uptrends at this time. The leading Asian emerging markets and South American resources markets may actually be commencing uptrends, but many others are likely to extend their bases in coming months.”

Source: David Fuller, Fullermoney, March 26, 2009.

BCA Research: Demystifying Chinese holdings of US assets
“In an unusual disclosure, Chinese Premier Wen Jiabao publicly expressed his concerns about the safety of China’s holdings of US assets, putting the country’s massive yet largely furtive foreign exchange assets into the spotlight.

“Our research finds that China currently has about 64% of its foreign reserves in US assets, a level that has declined gradually from as high as 84% in 2003. The majority of Chinese holdings of US assets are risk free and long-term in nature, but there has been a clear trend in China’s reserve holdings that shows a persistent increase in exposure to risky assets and non-US assets over the past five years.

“Although, China’s net purchases of risky US assets have dropped sharply since mid-last year, while its net purchases of Treasurys have jumped. This underscores the authorities’ reduced risk appetite amid the ongoing global storm. Their reserve diversification process could accelerate again when global financial markets stabilize. Importantly, China’s net purchases of short-term US Treasurys have jumped dramatically over the past year, accounting for the majority of the country’s total net purchases of US government paper. This is an unprecedented development and a situation that warrants close attention going forward.”

Source: BCA Research, March 23, 2009.

The Wall Street Journal: China takes aim at dollar
“China called for the creation of a new currency to eventually replace the dollar as the world’s standard, proposing a sweeping overhaul of global finance that reflects developing nations’ growing unhappiness with the US role in the world economy.

“The unusual proposal, made by central bank governor Zhou Xiaochuan in an essay released Monday in Beijing, is part of China’s increasingly assertive approach to shaping the global response to the financial crisis.

“Mr. Zhou’s proposal comes amid preparations for a summit of the world’s industrial and developing nations, the Group of 20, in London next week. At past such meetings, developed nations have criticized China’s economic and currency policies.

“This time, China is on the offensive, backed by other emerging economies such as Russia in making clear they want a global economic order less dominated by the US and other wealthy nations.

“However, the technical and political hurdles to implementing China’s recommendation are enormous, so even if backed by other nations, the proposal is unlikely to change the dollar’s role in the short term. Central banks around the world hold more US dollars and dollar securities than they do assets denominated in any other individual foreign currency. Such reserves can be used to stabilize the value of the central banks’ domestic currencies.

“Monday’s proposal follows a similar one Russia made this month during preparations for the G20 meeting. Like China, Russia recommended that the International Monetary Fund might issue the currency, and emphasized the need to update ‘the obsolescent unipolar world economic order’.”

Source: Andrew Batson, The Wall Street Journal, March 24, 2009.

Bespoke: Gold testing downside support
“Just one week after the Federal Reserve devalued the dollar by announcing that they would start buying US Treasuries, one would think gold would be in rally mode and in overbought territory. However, while gold had an initial spike following the Fed’s announcement, since then the yellow metal has come back down to earth. Gold is currently close to testing its 50-day moving average, which is a level that has provided reasonable support over the last few months. If that level fails to hold, the next level of support is around its 200-day moving average at 859.”

Source: Bespoke, March 25, 2009.

Platts: Chinese buying spree sparks fears of base metal shortage in Asia
“Robust Chinese demand could result in a supply shortage of base metals in Asia even as the rest of the world grapples with low demand, market sources said this week.

“Japanese copper smelters producing a total 120,000 mt/month of copper cathode have sold out of April-May shipments. Two smelters producing 20,000-40,000 mt/month each said they may be able to offer spot cargoes in June.

“Asia’s copper market has tightened as a result, sources said. Premiums for Japanese copper for prompt shipment within 60 days have risen to $150/mt plus London Metal Exchange cash CIF Shanghai this month, from $80-100 mt/plus LME CIF Shanghai in February.

“There is no shortage yet, and no copper consumer in Asia has yet been forced to curtail production of coils or cables due to a shortage of copper feedstock, sources said.

“But if demand in recession-hit Japan does start to pick up unexpectedly, Asia may suffer shortages, impacting smaller consumers in particular that have no protection from long term contracts.”

Source: Mayumi Watanabe, Platts, March 27, 2009.

David Fuller (Fullermoney): Where do oil prices go from here?
“The consensus view is usually a contrary indicator. Near the July 2008 peak at just under $150, many analysts were forecasting $200 and higher. This trend extrapolation was often influenced by their firms’ and clients’ own speculative positions, not least in tracker funds. Around $40, the consensus was for $25, suggesting sizable short positions.

“Price charts gave a very good signal that crude oil’s bull run was over in mid-July 2008 and since December we have interpreted the ranging price action as base formation development centred on $40. I do not assume that the lows will be retested and the base might even have been completed. If so, the next reaction and consolidation, representing the first step above the base, would most likely encounter support at $47 or higher.

“Historically, demand for crude oil has only experienced a small decline during deep recessions. Global consumption of crude continued to rise during the 2001-2002 recession, albeit at a slower rate. We are currently seeing a dip in demand but as Matthew Simmons points out, it is only slight and mostly in terms of consumption in the US.

“Meanwhile, OPEC has reduced supplies, while worldwide exploration and development of oil reserves has been curtailed by low prices and financing difficulties in the global recession. The search for viable alternatives has become a priority for oil-importing countries but it is a slow process.

“Energy is a Fullermoney secular theme and our view is that it has become a bull play once again, in all its various forms. The short to medium-term risk is probably limited to additional base formation development before significant uptrends occur. That will mark the return of commodity price inflation.”

Source: David Fuller, Fullermoney, March 24, 2009.

Ifo: Further decline in the Ifo Business Climate Index
“The Ifo Business Climate for industry and trade in Germany has cooled again somewhat in March. The firms have reported a further worsening of their current business situation. With regard to the business outlook for the coming six months, they are again slightly less pessimistic. An economic turning point has not yet been reached, in the opinion of the survey participants.”

Source: Ifo, March 25, 2009.

CEP News: Fall in German PMIs starts moderating
“German manufacturing and services output continued to contract at severe rates in March. However, the pace of contraction unexpectedly eased over the month, Markit Economics noted.

“On Tuesday, Markit Economics reported that the German manufacturing purchasing managers rose to 32.4 in March, up modestly from February’s 32.1 level. Economists had expected the PMI to fall back to its record low 32.0 level.

“Output in the services sector also showed unexpected strength, as reflected in the services PMI rising to 41.7 from February’s 41.3 level. Expectations had been for a fall to an all-time low of 41.0.

“Taking the two PMIs together, the composite index came to a two-month high of 37.7, up 1.4 points from February’s figure.

“‘The rise in the headline composite index provides some tentative hope that the downturn has passed its nadir,’ Markit economist Mark Smith said.”

Source: CEP News, March 24, 2009.

CEP News: ECB may turn to “unconventional policy” if rates reach limit
“The European Central Bank may take unconventional measures if its key policy rate hits its lower boundary, ECB Governing Council member Nout Wellink said on Thursday.

“‘The ECB could use unconventional monetary policy, on top of the unusual expansion already implemented, if the interest rate instrument can’t be used further because of [almost] reaching the zero-rate limit,’ Wellink said in the Nederlandsche Bank’s annual report.

“The policy maker also said that months of negative price growth could not be ruled out in the euro zone. ‘[Negative inflation] isn’t a problem in itself as long as consumers don’t continuously postpone spending in the hope on further price declines,’ Wellink said.

“Wellink also said that the global economic environment is unprecedentedly uncertain.’ He added, ‘The financial system has been under unprecedented pressure since August 2007.”

“However, the central banker said that it was ‘not unrealistic to expect that the world economy will get going’ by next year.”

Source: CEP News, March 26, 2009.

Financial Times: Take-up of City offices at new low
“Take-up of new offices in the City of London has fallen to its lowest for more than 20 years as the slowdown in the economy has reined in financial services businesses from expanding and moving to new buildings.

“There has been just 220,000 sq ft of new occupied space in the Square Mile since the beginning of the year, half the previous lowest office take-up during the last recession, when 500,000 sq ft was let in the third quarter of 1991.

“The economic downturn has hit the City office market hard, with many businesses looking to cut staff and reduce office occupation. Some are also looking to sub-let their own space.

“According to data compiled by Atisreal property consultancy since 1987, the vacancy rate in the City is 12.4%, or 10m sq ft, still significantly less than the last recession, when a fifth of offices were empty.

“Even so, there are a number of new buildings set for completion in the next two years that will add to those figures.

“City rents have also fallen sharply. Dan Bayley, head of national sales and lettings at Atisreal, said that prime rents were now about £45 per sq ft, down about a third from the peak of the market in 2007 when offices were being let at about £67.50 per sq ft.

“Mr Bayley said: ‘With rents continuing to fall, landlords are experiencing further pain. However, the positive factor is that a number of occupiers really are seeing value for money and, like the West End, may start seeing more activity in the coming quarters.’”

Source: Daniel Thomas, Financial Times, March 22, 2009.

CEP News: BOJ minutes reveal steps to buy assets
“The Bank of Japan’s minutes from the February 18-19 meeting revealed the bank felt that buying corporate bonds was necessary to stabilize financial markets.

“At the meeting, the central bank held the target rate unchanged at 0.1% as expected, but also announced further measure to boost corporate financing.

“The bank said it would begin purchases of corporate bonds and extend the period of time they will buy commercial paper. The bank has met since then and expanded their purchases of Japanese government bonds.”

Source: Megan Ainscow, CEP News, March 23, 2009.

Tags: Asset Backed Securities, Ben Bernanke, Deposit Insurance Corporation, Dow Jones Industrial, Dow Jones Industrial Index, Emerging Markets, ETF, Federal Deposit Insurance, Federal Deposit Insurance Corporation, Federal Deposit Insurance Corporation Fdic, Global Stock Markets, Government Bonds, India, Investment Program, Money Printing, Mortgage Backed Securities, oil, Percentage Gain, Point Gain, Ppip, Timothy Geithner, Treasury Secretary, Troubled Assets, Us Treasury
Posted in Bonds, Commodities, Emerging Markets, Gold, Markets | No Comments »

Fed monetization – not what it buys, but how much of anything it buys

Saturday, March 28th, 2009

This post is a guest contribution by Paul Kasriel* of Northern Trust Company.

Last week the Fed announced that it would purchase $300 billion of longer-maturity Treasury securities. The mainstream media got all excited, talking about the Fed “printing money”. But the Fed figuratively “prints money” or creates credit whenever it acquires assets - loans or investments.

For example, when the Fed purchases a mortgage-backed security, it pays for the security simply by crediting the deposit (reserve) account of the security seller’s bank. The seller’s bank, in turn, credits the seller’s deposit account. If the seller happens to be a bank, then just the bank’s reserve account gets credited.

Either way, the Fed is figuratively creating credit and, in the case when the seller of the security is a nonbank, money “out of thin air”. To create credit out of thin air, it does not matter whether the Fed purchases a mortgage-backed security or a Treasury security. Moreover, when the Fed lends to banks through its discount window, it also is creating credit out of thin air. In fact, when the Fed pays its employees, it is creating credit and money out of thin air.

Suppose the Treasury issues an additional $100 billion of securities and the Fed purchases an additional amount of mortgage-backed securities. Is the Fed “monetizing” the Treasury debt? Directly, no. Indirectly, yes. Funds are fungible. All else the same, the Treasury’s increase in the supply of securities is offset by a decrease in the amount of mortgage-backed securities as a result of the Fed’s purchase. So, the amount of securities to be held by the non-Fed public is unchanged. Indirectly, then, the Fed has monetized the increased debt issuance by the Treasury.

