David Rosenberg: How to Play Inflation

Thursday, February 11th, 2010

Here is a reprise of David Rosenberg’s thoughts on how to prepare for inflation, from Breakfast with Dave, December 15, 2010.

HOW TO PLAY INFLATION?

There is no sense in being dogmatic. But just in case inflation were to stage a comeback, this is how one would prepare for it:

• Precious metals (while gold grabs the spotlight, silver has surged 52% this year and has far outpaced the 27% runup in gold; and the gold/silver ratio, while down from a peak of 84 to 66, is still above the average of 54 over the past three decades).
• An even steeper U.S. yield curve!
• TIPS (or real return bonds) - the 5-year TIPS breakevens right now point to an inflation expectation of just over 1.7%, whereas consumer expectations are closer to 2.6%.
• Short-term duration corporate bonds (and go out the credit curve).
• Commodity currencies - Canadian Loonie, New Zealand Kiwi, Aussie dollar, Brazilian Real, and Norwegian Kroner.
• Basic material stocks (including energy) as well as consumer staples (tobacco, food/beverage).

We don’t have a big inflation view, but you never score brownie points by being dogmatic. If (when?) the massive amounts of fiscal and monetary stimulus ever do show through in final inflation (this will hinge on a renewed expansion in household balance sheets and a fresh credit-creation cycle), these are the areas that would likely garner the most investor interest.

Source: Breakfast with Dave, December 15, 2010

Tags: Balance Sheets, Brownie Points, Canada, Commodities, Consumer Expectations, Consumer Staples, Corporate Bonds, Credit Creation, David Rosenberg, Food Beverage, Gold, inflation, Investor Interest, Massive Amounts, New Zealand Kiwi, Norwegian Kroner, precious metals, Real Return Bonds, Runup, Stimulus, Term Duration, Three Decades, Yield Curve
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Why Precious Metals Aren’t in a Bubble

Thursday, December 17th, 2009

The post below is a guest contribution by Dr Jeffrey Lewis, author of the Hard Money Newsletter Review and Silver-Coin-Investor.com.

Critics of precious metals investing have called gold and silver a bubble, further claiming that today’s higher prices will fade as economic conditions improve.  Although gold and silver prices are much more expensive than they were even a few years ago, gold and silver are hardly near bubble status.

Scarce Ownership of Precious Metals

One of the most prominent reasons that gold and silver aren’t yet a bubble is that very few casual or institutional investors own physical gold and silver.  A recent poll of professional money managers indicated that fewer than 30% have ever purchased gold for their clients.  Ownership of gold is even rarer in the general populace, as investors have to go out of their way to buy physical metals.

The small percentage of precious metals investors could double, triple, or even quintuple before gold becomes a mainstream investment, pushing the price up several hundred percent in the interim.

Gold Isn’t Speculative

Unlike oil, dot com stocks and even real estate, gold isn’t bought and sold to make people rich.  It isn’t sold as a get-rich-quick product.  In fact, gold and silver are sold as get-rich-slowly products that help investors retain their purchasing power.  The main purpose to buying precious metals isn’t to grow wealth, but to protect it.  Even after the fear of global financial meltdown faded in the spring of 2009, gold and silver prices continued