Getting back to the Fed’s announcement last week, not only did it say that it would purchase $300 billion of longer-maturity Treasury securities, but it also would purchase an additional $750 billion of mortgage-backed securities and an additional $100 billion of direct debt of government-sponsored agencies (e.g. Fannie and Freddie debt). So, the Fed announced “monetization” in an amount of $1.15 trillion, all else the same.

But wait, there’s more. The Fed also has begun another monetization program via the Term Asset-backed securities Loan Facility (TALF). TALF currently is permitted to provide up to $1 trillion of new credit to the financial system - thus, another $1 trillion of monetization.

From December 2007 to December 2008, Federal Reserve Bank credit more than doubled, increasing from about $877 billion to $2.2 trillion. Mama mia, that’s a lot of monetization! But a sizeable portion of the increase in Fed credit just ended up as idle excess reserves on the books of banks and other depository institutions. Federal Reserve Bank credit minus excess reserves went from $875 billion in December 2007 to almost $1.5 trillion in December 2008 (see chart below).

Just as the non-bank public’s demand for money to hold has increased in the past year, banks’ demand for “money” or reserves to hold also has increased. Had the Fed not satisfied both the banks’ and the non-bank public’s increased demand for money by creating more of it, economic activity would have been even weaker than it was.

In the coming months, the federal government is going to be increasing its debt issuance to finance its increased spending as a result of the recently-passed fiscal stimulus program. The Congressional Budget Office is forecasting a federal budget deficit for fiscal year 2009 of about $1.8 trillion. As mentioned above, the Fed is on course to create about $2.15 trillion of new credit in the months ahead.

All else the same, the Fed’s monetization of debt through the purchase of mortgage-backed securities, Treasury securities or through the TALF program in conjunction with the federal government’s increased spending will generate stronger economic activity. If the increased federal spending were being funded with increased taxes, then those paying higher taxes would cut back on their spending as the federal government increased its spending. Net, net, there would not be much increase in total spending.

The same would hold true if the federal government’s increased spending were being funded with increased Treasury debt purchased by the non-bank public and not offset by Fed purchases of some kind of debt.

But if the Fed purchases some kind of debt in amounts equal to the federal government’s increased debt issuance, then the federal government can increase its spending without any one else having to cut back on his or her spending. In the short run, this will boost real economic activity. Of course, farther down the road, this will increase the rate at which prices rise - prices of goods, services and assets. Ben Bernanke’s “money-dropping” helicopter has been replaced by a C-5 Galaxy transport!

Source: Paul Kasriel, Northern Trust - The Econtratian, March 23, 2009.

*Paul Kasriel is Senior Vice President and Director of Economic Research at The Northern Trust Company. The accuracy of the Economic Research Department’s forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul’s 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst.

Tags: Assets, Banks, Credit Loans, Debt Issuance, Investments, Mainstream Media, Maturity Treasury, Mortgage Backed Securities, Mortgage Backed Security, Northern Trust Company, Paul Kasriel, Printing Money, Prints, Thin Air, Treasury Issues, Treasury Securities, Treasury Security
Posted in Markets | No Comments »

Quantitative Easing: A Guide and Outlook to the ‘Nuclear Option’

Sunday, March 22nd, 2009

Last week, Ben Bernanke announced the Fed’s decision to employ ‘Quantitative Easing’ (QE), the ‘nuclear option,’ to save the credit market and the economy. On the news that the Fed will buy back up to $300-billion worth of long dated US treasury bonds, and acquire an additional $750-billion of mortgage backed securities, the US dollar plunged, the euro surged, Treasury yields nose-dived, gold bullion exploded, and stocks, oil and commodities gained handsomely.

We know what the immediate reaction has been to this, but what does it all mean in the longer term?

The main design of QE is to supply the money, by printing it, that is required to fulfill current demand for money arising from the deleveraging of balance sheets. Buyers need to be able to access credit and cash in order to purchase assets from distressed vendors. If purchasers cannot be facilitated via the market, the bids for the assets will keep falling until they can. QE means to provide the stop-gap measure. The other purpose of QE, is to make it possible for the Fed to enlarge its own balance sheet by assuming or acquiring ‘toxic’ assets in return for retiring debt from banker debtors, so that they can be freer to resume lending.

Until now, the deleveraging of market assets in favour of debt reduction has resulted in strong demand for cash, such that it has given the dollar a disproportionate boost - hence the strangely strong dollar.

Prior to the Fed’s move last week, this quote describes the current nature of the strong US dollar, from FT.com:

Hans Redeker at BNP Paribas said under normal circumstances, a rising deficit works against the domestic currency. “However, in this environment, deleveraging by institutions in order to clean up balance sheets will provide the dollar with a natural bid,” he said.

This deleveraging helped create a dollar shortage that drove the US currency sharply higher against the euro after the collapse of Lehman Brothers last September. Analysts said a similar situation seemed to be developing as equity markets plunged below their lows from last autumn.

The following is an excellent tutorial from Marketplace.com on Leveraging and Deleveraging:

Leveraging and deleveraging from Marketplace on Vimeo.
Quantitative easing supplies the cash via the printing press to those institutions in need of cash in return from the sale of levered assets, in the form of credit for buyers of liquidated assets. With credit for the purpose of re-purchasing distressed assets unavailable to would-be buyers, the market for those assets has suffered immensely; stocks, bonds, real estate, etc. As for the CDOs, only a daring breed of investors have shown interest, but they too may find it hard to get the credit to make it worthwhile, or the concessions and covenants.

The following is a tutorial from Marketplace.com on Quantitative Easing:

Quantitative easing from Marketplace on Vimeo.

Effectively, when you sell (or short) assets, the end result is that you end up long the cash. For those seeking to reduce debt, the cash disappears into the money pit, returning to the lender’s balance sheet. For those selling assets because they are risk averse, the money ends up for the time being in now zero-interest treasuries and short term cash equivalents. Therefore you end up with a strong dollar. When the market was over-using credit, it was short the dollar and the dollar was weaker. Now that the market is in a debt-reduction or deleveraging mode, it is long the dollar, therefore the dollar gains strength.

The Feds decision to employ the ‘nuclear option’ of QE sends a signal that there may be a great deal more deleveraging in store for the economy and there is substantial need to supply the money.

The immediate reaction is the weakening of the dollar, but that just provides temporary breathing space until the subsequent rounds of deleveraging sop up the slack created by QE, and what follows is a revitalized dollar, strengthened yet again by the deleveraging.

Graduated QE will periodically and gradually weaken the dollar, as it is dilutive, but the take up created by graduated deleveraging will gradually renew dollar strength. Ideally, if all the central banks in the G6 resort to this, there will be balance, but the timing may at times prove to be skewed by the independent agendas of the UK and the ECB.

The bottom line is that this first round of QE is just that. The first round. Bill Gross, Managing Director, PIMCO, points out that while it is a good move, it may not be enough, and that the Fed may have to expand its balance sheet to $5 or $6-trillion, as it takes $4 of debt to generate $1 of GDP growth.

Bill Gross: No, I agree with all of that. Its just a question, Kathleen, of ‘how big of a kick?’ There are a number of ways of looking at this. Goldman Sachs has approached it from the standpoint of the Taylor Rule, the deficiencies of output relative to their own particular index.

We look at it a little bit differently at PIMCO, we look at it from the standpoint of the amount of debt that’s required to produce a dollar’s worth of GDP growth. And up until 12-18 months ago in terms of our existing economy, that was about $4 of debt for $1 of GDP growth.

This $1-trillion dollars to our way produces $250-billion of GDP; that’s just under two percent real growth. That`s good, that produces in our opinion about 1-million jobs, but we need more than that.

KH: Is it enough to avoid the mini-depression you were talking about last month when I joined you for an interview out there at Newport Beach?

BG: We think so, you know yesterday’s move by the Fed were in recognition of this recessionary economy that could have resembled a small depression unless credit markets and risk taking were revived. And in fact the Fed labelled their policies ‘credit easing’ and you mentioned the obvious intent to lower mortgage rates to homeowners and lower credit card rates, auto loans, commercial rates as well so, you know, its very much of a positive push. We have sense that the $1.8-trillion balance sheet that the Fed has, that’s now growing to $3-trillion, probably will have to grow to $5-trillion and $6-trillion in order to keep us on a trend line that produces positive as opposed to negative growth.

Because QE measures may not yet be sufficient to completely overcome the problems facing the banking system in terms debt reduction the outlook continues to be tilting towards deflation.  As long as the need to deleverage balance sheets exceeds the availability of credit, assets could continue to deflate. Therefore, our sense is that the Feds first QE move is preliminary, and primes the pump for more QE in the next 6-12 months.

So, is the Fed’s move a signal that we are at an inflationary or deflationary inflection point for the moment? Watch the debate unfold between Hugh Hendry, and Liam Halligan. Then you decide…

We like to err on the side of reason and validity.

At the moment the political will to carry out this process fully, and further, faces significant opposition, especially to the idea of bailing out Wall Street and the US banking system, and is hobbled by the public outcry against the AIG bonuses debacle, and government has done as much as it can to suitably convince constituents of what it needs to do, for now. Today, the US Treasury announces a $1-trillion ‘public-private investment programme’ to absorb the toxic assets into what amounts to a ‘bad bank.’ One of the big issues is the competence of those in the private sector (which is meant to be a checks and balances component) to price these assets. Another issue remains whether or not this will get banks to release their chokehold on credit and resume business as usual in the lending business. The White House is expected to follow up this week with its comprehensive financial plan. This administration’s public relations programme has reached a crescendo; 60 Minutes, Jay Leno. Will they be able to finally stop talking and actually get down to work on it?

Does Geithner have the political ammunition to take further measures? Geithner must convince the market and constituents that this move will complement the Fed’s quantitative easing.

From today’s Globe and Mail: Nobel Prize-winning economist and Princeton University professor Paul Krugman blasted the strategy as a rehash of former treasury secretary Henry Paulson’s discredited solution to the banking crisis, first proposed six months ago. “It’s not new; it’s just another version of an idea that keeps coming up and keeps being refuted,” Prof. Krugman wrote over the weekend on his New York Times blog.

“It’s just horrifying that [U.S. President Barack] Obama - and yes, the buck stops there - has decided to base his financial plan on the fantasy that a bit of financial hocus-pocus will turn the clock back to 2006.”

The only way out of the banking crisis is for the government to offer a sweeping guarantee of problem debts and to seize control of banks with too few assets to cover their debts, Prof. Krugman argued.

The current crisis, he argued, isn’t just a panic, but a fundamental realignment of a financial system that foolishly bet big that house prices and consumer debt would continue rising forever.

For these reasons, QE and other measures will be a gradual process and could work, but only if taxpayers are willing to be saddled with the burden.

Tags: Balance Sheet, Balance Sheets, Ben Bernanke, Bnp Paribas, Cdos, Collapse, Covenants, Debt Reduction, Debtors, Distressed Assets, Domestic Currency, End Result, Feds, Gap, Gold Bullion, Last Autumn, Last September, Lehman Brothers, Lows, Market Assets, Mortgage Backed Securities, Nuclear Option, Printing Money, Printing Press, Qe, Redeker, Stocks Bonds, Stop Gap, Strong Dollar, Treasury Yields, Us Treasury Bonds, Vimeo
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Words from the (investment) wise for the week that was (March 16 – 22, 2009)

Sunday, March 22nd, 2009

Phew - what a week! What an announcement!

The Federal Open Market Committee (FOMC) on Wednesday left the Fed funds range unchanged at zero to 0.25%, but stunned the financial markets with an announcement that it would purchase up to $300 billion in longer-term Treasuries over the next six months.

Acting boldly in an attempt to get the economy breathing again, the policy board also committed to purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, as well as a further $100 billion in agency debt.

The objective of purchasing Treasuries is to orchestrate a reduction in long-term rates in the expectation that these lower rates would filter through to mortgage rates and other private sector loans. The average 30-year fixed-rate mortgage fell to 4.98% on Thursday, down from 5.47% in early December and a high of 6.46% in mid-October (see Freddie Mac’s weekly survey).

“They’re calling it ‘The Rambo Fed‘,” said Richard Russell (Dow Theory Letters). “Bernanke is not fooling around any longer. He’s playing all his cards. He’s going to put a floor under housing and boost asset prices in an all-out attack on the bear market. Bernanke will in no way accept deflation. The Fed will go all out in printing Federal Reserve Notes in its massive assault on deflation. Bernanke will accept a collapsing dollar rather than a repeat of the Great Depression.”

“These actions are high-quality bond-friendly and dollar-unfriendly,” commented Bill Gross of Pimco (via Reuters). “To the extent that they are successful and Treasury efforts match these efforts, certain risk assets may benefit as well, although their ultimate prices will reflect the ability of government to successfully reflate.”

On the announcement, the yield on the US ten-year Treasury Note recorded its sharpest fall since the Wall Street crash of 1987, the US dollar suffered its biggest weekly loss for almost 25 years, gold bullion surged by more than $80 at one stage, and oil and base metals gained handsomely.

The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.

Stock markets initially rose strongly on the Fed’s move to revive the economy, adding to the gains of the rally that commenced on March 10. Although stocks succumbed to profit-taking towards the close, indices nevertheless managed to register a second straight week of gains - the first such stretch since May 2008 in the case of the US bourses.

Elsewhere in the world stocks also performed strongly, with the MSCI World Index gaining 4.4% (YTD -14.2%) and the MSCI Emerging Markets Index ahead by 4.7% (YTD -2.5%). Returns ranged from +17.7% in the case of Romania to -5.6% for Bermuda. The Shanghai Composite Index (+7.2%) had another solid week and remains at the top of the field for the year to date with a 25.0% gain in US dollar terms. (Click here to access a complete list of global stock market movements, in local currency terms, as supplied by Emeginvest.)

As far as US exchange-traded funds (ETFs) are concerned, John Nyaradi (Wall Street Sector Selector) reports that the strongest sectors this week were energy, commodities and emerging markets. Leaders included SPDR S&P Oil and Gas Exploration (XOP) (+7.6%), PowerShares Commodity Tracking Index (DBC) (+9.4%) and iShares MSCI South Korea Index (EWY) +7.5%. On the other end of the performance spectrum Real Estate Investment Trust (REIT) stocks had a torrid time, with SPDR DJ Wilshire REIT (RWR) losing 12.3% and Vanguard REIT (VNQ) down by 10.3%.

Notwithstanding supply concerns and a US budget deficit expected to hit $1.8 trillion this year, government bond yields around the globe declined as the US central bank joined the Bank of England, the Bank of Japan and the Swiss National Bank in a policy of quantitative easing. Yields of 10-year Treasuries and Bunds were down by 22 and 5 basis points respectively on the week. However, the yield on the 10-year Gilt rose by 7 basis points even as the Bank of England continued to buy long-dated bonds.

“… I think the US government bond market is a disaster waiting to happen for the simple reason that the requirements of the government to cover its fiscal deficit will be very, very high,” said Marc Faber in a CNBC interview. “There will be a time when the Federal Reserve will have to increase interest rates to fight inflation, and it will be reluctant to do so because the cost of servicing government debt will rise substantially.”

Not surprisingly, the US dollar got whacked. According to Bespoke, the US Dollar Index had its third biggest one-day decline (-2.69%) on Wednesday since daily pricing started back in 1970. The greenback broke below its 50-day moving average and short-term uptrend, but is still trading above its 200-day moving average and longer-term uptrend. Given the Fed’s “nuclear” strategy, further damage appears likely.

Source: StockCharts.com

In the expectation that the Fed’s printing of massive amounts of money will stoke inflationary pressures, Treasury Inflation-protected Securities (TIPS) surged to a level last seen in October 2009, as shown by the performance of iShares TIPS Bond ETF (TIP).

Source: StockCharts.com

Bernanke’s “inflate or die” approach also caused gold bullion to shine. After having traded below $884 prior to the Fed’s announcement, the yellow metal rose sharply to $967 before easing back to close the week at $952.

Commodities benefited as the Fed’s announcement saw the US dollar nose-diving, with West Texas Intermediate Crude (+10.7%) rising above $50 for the first time since November. Similarly, copper touched a four-month high as the price breached $4,000 a metric ton.

Next, a tag cloud of al the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “bank”, “market”, “economy”, “Fed” and “government” featured prominently, whereas “China” is also attracting more attention by the week.

Turning to the stock market again, the 800 level on the S&P 500 Index needs to be exceeded for stocks to make further headway. It not only represents a 50% retracement of the January/March decline, but is also the resistance level of the two-month downtrend and the 50-day moving average.

Source: StockCharts.com

The key chart levels for the major US indices are provided in the table below.

Kevin Lane, technical analyst of Fusion IQ, said: “… we continue to view this current rally as having legs with maybe another 10-15% up from present levels. However, ultimately we think this rally will fade and we will get a retest of the recent lows (check the history books, we almost always get a retest). How the market handles that retest will tell us a lot with regard to the longer-term picture.”

“While our sense is that the rally has more to go on the upside in the weeks to come, we feel it is still too early to say the final bottom has been put in place,” added Jeffrey Saut of Raymond James.

Back to the venerable Richard Russell, who said: “The rally is running into some hesitation. Transports have been down four out of the last six sessions. When the Averages disagree, it’s often a sign of distribution. Let the market have its fun. As far as I’m concerned, the primary trend of the stock market remains bearish although the secondary trend has turned up. When a market becomes too oversold, the secondary correction acts like the ‘release valve’ in an over-heated boiler. Some of the steam escapes, and they call that an upward correction.

“Often, these explosive corrections look better than the real thing, Furthermore, they can prove costly to both bulls and bears. Corrections in a bear market are always tricky and deceptive, and I’ve learned not to fool with them.”

In the extreme bearish camp, Nouriel Roubini shared the following caveat emptor (via Tech Ticker, Yahoo Finance): “Dear investors, do enjoy this dead cat bounce and bear market sucker’s rally … don’t wait too long until you jump ship while the financial Titanic hits the next financial iceberg: you may get squeezed and crashed in the rush to the lifeboats.”

The Achilles heel of the stock market is the uncertainty regarding corporate earnings. The graph below, courtesy of Chart of the Day, illustrates that 12-month, as-reported S&P 500 real earnings have declined over 80% over the past 18 months, making this by far the largest decline on record (the data go back to 1936). “During Q4 2008, the S&P 500 came in with its first negative earnings quarter ever and the amount lost during the quarter was more than the index has ever earned during a single quarter,” said Chart of the Day.

Also, it is important that confidence be restored for the recent gains to be more enduring. The chart below shows the strong historical relationship between the US Consumer Confidence Index and the 12-month change in the S&P 500 Index. One needs to take a view on the direction of confidence, but should it for argument’s sake pick up from 30 to 40 by the end of June, the relationship indicates a S&P 500 decline of 30-35% in year-ago terms. Using end-of-quarter prices, this means an Index at between 832 and 896.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Taking one step at a time, the next hurdle is the release of potentially ugly earnings and guidance announcements in April. By then a clearer picture should also start emerging on the results of the Fed’s medicine and whether credit markets are thawing and confidence is beginning to improve. Very selective stock picking is in order, but tread carefully otherwise.

For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Fed employs nuclear option” and “Technical Talk: Rally continues …“. (And do make a point of listening to Donald Coxe’s webcast of March 20, which can be accessed from the sidebar of the Investment Postcards site.)

Invitation
I will again be embarking on a long-haul flight from Cape Town to the US in a week’s time. My final destination is San Diego where, amongst others, I will be attending a Richard Russell Tribute Dinner. However, in order to catch up with business associates and “feel” the East Coast economic temperature, I have arranged to connect via JFK and will be spending Tuesday, March 31 in New York City.

I am keen to meet as many of the Investment Postcards readers as possible on the one day I will be in the Big Apple and have scheduled an informal get-together in midtown Manhattan from 17:30 to 19:00 that afternoon. If you are interested in joining me for a drink, and “putting a face to the name”, please get in touch through the “comments” or “contact” sections of the site so that that I can send the details to you.

Economy
“Businesses remain darkly pessimistic across the globe. Sentiment hit a new record low in Asia last week and is close to record lows everywhere else,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Hiring intentions have taken a decided turn for the worse in recent weeks and suggest that there has been no let-up in the massive global layoffs and rising unemployment in March.”

Confidence is very poor across all industries, particularly in manufacturing, where it has never been as bleak. For example, Eurozone manufacturing activity continued to plummet in January, falling by 3.5% from the previous month, when it dropped by a revised 2.7%. In year-ago terms it fell by 17.3% - the steepest fall on record.

Source: Moody’s Economy.com

As shown by Rebecca Wilder (News N Economics), retail sales are likewise anemic around the world.

The World Bank has reduced its 2009 growth forecast for China from 7.5% to 6.5%, but indicated that the country’s economy was showing “early signs” of stabilization as government-sponsored investment mitigated the negative impact of contracting exports. “In an era when exports may continue to shrink due to an external demand collapse and consumption may prove difficult to stimulate as deflation has arrived, fixed asset investment championed by the government would be vital for China’s economic growth this year,” said US Global Investors.

“Although corporate savings played a more important role in financing investment than bank loans in the recent cycle, credit expansion, which has accelerated rapidly since December, remains a key driver for public sector investment which is likely to dominate this year.”

It hardly comes as a surprise that the International Monetary Fund has cut its forecast for global growth this year from +0.5%/-0.5% to -0.5%/-1.0%. According to CEP News, the report said Japan’s economy will contract by 5.8% in 2009, that of the US by 2.6% and the Eurozone’s by 3.2%. In 2010, the US and Eurozone are expected to see anemic growth, and the Japanese economy is forecast to see a mild annual contraction in GDP.

A snapshot of the week’s US economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

March 20
• None

March 19
• Index of Leading Indicators - continued contraction of economic activity
• Jobless claims - new high for continuing claims and insured unemployment rate

March 18
• Fed adopts more aggressive measures to fix the credit machine and facilitate working of the economy
• Higher gas prices mostly responsible for sharp increase in Consumer Price Index
• Current account deficit shrinks as imports fall

March 17
• Multi-family starts lift total housing starts; recovery in home building not there yet
• Core wholesale prices show moderating trend

March 16
• Factory production remains weak, but pace of decline shows moderation
• Home Builders Survey shows flickering signs of stability

“In sum, although the economy remains mired in a severe recession, we have seen nothing of late to dissuade us from our forecast of recovery getting under way in the fourth quarter of this year. In fact, what we have seen of late increases our confidence in the forecast,” concluded Paul Kasriel (Northern Trust).

Not disputing the downward momentum in economic data, Binit Panel, economist at Goldman Sachs, asked in a recent research report (via the Financial Times ) “what could go ‘right’ for the world economy”. He listed a number of developments that might be potential bright spots.

“First, a stabilization in consumer demand in the US - and an improvement in the UK and Germany.

“Second, an early end to the US housing downturn and a stabilization in the UK housing market.

“Third, the successful operation of the Federal Reserve’s term asset-backed securities loan facility, or Talf.

“Fourth, greater international co-operation - for example at the forthcoming G20 meeting.

“Fifth, better signs from the Bric (Brazil, Russia, India and China) emerging market economies - in particular China.”

Interestingly, after months of bleak economic news, an increasing proportion of Americans now say they are hearing a mix of good and bad economic news, while fewer say they are hearing mostly bad news. “As has been the case for the last few months, very few say they are hearing mostly good news about the economy,” reported The Pew Research Center for the People & the Press.

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

Source: Yahoo Finance, March 20, 2009.

In addition to Fed Chairman Ben Bernanke’s testimony to the House Financial Services Committee (Tuesday, 24 March), the US economic highlights for the week include the following:

Source: Northern Trust

Click here for a summary of Wachovia’s weekly economic and financial commentary.

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, March 20, 2009.

“You are too concerned about what was and what will be. There is a saying: yesterday is history, tomorrow is a mystery, but today is a gift. That is why it is called the present,” said Oogway (Kung Fu Panda - hat tip: Charles Kirk). These words ring especially true as I mourn the sad loss of Bennet Sedacca. He was not only a brilliant strategist and regular contributor to the Investment Postcards site, but also a dear personal friend. Rest in peace, Bennet.

That’s the way it looks from Cape Town.

The Wall Street Journal: Obama on The Tonight Show with Jay Leno
“President Obama took to Jay Leno’s stage and compared life in Washington to ‘American Idol’, where ‘everybody’s got an opinion’. The appearance on ‘The Tonight Show with Jay Leno’ was itself a sign of just how much the culture has changed in America, where comedy and politics often mix.”

Source: The Wall Street Journal, March 19, 2009.

CEP News: IMF slashes global growth forecast for 2009
“The International Monetary Fund cut its forecast for global growth in 2009. According to the report released on Thursday, global growth will contract between 0.5% and 1.0% this year and expand between 1.5% and 2.5% in 2010.

“The report said Japan’s economy will contract 5.8% in 2009, the US economy by 2.6%, and the euro zone economy by 3.2%. In 2010, the US and euro zone are expected to see anemic growth, and the Japanese economy is forecast to see a mild annual contraction in GDP.

“Going forward, the IMF said essential action includes additional easing in monetary policy, and more concerted action to steady markets - namely dealing with toxic bank assets.

“For its part, the US rescue plan was criticized by the IMF for lacking detail.

“Furthermore, there is a serious risk of deflation in some advanced economies, the report said. As for emerging economies, there is a ‘serious risk’ they will not have funding, the report added.

“At the G20 meeting on April 2 in London, world nations are expected to consider up to $500 billion in additional funding for the IMF in order to aid emerging economies.”

Source: Megan Ainscow, CEP News, March 19, 2009.

CEP News: FOMC keeps rates unchanged, announces purchase of $300 billion in Treasuries
“The Federal Reserve’s monetary policy board left the key interest rate unchanged, as expected, within a target range of zero to 0.25% on Wednesday, but announced it will purchase up to $300 billion in longer-term Treasuries over the next six months.

“The Federal Open Market Committee also committed to purchasing an additional $100 billion in agency debt, and up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year.

“‘Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth,’ the statement reads.

“The FOMC said it continues to ‘employ all available tools to promote economic recovery and to preserve price stability’, a comment identical to the January statement. The statement also mentioned that ‘economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period’, also unchanged from last month.

“Absent from this month’s statement is the assessment that ‘conditions in financial markets have improved’.

“The committee said it expects inflation will remain subdued in light of increasing economic slack in the US and abroad. ‘Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term,’ the statement said.

“The committee also said it will continue to ‘carefully monitor the size and composition of the Federal Reserve’s balance sheet’ in light of evolving financial and economic developments.”

Source: Stephen Huebl, CEP News, March 18, 2009.

Reuters: Pimco’s Gross - unclear why Fed moved Wednesday
“Pimco’s Bill Gross said it is unclear what was behind the Federal Reserve’s surprise decision on Wednesday to buy up to $300 billion in Treasuries.

“The move came as the government prepares its latest efforts to resuscitate credit markets with a program aimed at consumer and small business lending.

“But that program faces an uphill battle given the backdrop of public outrage over the fact that taxpayer money will be used to pay $165 million in bonuses for executives at bailed-out insurer American International Group.

“As a result, the shock move by the Fed raises the question of whether the immediate effect of buying Treasuries was deemed necessary in the event these programs fail to produce credit market improvement as quickly as hoped.

“‘It’s unclear whether today’s policy changes by the Fed are coordinated with the Treasury,’ Gross, co-chief investment officer at Pacific Investment Management Co, told Reuters in an interview on Wednesday.

“The uproar over AIG’s retention bonuses are seen by many hedge funds, private equity and big money managers as significantly raising the risks associated with partnering with the government on its Term Asset-Backed Securities Loan Facility, or TALF, as well as the Treasury’s public-private plan to buy toxic assets from ailing banks.

“An irate US Congress, fuming over AIG’s bonus payments to executives after the insurer was bailed out three times using taxpayer dollars, are more likely than ever to change the rules of engagement - possibly retroactively - and that is unnerving money managers at hedge funds, private equity firms and banks on the eve of the long-delayed launch of the government’s newest rescue efforts.

“On Thursday, applications from investors are due to participate in the Treasury and Fed’s $1 trillion TALF program.

“Gross, who helps oversee more than $800 billion at Pimco, said the economy and, by extension, the financial markets ‘needed a substantial shot of adrenaline’.

“‘The Fed’s balance sheet may approach $3.5 trillion - nearly a 100% addition - which will help substitute for the private sector’s deleveraging over the past 12 to 18 months,’ Gross said.

“‘These actions are high-quality bond-friendly and dollar unfriendly,’ Gross said.

“‘To the extent that they are successful and Treasury efforts match these efforts, certain risk assets may benefit as well, although their ultimate prices will reflect the ability of government to successfully reflate.’”

Source: Jennifer Ablan, Reuters, March 18, 2009.

Bill King (The King Report): Why has Ben opted for nuclear option?
“Just a couple days ago, Ben Bernanke said the economy would bottom this year. Citi and GM don’t need any more taxpayer funds. Banks have earnings year to date; and stocks are rallying. So why has Ben opted to employ the nuclear option and commence a Weimar Watch? In a word: China

“We thought the main FOMC issue would be its monetization disposition. But we did not think that Ben would play his final option now. Either something systemic is terrifying Ben and the solons or China, as the US’s Creditor in Chief, told Hillary the cold hard facts of debtor life.

“And when the US didn’t respond fast enough, China publicly expressed their concern about US debt.

“The US cannot jump through the proverbial hoop and buy bonds from China. But it can monetize bonds in the market, which helps China indirectly, and directly if China hits the Fed’s syndicate bid.

“However, China cannot be happy that the dollar tanked. This not only nullifies much of the bond market rally in yuan terms, it also strengthens the yuan, which will further crimp China’s exports.”

Source: Bill King, The King Report, March 18, 2009.

BCA Research: The Fed gets more aggressive
“The FOMC’s increasingly aggressive actions highlight a deep concern about the economic outlook. The Fed will run the printing presses until it gets results.

“The FOMC remains very concerned about the economic and financial outlook. The Fed’s balance sheet recently has shrunk modestly, but that does not reflect any deliberate actions. The Fed’s support of commercial paper has unwound as activity in that market has declined. The Fed’s balance sheet should start to grow again as the TALF program ramps up.

“Moreover, the decision to boost purchases of agency debt and mortgages, and to start directly buying Treasurys, suggests that the Fed’s balance sheet will mushroom in the months ahead. The key point is that monetary policy will remain highly accommodative and proactive until there are signs that financial intermediation is working more effectively. The Fed’s actions should be positive for both stocks and bonds.”

Source: BCA Research, March 19, 2009.

Asha Bangalore (Northern Trust): The Fed’s announcement - indicators to track
“The Fed’s intention to purchases mortgage backed securities, agency debt, and long dated Treasuries amounting to the sum of $1.15 trillion is an aggressive move. This follows the plethora of programs in place and the $1 trillion TALF program, the first disbursement of funds under TALF will take place next week.

“How would we track the impact of this announcement and other programs in place? The immediate impact should be visible in credit markets as we have seen since the current crisis commenced in August 2007.

“The chart below illustrates the recent behavior of the federal funds rate, 10-year Treasury note yield and the Moody’s Aaa corporate bond yield. The 10-year Treasury note yield closed at 2.51% on March 18 after the FOMC policy statement was published from 3.00% earlier in the day. A statement on the New York Fed’s website indicates that the Fed’s purchase will focus on the 2- to 10-year sector of the nominal Treasury curve. The purchases will be conducted through the Fed’s primary dealers 2-3 times per week. Further details will be available early next week and the plan is to hold the first purchase operation late next week. The objective of the Fed’s explicit purchase of long-dated Treasuries is to bring down borrowing costs which in turn should be reflected in lower yields of other private sector securities in the weeks ahead.

“The increase in the purchase of mortgage-backed securities is focused on driving down mortgage rates. The Fed has been successful in this regard since the program was operational from early-January 2009. As of the week ended March 19, the 30-year fixed rate on mortgages was 4.98%, down from 5.47% in early-December and a high of 6.46% in mid-October.

“The TALF program is aimed at unlocking the frozen consumer and small business loan sector. The accomplishments of this program will be visible in the interest spreads with regard to asset-backed securities such as those of credit cards and autos. These spreads have narrowed since their peaks in late-2008. Additional improvements in these spreads would indicate that the Fed’s program is working in the desired direction. These actions combined with the fiscal policy stimulus package are expected to get the economy back on track.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 19, 2009.

CEP News: Fed expands collateral for TALF
“The Fed expanded the securities it will accept for its short-term lending program just hours before the revamped plan was set to begin.

“The program is designed to free up capital for lending by purchasing securities backed by high-quality assets from financial institutions. The Fed plans to spend about $1 trillion through the program.

“In a release on Thursday, the Fed said it will accept securities backed by mortgage servicing advances, securities backed by loans or leases relating to business equipment, and securities backed by floorplan loans.

“‘The additional new asset-backed securities categories complement the consumer and small business loan categories that were already eligible,’ the Fed said in a press release.”

Source: Adam Button, CEP News, March 19, 2009.

Bloomberg: Ross says TALF will help end recession “more quickly”
“Billionaire investor Wilbur Ross talks with Bloomberg’s Matt Miller in New York about auto supplier aid and the Term Asset-Backed Securities Loan Facility. Auto suppliers will get as much at $5 billion in US Treasury aid to avoid a collapse that would cripple the domestic industry, including federally funded General Motors Corp and Chrysler.”

Source: Bloomberg, March 19, 2009.

BBC News: US deficit “to hit $1.8 trillion”
“The US budget deficit will hit $1.8 trillion this year, a record amount, according to US Congress estimates.

“The White House said the prediction by the Congressional Budget Office (CBO) would not alter President Barack Obama’s policy agenda. Nor would it affect its goal to cut the deficit in half by 2013, it added.

“The massive deficit forecasts come after President Obama’s $3.55 trillion budget plan for the 2010 financial year, which includes big spending programs to address healthcare, education and curb greenhouse gas emissions.

“The CBO also issued gloomy forecasts for the US economy, projecting that it will contract 3% in 2009 before growing 2.9% next year and expanding 4% in 2011.”

Source: BBC News, March 20, 2009.

CNBC: Meredith Whitney - credit crunch & financials
“Weighing in on consumer credit and why mark-to-market will not really help banks, with Meredith Whitney, Meredith Whitney Advisory Group CEO.”

Source: CNBC, March 17, 2009.

Nouriel Roubini (Forbes): United States of Ponzi - behold the Madoff in the mirror
“A reporter contacted me recently with the following question:

“‘I am a reporter, and I am doing a story on Bernard Madoff’s life after pleading guilty. As part of this, I was wondering if you could comment on what significance he will have in the history of this period. Will he represent more than a scamster who stole a lot of money from a lot of people? As Bernie Ebbers and Ken Lay came to embody corporate greed and deceit, what will Madoff symbolize?’

“Here is my answer fleshed out in full:

“Americans lived in a ‘Made-off’ and Ponzi bubble economy for a decade or even longer. Madoff is the mirror of the American economy and of its over-leveraged agents: a house of cards of leverage over leverage by households, financial firms and corporations that has now collapsed in a heap.

“When you put zero down on your home, and you thus have no equity in your home, your leverage is literally infinite and you are playing a Ponzi game.

“And the bank that lent you, with zero down, a NINJA (no income, no jobs and assets) liar loan that was interest-only for a while, with negative amortization and an initial teaser rate, was also playing a Ponzi game.

“And private equity firms that did over a $1 trillion of leveraged buyouts (LBOs) in the last few years with a debt-to-earnings ratio of 10 or above were also Ponzi firms playing a Ponzi game.

“A government that will issue trillions of dollars of new debt to pay for this severe recession and socialize private losses may risk becoming a Ponzi government if - in the medium term - it does not return to fiscal discipline and debt sustainability.

“A country that has - for over 25 years - spent more than income and thus run an endless string of current account deficit - and has thus become the largest net foreign debtor in the world (with net foreign liabilities that are likely to be over $3 trillion by the end of this year) - is also a Ponzi country that may eventually default on its foreign debt if it does not, over time, tighten its belt and start running smaller current account deficits and actual trade surpluses.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, March 19, 2009.

Bespoke: Geithner gone chatter
“Many stories have popped up over the last couple of days about Treasury Secretary Tim Geithner’s job security. Of course, leave it up to Intrade to release a contract on the matter that people can trade. Intrade currently has two contracts allowing people to bet on Geithner’s departure. One is whether he will depart by the end of June, and the other is whether he will depart by the end of 2009. While the contracts have been ticking up in price lately, traders on Intrade aren’t betting big yet that his departure is imminent. The contract for Geithner’s departure by the end of June is currently putting the odds at 15%, while the end of the year departure odds are higher at 26%.”

Source: Bespoke, March 18, 2009.

Asha Bangalore (Northern Trust): Index of Leading Indicators - continued contraction of economic activity
“The Conference Board’s Index of Leading Economic Indicators (LEI) fell 0.4% in February, after a revised 0.1% increase in January (previously reported as a 0.4% increase). On a quarterly basis, the year-to-year change in the LEI advanced one quarter has a strong positive correlation with the year-to-year change in real GDP. The January-February average, the proxy for the first quarter, declined 3.5% from a year ago, a slightly smaller reduction than the 4.0% drop recorded in the fourth quarter of 2008. We are following this indicator closely to identify a turnaround in economic conditions.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 19, 2009.

Asha Bangalore (Northern Trust): Multi-family starts lift total housing starts
“Housing starts increased 22.2% to an annual rate of 583,000 during February, after posting double digit declines for three consecutive months. However, the bulk of the increase was from multi-family starts which rose 82.3%, while starts of single-family homes moved up only 1.1% to an annual rate of 357,000.

“Starts of single-family homes are still down 80.5% from the peak in January 2006.

“The surprise strength in housing starts in February, which was largely in the volatile multi-family sector, reduces expectations of a continued recovery of home building because single-family starts are the larger and more stable component of total housing starts. Moreover, the elevated inventory of unsold homes suggests that a robust recovery in home building will be possible only after there is a substantial reduction in the inventory of unsold new single-family homes.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 17, 2009.

Bill King (The King Report): Don’t trust housing starts
“The common excuse for Tuesday’s rally is the surge in condo construction that boosted housing starts. PUHLEASE! The wicked winter delayed construction. More importantly, from where will the jobs, income and financing to buy all the condos and homes be derived?

“Also, the spring selling season is commencing and we don’t know what seasonally adjusted magic was used to craft the numbers.”

Source: Bill King, The King Report, March 18 , 2009.

Asha Bangalore (Northern Trust): Current account deficit shrinks as imports fall
“The current account deficit of the US economy was $132.8 billion in the fourth quarter, down from $181.3 billion in the third quarter. During 2008, the current account deficit narrowed to $673.3 billion from $731.2 billion in 2007. This is the smallest current account deficit since 2004.

“The current account deficit as a percent of GDP was 3.7% in the fourth quarter of 2008, the lowest since the fourth quarter of 2001. On an annual basis, the current account deficit was 4.7% of GDP, the lowest since 2002. In sum, the current account deficit has narrowed to a significant extent.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 18, 2009.

Asha Bangalore (Northern Trust): Higher gas prices mostly responsible for sharp increase in CPI
“The Consumer Price Index (CPI) moved up 0.4% in February, following a 0.3% increase in January. Gains of the energy price index in January (+1.7%) and February (+3.3%) helped to raise the headline readings during these months. The Labor Department has indicated that about two-thirds of the all items increase was from higher prices for gasoline. The gasoline price index increased 8.3% in February after a 6.0% jump in January. The food price measure rose 0.1% in January and was followed by a 0.1% drop in February. Excluding food and energy, the core CPI has recorded gains of 0.2% in January and February. On a year-to-year basis, the CPI rose 0.2% in February after registering readings close to zero in each of the two prior months. The core CPI increased 1.79% in February versus a 1.68% increase in January.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 18, 2009.

Asha Bangalore (Northern Trust): Core wholesale prices show a moderating trend
“The Producer Price Index (PPI) for Finished Goods rose only 0.1% in February after a 0.8% gain in January, as the 1.6% drop in food prices offset the 1.3% jump in energy prices. The core PPI, which excludes food and energy, rose 0.2% in February compared with the 0.4% increase in the prior month.

“On a year-to-year basis, the finished goods wholesale price index fell 1.3% and the core PPI rose 4.0%. The core PPI posted a cycle high of 4.7% in October 2008.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 17, 2009.

Bespoke: The commodity rebate
“In the chart below we have calculated the cumulative daily price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) since the beginning of 2008. We then multiplied the changes by the annual per capita consumption of each item. While this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers’ wallets over the last 15 months.

“In July, when the price of oil and other key commodities were trading at record highs, the impact of rising prices was translating into an extra $4.77 per American per day versus the start of 2008.

“Ever since then, however, commodities have crashed back down to earth, resulting in an effective rebate for consumers. As a result, even after the recent rebound in oil prices, the average American is saving $4.10 per day due to lower commodity prices. While this may not sound like much, multiplied out over a year, it works out to just under $1,500 per year per individual, and nearly $6,000 per year for a family of four.”

Source: Bespoke, March 18, 2009.

The Wall Street Journal: Pension bills to surge nationwide
“Many state and city governments reeling from financial woes are about to get whacked again, this time by an unforeseen increase in their pension bill thanks to market declines.

“In an effort to stave off tax increases, New Jersey lawmakers on Monday will consider a bill that would allow municipalities to defer payment of half their annual pension bill, due April 1, for one year. Those towns, counties and schools that opt to defer would face a higher pension bill for years to come.

“Other states and municipalities are facing similarly difficult choices. In Pennsylvania, the state employees and public teachers pension funds both have warned that employer contribution rates could surge seven-fold from about 4% of payroll to 28%, starting in 2012. The Detroit police and fire pension plan might have to double employer contribution rates to 50% of payroll by 2011, according to the fund’s outside actuary.

“‘It’s going to be huge showdown’ between taxpayers and public employees, said Susan Mangiero, president of Pension Governance, a consulting and research firm in Trumbull, Conn. ‘The anger is more acute today when people are feeling economic hardship.’”

Source: Craig Karmin, The Wall Street Journal, March 16, 2009.

CEP News: US House passes bill to take back AIG bonuses
“The US House of Representatives passed a bill on Thursday that will recoup the majority of bonuses paid to AIG executives.

“AIG paid out $165 million in bonuses to executives after the company received up to $180 billion, in government aid, many executives whom politicians say were responsible for bringing the company to near-collapse.

“The US government kept the insurance giant on a lifeline by dumping several multi-billion dollar bailouts into it. The US government now owns 80% of the company.

“The bill passed by the House Thursday will impose a 90% tax on any bonuses paid out to executives earning $250,000 a year or more working at companies given more than $5 billion in government bailout cash.”

Source: Megan Ainscow, CEP News, March 19, 2009.

DK Matai (Silicon Valley Watcher): The size of derivatives bubble = $190K per person on planet
“According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland - the central bankers’ bank - the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, i.e., USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:

1. Listed credit derivatives stood at USD 548 trillion;

2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:

a. Interest Rate Derivatives at about USD 393+ trillion;

b. Credit Default Swaps at about USD 58+ trillion;

c. Foreign Exchange Derivatives at about USD 56+ trillion;

d. Commodity Derivatives at about USD 9 trillion;

e. Equity Linked Derivatives at about USD 8.5 trillion; and

f. Unallocated Derivatives at about USD 71+ trillion.”

Source: DK Matai (via Silicon Valley Watcher), October 16, 2008.

Fabius Maximus: A look at the new world - after the downturn
1. Far less risk-taking in America.
2. Our financial system swings from disintermediation to re-intermediation.
3. The government becomes obviously insolvent.
4. Government controls not just the risk-free rate of interest, but also risk premia.
5. The end of the US dollar as the reserve currency.
6. The end of the US empire.
7. The US dollar declines in value so that our trade deficit goes away, and we can pay our foreign debts.

Source: Fabius Maximus (via RGE Monitor), March 19, 2009.

CNBC: Treasurys are “disaster waiting to happen”
“The Federal Reserve has no option but to start buying Treasurys as the government’s needs for financing are huge, but the government bond market is a disaster in the making, Marc Faber, editor and publisher of The Gloom, Boom & Doom Report, told CNBC.”

“Federal Reserve policymakers start a two-day meeting on Tuesday, weighing options on how to spur lending to help cash-strapped consumers kickstart the economy.

“Economists expect them to leave rates at zero and look to other ways of boosting liquidity, such as buying government bonds - a measure which has already been taken by the Bank of England.

“‘Well I think other central banks have done it already around the world but basically what it amounts to is money printing and in fact I don’t think that it will help the bond market at all in the long run,’ Faber told CNBC’s Martin Soong.

“‘… I think the US government bond market is a disaster waiting to happen for the simple reason that the requirements of the government to cover its fiscal deficit will be very, very high,’ Faber said.

“‘The Federal Reserve will have to buy Treasurys, otherwise yields will go up substantially,’ he said, adding that as their reserves were dwindling, foreign investors were likely to scale down their purchases.

“But there will be a time when the Federal Reserve will have to increase interest rates to fight inflation, and it will be reluctant to do so because the cost of servicing government debt will rise substantially.

“‘So we’ll go into high inflation rates one day,’ Faber said.

“The stock market is likely to continue its bounce at least for a while, but the outlook is bleak, he added.

“‘I think we may still have a rally (in the S&P) until about the end of April and probably then a total collapse in the second half of the year sometimes, when it becomes clear that the economy is a total disaster,’ Faber said.”

Source: CNBC, March 17, 2009.

John Authers (Financial Times): Fed’s shock and awe
“John Authers on market reaction to the Federal Reserve’s decision to buy $300 billion in long-dated Treasury bonds.”

Click here for the article.

Source: John Authers, Financial Times, March 18, 2009.

Bespoke: S&P 500 financial sector approaches November lows
“It’s hard to believe, but even after the financial sector’s 50%+ rally since March 6th, it is still marginally below its closing low of 2008 on November 20th. As shown below, the sector is currently at levels that have the potential to provide short-term resistance.”

Source: Bespoke, March 19, 2009.

Bespoke: S&P 500 stops dead in its tracks at 50-day moving average
“As shown in the candlestick chart of the S&P 500 below, the index tested and then failed at its 50-day moving average resistance this morning. After a gain of nearly 20% off of its lows, the index is experiencing a bit of a pullback today. The 50-day is right at the 800 level for the S&P, and if the index can eventually break through it, it will then act as support instead of an upside barrier.”

Source: Bespoke, March 19, 2009.

Richard Russel (Dow Theory Letters): What are the signs of a final bottom?
“Will the evidence come from the D-J Averages? I think it might. At the final bear market bottom, we should see:

(1) a dramatic non-confirmation by either the Industrials or the Transports (this is what occurred in 1974).

(2) or we might see an extended ‘line’ in the Averages, in which the Averages fluctuate within a 5% zone for many weeks on low volume. At some point both averages will surge higher on increasing volume.

(3) Values - We will see blue chip stocks selling ‘below known values’ with P/E ratios at single digits and the yield on the Dow near 6%.

“In the area of the final bear market lows, public attitude towards stocks and the stock market will be black-pessimistic and even angry. Wall Street will be despised and denounced as a scam. Actually, we are beginning to see just a bit of that via the highly-publicized debate between Jim Cramer and John Stewart, in which Stewart literally calls both Cramer and Wall Street a fraud.

“Already the public is turning against Wall Street, and, of course, the Bernie Madoff scheme only adds to the public anger against the ‘crooks of Wall Street’. Already, the ‘buy and hold’ creed (religion?) is being denounced along with the image of stocks as wealth-building vehicles. Warren Buffett is being tarred and feathered - Berkshire Hathaway lost billions of dollars over the last year, despite Buffett’s cheer-leading role a few months ago when he announced that he was buying stocks.

“Taking it to the present, the big question is whether we have already seen the bottom of the bear market and whether the recent strength in the market is the beginning of a new bull market. My opinion is that the latest rally is part of a bear market correction - not the beginning of a new bull market. The primary trend was recently re-confirmed as bearish when both the Industrials and the Transports broke to simultaneous new lows.

“One hint as to where we are is that prior to a major low, Lowry’s Selling Pressure Index (supply) turns down while their Buying Power Index (demand) leads on the upside. This did not occur at or near the recent lows.”

Source: Richard Russell, Dow Theory Letters, March 16, 2009.

Forbes: Barry Ritholtz on whether the stock market is near the bottom

Source: Forbes, March 16, 2009.

Richard Bernstein (Banc of America Securities-Merrill Lynch): The best risk-reward potential
“Small-cap stocks have historically offered the best risk-reward potential to investors, while gold has offered the worst, says Richard Bernstein, chief investment strategist at Banc of America Securities-Merrill Lynch.

“He says: ‘Investors often lose sight of longer-term historical investment results, especially during short-term periods of extreme volatility and trending markets.

“‘We have investigated the true long-term risk/return characteristics of standard asset classes.’

“Instead of defining risk as the standard deviation of returns, Mr Bernstein defined it as the percentage of the historical returns that were negative. If an asset provided a negative return during five of 25 periods studied, the risk measure would be 20%.

“Mr Bernstein says longer time horizons tend to reduce the probability of losing money in an investment - although gold appeared to be an exception.

“He said: ‘Gold was the only asset class that generated a significant proportion of negative returns over 10-year periods.

“‘Small stocks offered the best risk/reward potential, regardless of time horizon.

“‘With the exception of gold, investors had little chance of losing money in our selected asset classes over 10-year time periods.

“‘Only in the current bear market did many equity benchmarks generate their first trailing 10-year losses for the periods we analysed.’”

Source: Richard Bernstein, Banc of America Securities-Merrill Lynch (via Financial Times, March 18, 2009.

Reuters: China and Russia question dollar’s reserve status
“China and other emerging nations back Russia’s call for a discussion on how to replace the dollar as the world’s primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

“Calls for a rethink of the dollar’s status as world’s sole benchmark currency come amid concerns about its long-term value as the US Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.

“Russia met representatives of China, India and Brazil ahead of the G20 finance ministers meeting last week, as the big emerging powers seek to up their influence on decision-making globally. Their first ever joint communiqué did not mention a new currency but the source said the issue was discussed.

“‘They (China) did not formally put forward their position for the G20 summit but unofficially they had distributed their paper regarding the same ideas (the need for the new currency),’ the source told Reuters, speaking on condition of anonymity.

“The source said the Chinese paper envisaged the International Monetary Fund’s Special Drawing Rights (SDRs) being first assigned a role of a clearing currency on some transactions and then gradually becoming the main global reserve currency. ‘They said that the role of reserve currency should be given to SDR,’ the source said.”

Source: Gleb Bryanski, Reuters, March 19, 2009.

Globalists: Skip Amero, bring on Acmetal
“Nobel Laureate Robert Mundell, the man behind the euro, is backing a proposal by Kazakh President Nursultan Nazarbayev to create a one world currency.

“That’s quite an endorsement for Nazarbayev, who is indisputably one of the world’s most corrupt dictators (he’s been running Kazakhstan since the Soviet era).

“Supporters of the currency, to be called the acmetal (or akmetal), say the proposal ‘holds great promise’.

“But I wonder, as Alan Watt did in his March 12 radio show, ‘Holds great promise for whom?’

“Nazarbayev, speaking at an economic forum in the glitzy new capital he has built on the Kazakh steppe, defended his proposal for the ‘acmetal’ world currency saying it might ‘look kind of funny’ but was not.”

Source: Mark Baard, Globalists, March 14, 2009.

CNBC: Dr Gloom - choose gold over AIG insurance
“Marc Faber, editor & publisher of The Gloom, Boom & Doom Report, a.k.a. Dr Gloom, would rather own gold as an insurance policy, than an insurance policy from AIG. He tells CNBC’s Amanda Drury how else he is investing his money.”

Source: CNBC, March 17, 2009.

Richard Russell (Dow Theory Letters): Why I am bullish on gold
“I started building my gold position in 1999. At the time gold was flat on its fanny well below 300 - what few gold mining shares were still alive were selling under $5. I wrote at the time that many gold shares were so cheap that you could buy them as if they were perpetual warrants. My gold position now is comparable to my market position back in 1958. My gold position represents maybe 30% of my total worth. Why have I done this again?

“For the following reasons:

(1) I believe gold is in a major or primary bull market. I believe the gold bull market is currently in its second phase. This is the phase where sophisticated and seasoned investors and the funds enter the market. I don’t believe the public is in the gold market to any extent. They are interested and watching the action, but they do not have the nerve to buy gold. In fact, the public doesn’t know how to buy gold, although ads are now appearing telling them of the ‘wonders’ of gold and how they can buy the coins (at huge premiums over spot gold).

(2) If there is only one bull market in progress, it will attract broad new coverage and attention - just as Thursday’s $70 rise in gold did.

(3) I believe the bear market in stocks will continue erratically and the deflationary trends will persist. This will drive Fed Chairman Bernanke up the wall, and I think he will stop at nothing (including massive printing of dollars) in his effort to halt deflation.”

Source: Richard Russell, Dow Theory Letters, March 20, 2009.

David Fuller (Fullermoney): IMF gold sales not great concern
“While I remain a long-term bull of gold and other precious metals, I have often mentioned in the last two years that we should expect some IMF gold sales to increase their lending capacity.

“Yesterday, I discussed this with a subscriber who used to work for the IMF. In addition to confirming that an additional $500 billion has been agreed for the IMF, he mentioned that each contributing country could pay 75% of their allocation in their own currencies, and the remaining 25% in either another viable currency or gold.

“Clearly, an extra $500 billion will not be sufficient in what is arguably the worst global recession since the ’30s. Additional contributions will be required. It is not unreasonable to assume that US, UK and most likely some other countries will print the 75% in their own currencies. Presumably individual Euroland countries cannot print euros but the ECB can and almost certainly will. This reinforces the long-term bullish outlook for gold.

“However, the prospect of IMF sales is a headwind for bullion. There are likely to be more central bank sales of gold under the Washington Agreement, than purchases by creditor nations during the economic slump. I also mentioned that gold had become a crowded trade on the brief look at $1000 in late February, adding that since fear was the most recent motive to buy gold, the yellow metal would be susceptible to a correction once stock markets firmed.

“I think any IMF gold sales would be handled discretely and it could also be a case of: ‘Sell the rumour, buy the news.’”

Source: David Fuller, Fullermoney, March 18, 2009.

Bespoke: Bespoke’s commodity snapshot
“Below we provide a table and chart of the recent performance of ten major commodities. As shown, copper is up the most year to date at 23.66%. Copper is followed by silver, platinum, and oil on the upside. At the start of the year, we pointed out that gold had been significantly outperforming silver, and that a long silver/short gold strategy may be a good play. That trade has worked out well so far this year. A similar trend has been happening with oil and natural gas lately, where oil has been rallying and natural gas has continued its decline. From their peaks last year, gold is still the commodity that has held up the best.”

Source: Bespoke, March 17, 2009.

Money News: Gartman - oil headed higher, sooner
“Economist Dennis Gartman, editor of the Gartman Letter, says oil is headed higher, possibly to $50 or $55 per barrel within the next three months.

“‘A huge sum of oil has been put in storage,’ Gartman told Bloomberg TV. ‘Over many months, when the contango was extraordinarily wide, you could make almost 30% or more.’

“Contango refers to the situation when distant-month futures contracts trade at a higher price than front-month contracts. In a wide contango, prices would be much higher in far out months than nearby ones.

“You make money off that ‘by buying front month crude, taking delivery if you had the storage facilities, and then selling deferred futures,’ Gartman says.

“‘If you were borrowing money at 5% and lending money via the crude future contango at 35%, you would have locked in profit.’

“But now, Gartman says, ‘we are seeing the inordinately wide contango coming in dramatically. When contango narrows, it is really saying to crude itself, we need you. There’s demand; please come out of storage.’

“Bottom line: ‘That’s bullish for crude,’ he says. “We can trade to $50 maybe $55 over the next two to three months,’ Gartman says.”

Source: Money News, March 13, 2009.

CEP News: Euro Zone industrial output falls at sharpest pace on record
“Euro zone industrial production fell at its sharpest pace on record to kick off the year, Eurostat reported on Friday.

“In the 12 months to January, euro zone industrial production fell 17.3%, down from both the 15.5% tumble expected and December’s 11.8% contraction.

“On a monthly basis, industrial output fell 3.5% in January, adding to the previous month’s 2.7% slide, which was revised down from -2.6%. Economists had expected a more pronounced decline of 4.0% for the month.”

Source: CEP News, March 20, 2009.

CEP News: German investor sentiment rises for fifth consecutive month
“German investor optimism towards the economic outlook continued to gain strength in 2009, according to the Centre for European Economic Research (ZEW).

“In a press release issued on Tuesday, the ZEW reported that investor sentiment rose to a reading of -3.5 in March, despite expectations of a fall back to -8.0 from -5.8 in February.

“While the improvement from February to March has slowed compared to previous months, the impression remains that investors are becoming more hopeful regarding the German economic outlook in six-months time, the ZEW said.

“‘According to the financial market experts, the economic slowdown is gradually phasing out,’ ZEW President Dr. Wolfgang Franz said. ‘The bottom of the recession is likely to be reached this summer.’

“Meanwhile, euro zone investor confidence also unexpectedly improved in March, rising to a reading of -6.5 from -8.7 previously. Economists had forecast a fall back to -12.0 for the month.”

Source: CEP News, March 17, 2009.

CEP News: EU leaders agree to stimulus spending, to increase aid to non-EMU members
“European Union leaders have agreed in principal to double the amount of aid allowed to non-euro zone member states and have reached a compromise on infrastructure project spending.

“Speaking to reporters following the first day of an EU summit held in Brussels on Thursday, Czech Prime Minister Mirek Topolanek said that the EU heads of state were close to agreeing on a €5 billion stimulus spending plan.

“Germany had raised concerns, but later compromised when it was agreed that the funds, to be used for infrastructure projects, would be spent by the end of next year.

“‘Substantial parts’ of the projects would need to be in progress by then, ‘otherwise it won’t contribute to dealing with the crisis, which will be over after a certain period of time,’ German Chancellor Angela Merkel said.

“Also speaking to the press on Thursday, European Commission President Jose Manuel Barroso said that the maximum amount of aid available to EU states outside the monetary union could rise to €50 billion from its current €25 billion level.

“The EU also pledged to increase funding to the International Monetary Union. The amount ‘should be quite a large figure’, Czech Finance Minister Miroslav Kalousek said to reporters late Thursday evening, adding that the range would likely be between €75 billion and €100 billion.”

Source: CEP News, March 20, 2009.

CEP News: UK house prices higher for second consecutive month
“UK house prices climbed 0.9% month-over-month to an average asking price of £218,081 in March following a 1.2% gain in February, according to property website Rightmove.

“The two consecutive months of gains come after three straight months of losses that saw the average price fall from £229,691 in October.

“On an annualized basis, house prices declined 9.0% in March, slightly less than the 9.1% annual decline in February.”

Source: Adam Button, CEP News, March 15, 2009.

Financial Times: Swiss warn lifting secrecy “will take time”
“Switzerland has warned countries against expecting swift results from its decision last week to water down bank secrecy laws, saying it could take years for the necessary legislation to come into action.

“Hans-Rudolf Merz, Switzerland’s finance minister, said renegotiating the country’s more than 70 double taxation treaties ‘won’t be so fast’ as each would have to be approved individually by the country’s parliament.

“New treaties could be subject to referendums, he told the Financial Times in an interview, while putting in place the rules prescribed by of the Organisation for Economic Co-Operation and Development would also require negotiations and ‘will take time’.

“The comments from Mr Merz, who is head of state under Switzerland’s rotating presidency, came as some of the countries that have pressed hard for greater international tax transparency greeted last week’s move with caution.”

Source: Haig Simonian, Financial Times, March 16, 2009.

RGE Monitor: China now expected to grow by 6.5% in 2009
“In a series of downward revisions, the World Bank is the latest to reduce its forecast of 2009 economic growth in China. As with many export-led economies, China has been hit hard by the precipitous decline in export demand, falling 25.7% in February 2009. For this reason, the World Bank reduced its 2009 growth forecast for China 1% to 6.5%. You can watch the World Bank’s quarterly update on video here.

“The new World Bank forecast is in line with that of the IMF; the IMF downgraded their forecast of 2009 Chinese economic growth to 6.7% at the end of January.

“The Chinese government recognizes that export-led growth is not sufficient in the current economic environment. In addition to supporting its export sector - the government plans to reduce export taxes to zero - the Chinese government is focusing on the domestic economy with fiscal stimulus measures and promoting domestic consumption. The fiscal stimulus already in place (4 trillion yuan announced in November) is probably passing through to the economy, as China’s PMI increased for the third consecutive month in February.

Chinese growth is expected to improve in 2010, where the World Bank forecast is 8.0%.”

Source: Rebecca Wilder, RGE Monitor, March 18, 2009.

China Daily: Slide in reserves reported
“China’s foreign exchange reserves slid the most in at least nine years in January, Reuters reported yesterday, citing an unidentified person ‘familiar with the situation’.

“The Reuters report did not disclose the exact amount of declining reserves, but said the decline was partly due to the US dollar’s appreciation and withdrawal of capital by foreign companies and investors hurt by the financial crisis.”

Source: China Daily, March 18, 2009.

CEP News: Chinese entrepreneur sentiment improving, says PBOC
“Chinese entrepreneur sentiment is recovering, while firms appear less worried about the economy, the People’s Bank of China said on Wednesday.

“According to the central bank’s first quarter entrepreneur survey results, sentiment regarding business operations is recovering. Meanwhile, bank lending levels have improved, as reflected in the sharp gain in the bank lending index, the PBOC added.

“Nevertheless, firms’ domestic and foreign orders indexes are still deteriorating, pointing to ongoing weakness in overall demand levels, the central bank said.”

Source: Todd Wailoo, CEP News, March 11, 2009.

Herald Tribune: Medvedev announces plan to rearm Russia
“President Dmitri A. Medvedev said Tuesday that Russia would begin a ‘large-scale rearming’ in 2011 in response to what he described as threats to the country’s security.

“In a speech before generals in Moscow, Mr. Medvedev cited encroachment by NATO as a primary reason for bolstering the military, including nuclear forces.

“Mr. Medvedev did not offer specifics on how much the budget would grow for the military, whose capabilities deteriorated significantly after the fall of Soviet Union.

“Russia has increased military spending sharply in recent years, but with the financial crisis and the drop in the price of oil, the country’s finances are under pressure, suggesting that it would be hard to lift these expenditures further.

“Even so, Mr. Medvedev’s timing was notable. He is expected to hold his first meeting with President Barack Obama in early April in London on the sidelines of the summit meeting of the Group of 20 industrialized and developing countries.”

Source: Clifford J. Levy, Herald Tribune, March 17, 2009.

Tags: 30 Year Fixed Rate, 30 Year Fixed Rate Mortgage, Asset Prices, Bill Gross, BRIC, Dow Theory Letters, Emerging Markets, ETF, Fed Funds, Federal Open Market Committee, Fixed Rate Mortgage, Freddie Mac, Great Depression, India, Massive Assault, Mortgage Backed Securities, Mortgage Rates, oil, Open Market Committee, PIMCO, Private Sector Loans, Quality Bond, Richard Russell Dow Theory, Wall Stree, Year Fixed Rate Mortgage
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Bill Gross: More Fed Buying Needed to Spur Growth

Friday, March 20th, 2009

Bloomberg: Pimco’s Gross says more Fed buying needed to spur growth
“Bill Gross, co-chief investment officer of Pacific Investment Management Co., talks with Bloomberg’s Kathleen Hays about the Federal Reserve’s plan to buy more than $1 trillion in Treasuries and mortgage-backed securities in an effort to help revive the economy.

Gross also discusses the Fed’s balance sheet, currency concerns and the need for a ‘healthy level’ of inflation.”

00:00 Fed’s buying: “We need more than that.”
01:16 Fed’s balance sheet; “buyer of last resort”
02:49 Treasury supply, currency concerns
03:54 “We need reflation. We need inflation.”
06:08 Strategy for TIPS; corporate bonds

Kathleen Hays: Yesterday, after this historic move by the Federal Reserve, you said, ‘Its not enough.’ We’ve heard from other economists who’ve said this could very well drive down that mortgage rate below 5% maybe to 4.5%, give housing a kick, give the economic recovery a kick, even by the second half. You don’t agree?

Bill Gross: No, I agree with all of that. Its just a question, Kathleen, of ‘how big of a kick?’ There are a number of ways of looking at this. Goldman Sachs has approached it from the standpoint of the Taylor Rule, the deficiencies of output relative to their own particular index.

We look at it a little bit differently at PIMCO, we look at it from the standpoint of the amount of debt that’s required to produce a dollar’s worth of GDP growth. And up until 12-18 months ago in terms of our existing economy, that was about $4 of debt for $1 of GDP growth.

This $1-trillion dollars to our way produces $250-billion of GDP; that’s just under two percent real growth. That`s good, that produces in our opinion about 1-million jobs, but we need more than that.

KH: Is it enough to avoid the mini-depression you were talking about last month when I joined you for an interview out there at Newport Beach?

BG: We think so, you know yesterday’s move by the Fed were in recognition of this recessionary economy that could have resembled a small depression unless credit markets and risk taking were revived. And in fact the Fed labelled their policies ‘credit easing’ and you mentioned the obvious intent to lower mortgage rates to homeowners and lower credit card rates, auto loans, commercial rates as well so, you know, its very much of a positive push. We have sense that the $1.8-trillion balance sheet that the Fed has, that’s now growing to $3-trillion, probably will have to grow to $5-trillion and $6-trillion in order to keep us on a trend line that produces positive as opposed to negative growth.

KH: So, you just think that they have to buy a lot more of all kinds of bonds?

BG: I think so, you know, that’s the way the Fed does it in terms of expell..uh expanding their balance sheet and ultimately yes that has been mortgages, its going to be treasuries and agencies. It may very well move into other particular asset classes if they’re well protected and triple-A rated. But, yes, certainly the Fed has to be the buyer of last resort here, because the Treasury is limited politically, and its limited from the standpoint of what’s been authorized in terms of their chequebook balance.

KH: Bill, do these Fed purchases, particularly of treasury bonds take supply in the government bond market off the table as the concern, what $98-billion of government bonds will be auctioned off next week, or does this huge scale of borrowing still pose some risk down the road.

BG: No I think it the supply off the table for the moment. What it introduces, Kathleen, however, is the problem of the currency, to the extent that the Fed is buying what isn’t desired by foreign holders, or by PIMCO. Then there are constraints, and there are problems that develop, in terms of the countries currencies. Basically if the Chinese or other foreign holders don’t want to buy treasuries, that’s a lack of support for the currency, and I think that’s what you’ve seen in the last several days. So nothing is perfect here; I think it helps with the supply, I think the Fed can keep interest rates where they want to keep them at least for 6-18 months period of time, but it will have consequences down the road.

KH: Consequences down the road in terms of inflation, in terms of a hard fall in the dollar, something you warned about in your letter this month?

BG: Well sure, inflation’s another one too. And, a declining dollar would directly lead into that. What the Treasury really wants to do, what the Fed really wants to do, what President Obama really wants to do is to create inflation, a positive level of reflation, that not only supports assets, but allows our nominal economy to grow at 4-5%. That is really what’s required in order to prevent debt destruction which means default, which means loss of jobs, which means loss of corporate health and welfare, so we need relation, we need inflation; hopefully much of that comes with real growth, but if it doesn’t then I think the Fed will take inflation.

KH: How does this play out Bill, if you see inflation coming back; i think actually one of the recent PIMCO report said ‘Inflation by 2010.’ That is kind of around the corner. How much lower can 10-year yields go, you’ve actually, your portfolio has more treasury bonds in it than it used to, more mortgage backed securities. When will you start turning that big ship, and again, the 10-year note yield, how low does it get?

BG: Well probably not that much lower, to be practical and realistic about this. I mean the Fed suggested they’re going to stay close to zero in terms of their policy rates for an extended period of time and that helps fives (5-year) and that helps tens (10-year), even outside of what the Fed’s doing in terms of purchasing power; it suggests that the carry is a positive going forward, but at some point probably late 2010 and beyond, you know, we will cross the line from deflation into inflation, and that doesn’t mean 3-4-5% inflation immediately, I mean there’s a huge output gap between capacity for people and capacity in terms of production. That’ll take a long time to close that so don’t too far in terms of what PIMCO’s forecasting, but what we really want down the road is a really healthy level of inflation to take us out of this debt deflation and debt destruction that we’re witnessing.

KH: So when you saw the news yesterday, I know you’ve been calling for the Fed to do something for a while, did PIMCO buy… what is your next step down the road? Again, what’s the exit strategy for PIMCO? The Fed’s supposed to have an exit strategy. What’s yours?

BG: We were well positioned, we’ve owned a lot of mortgages, and that $750-billion cheque for mortgages was very much a positive for the mortgage market, so that was a plus for us. You know what I think going forward is that, yes, if there’s going to be inflation in 2011, 2012, 2013, and if the government is going to be buying treasuries and TIPs by the way, and if the TIPS market is not going to see a significant increase in supply, which is what’s been announced at least up until this point, then the TIPS market is the way to go (as an exit strategy from deflation) and in the last 24 hours, you’ve seen a huge move in TIPS which is relative to nominal treasuries. Nominal treasuries went down by 30-34 basis points, TIPS have gone down even more, and up in price more, relative to their duration.

KH: How about corporate bonds, you said you should be at the top of the credit pyramid, you should be in corporate bonds and avoid equities and is there anything about the Feds program, very aggressive, historic, that makes you start shifting your view a little bit?

BG: Yes, I think to some extent, Kathleen, at least in terms of an attitude, maybe not in terms of a wallet or a cheque book, because we’ve had a lot of bank paper, and we’re comfortable there, in terms of what we own. There’s no doubt that if the Fed’s going to writing a cheque for a trillion dollars into the credit markets that that ultimately supports some asset classes further out on the risk spectrum. It doesn’t necessarily mean that stocks will do well, although, they’ve caught a bid so to speak since 24 hours ago, but it does mean that, yes, high quality coporate bonds are more well supported here.

KH: Okay, our thanks to PIMCO Managing Director, Bill Gross.

Tags: Bill Gross, Chief Investment Officer, Corporate Bonds, Economic Recovery, Federal Reserve, GDP Growth, Goldman Sachs, Gross Co, Hays, Investment Management, Kh, Last Resort, Mortgage Backed Securities, Newport Beach, Pacific Investment Management Co, PIMCO, S Gross, Standpoint, Taylor Rule, Treasuries
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Fed Employs Nuclear Option

Friday, March 20th, 2009

Financial markets were dominated this week by the announcement by Fed Chairman Ben Bernanke to buy as much as $300 billion of long-term Treasuries and acquire an additional $750 billion of mortgage-backed securities. On the news, the US dollar plunged, the euro surged, Treasury yields nose-dived, gold bullion exploded, and stocks, oil and commodities gained handsomely. What an announcement, what a week!

A few of the more interesting video clips that attracted my attention are shared below. In addition to Bill Gross stating that the Fed’s purchases are still not enough, AIG remained in the news as payment of bonuses to its executives from bailout money stirred up emotions. This culminated in the House passing a bill to tax TARP bonuses by 90%.

As far as the stock markets are concerned, with indices running into resistance levels the debate intensified on how enduring the recent gains will be.

The video clips feature the likes of Bill Gross, Steve Forbes, John Lonski, Mario Gabelli, Ron Paul, John Bogle, Barry Ritholtz, Doug Kass, Gary Shilling, Meredith Whitney, Marc Faber, Jim Rogers and Stephen Roach.

John Authers (Financial Times): Fed’s shock and awe
“John Authers on market reaction to the Federal Reserve’s decision to buy $300 billion in long-dated Treasury bonds.”

Click here for the article.

Source: John Authers, Financial Times, March 18, 2009.

Bloomberg: Pimco’s Gross says more Fed buying needed to spur growth
“Bill Gross, co-chief investment officer of Pacific Investment Management Co., talks with Bloomberg’s Kathleen Hays about the Federal Reserve’s plan to buy more than $1 trillion in Treasuries and mortgage-backed securities in an effort to help revive the economy. Gross also discusses the Fed’s balance sheet, currency concerns and the need for a ‘healthy level’ of inflation.”>

Source: Bloomberg, March 19 2009.

60 Minutes: The Chairman - Ben Bernanke
“In a rare interview with a sitting Fed chairman, Ben Bernanke tells Scott Pelley what went wrong with America’s financial system, how it caused the economic crisis, what the Fed is doing to help fix it and when he expects the recession to end. If you think your job is tough, consider Ben Bernanke’s. As Chairman of the Federal Reserve, the task of reviving the US economy falls largely on his shoulders.

In Part 2 of the interview Bernanke candidly speaks to Pelley about his personal life, and how the current financial crisis is affecting Main Street America.

Source: 60 Minutes, March 15, 2009.

Bloomberg: Geithner says US to move quickly on “legacy assets”
“US Treasury Secretary Timothy Geithner talks with Bloomberg’s Lizzie O’Leary about the US government’s plan to ‘move very quickly’ on impaired ‘legacy assets’ clogging bank balance sheets. Geithner also discusses planned action by the Group of 20 nations to end the global recession, executive compensation and US cooperation with China. They talk following a meeting of the G-20 finance ministers and central bankers today in Horsham, England.”

Source: Bloomberg, March 14, 2009.

CNBC: Forbes - Geithner, Bernanke have “the slows”
“Ben Bernanke and Tim Geithner both have a bad case of ‘the slows’, Steve Forbes, Chairman & CEO of Forbes, tells CNBC’s Martin Soong. Both of them have been slow to take decisive action on the banking crisis.”

Source: CNBC, March 20, 2009.

The Wall Street Journal: Sorting through the latest batch of economic data
“John Lonski, chief economist at Moody’s Capital Markets, interprets the latest economic data on housing starts and the producer price index. MarketWatch’s Kelsey Hubbard reports.”

Source: The Wall Street Journal, March 17, 2008.

Bloomberg: Mario Gabelli sees stability returning to US economy
“Mario Gabelli, chief executive officer of Gamco Investors, talks with Bloomberg’s Betty Liu about the outlook for the US economy. Gabelli, who oversees more than $20 billion in assets, also discusses American International Group’s decision to award some of its traders $165 million in bonuses.”

Source: Bloomberg, March 17, 2009.

Charlie Rose: A conversation with Nancy Pelosi, Speaker of the House

Source: Charlie Rose, March 13, 2009.

Charlie Rose: A conversation about AIG
“A conversation about AIG with Hank Greenberg former chairman and CEO of AIG, Carol Loomis Senior editor-at-large of ‘Fortune’, Gretchen Morgenson of ‘The New York Times’ and Meredith Whitney.”

Source: Charlie Rose, March 18, 2009.

Bloomberg: Ron Paul says AIG bonus money was stolen from taxpayers
“US Representative Ron Paul, a Texas Republican, talks with Bloomberg’s Carol Massar about American International Group paying $165 million in bonuses to its executives after accepting a $173 billion government bailout. Paul also discusses the role of the Federal Reserve and his recommendations for tax policy and spending.”

Source: Bloomberg, March 17 2009.

CNBC: Bonus tax - good or bad?
“Discussing House voting on bill to tax TARP bonuses at 90%, with CNBC’s John Harwood; David Min, Center for American Progress; Stephen Moore, WSJ; and CNBC’s Erin Burnett.”

Source: CNBC, March 19, 2009.

CNBC: Bogle-izing the hedge fund industry
“Thoughts on an investable index for the hedge fund industry with John Bogle, The Vanguard Group founder/former CEO. On the bonuses paid to AIGFP, Bogle says, ‘Off with their heads’.”

Source: CNBC, March 18, 2009.

The Street: Inside Bear Stearns collapse
“In an extended interview, William Cohen, author of the bestselling book House Of Cards, reveals the truth about what happened during Bear Stearns’ final days.”

Source: The Street, March 14, 2009.

Forbes: Barry Ritholtz on whether the stock market is near the bottom

Source: Forbes, March 16, 2009.

The Wall Street Journal: Trying to call an enduring bottom
“Trying to call an enduring bottom Barron’s Mike Santoli says the market has seen a 12% jump in a week while fewer stocks have made new lows, eliciting calls that we’ve finally seen an enduring bottom. Is this being too optimistic?”

Source: The Wall Street Journal, March 17, 2009.

CNBC: Kass & Shilling - has the bottom bottomed?
“Douglas Kass, of Seabreeze Partners; Gary Shilling, of A. Gary Shilling & Co.; and CNBC’s Larry Kudlow discuss today’s market action.”

Source: CNBC, March 18, 2009.

CNBC: Forbes - suspend mark-to-market accounting
“Mark-to-market accounting should be suspended says Steve Forbes, Chairman & CEO at Forbes. He tells CNBC’s Martin Soong the reasons why and how this has been a bipartisan disaster.”

Source: CNBC, March 20, 2009.

CNBC: Meredith Whitney - credit crunch & financials
“Weighing in on consumer credit and why mark-to-market will not really help banks, with Meredith Whitney, Meredith Whitney Advisory Group CEO.”

Source: CNBC, March 17, 2009.

Bloomberg: Rogers, Faber, Cheng on gold’s outlook
“Marc Faber and Jim Rogers talk about the outlook for gold prices and their investment strategies. Gold’s failure to rally to a record in recent weeks disappointed some investors, analysts said. Last month, the price climbed to $1,007.70, the highest this year. The all-time high of $1,033.90 was reached on this date last year. Schroders plc’s Christopher Wyke, Credit Suisse Group’s Tobias Merath and World Gold Council’s Albert Cheng also offer their views.”

Source: Bloomberg, March 18, 2009.

Financial Times: Oil price crash shifts balance of power
“Carola Hoyos reports from the Opec seminar in Vienna on how the collapse in oil prices has shifted the balance of power between oil producers and consumers and the companies within the sector.”

Source: Financial Times, March 18, 2009.

CNBC: Can China achieve its 8% growth target?
“China is dreaming, says Marc Faber, editor & publisher of The Gloom, Boom & Doom Report, when asked whether it can hit its 8% growth target. Faber & Jerry Lou, China strategist at Morgan Stanley assess the road ahead of China’s economy, with CNBC’s Martin Soong.”

Source: CNBC, March 17, 2009.

RGE Monitor: China now expected to grow 6.5% in 2009
“In a series of downward revisions, the World Bank is the latest to reduce its forecast of 2009 economic growth in China. As with many export-led economies, China has been hit hard by the precipitous decline in export demand, falling 25.7% in February 2009. For this reason, the World Bank reduced its 2009 growth forecast for China 1% to 6.5%.”

Source: Rebecca Wilder, RGE Monitor, March 18, 2009.

CNBC: Roach - China needs internal demand
“China needs to change its structure to an internal demand driven economy, says Stephen Roach, chairman for Asia at Morgan Stanley. He tells CNBC’s Martin Soong & Amanda Drury that China is hugely dependent on external demand as a major source of economic growth.”

Source: CNBC, March 18, 2009.

Financial Times: Bank of England pins hopes on quantitative easing
“Roger Brown, global head of rates research at UBS, says the Bank of England is in effect creating cash to kickstart lending in the UK. However, he tells FT’s David Oakley that the Bank must increase the amounts involved.”

Source: Roger Brown, Financial Times, March 13, 2009.

YouTube: Gold for bread - Zimbabwe
“MDC activist Sam Chakaipa returns to his village in Zimbabwe to find his friends and neighbours starving. As the Zimbabwean dollar becomes ever weaker, gold has become the currency of choice.”

Source: YouTube, March 9, 2009.

Tags: Barry Ritholtz, Chief Investment Officer, Doug Kass, ETF, Gary Shilling, Gold Bullion, Gross Co, Jim Rogers, John Authers, John Bogle, Marc Faber, Mario Gabelli, Meredith Whitney, Mortgage Backed Securities, Pacific Investment Management Co, Resistance Levels, Shock And Awe, Stephen Roach, Steve Forbes, Treasury Bonds, Treasury Yields
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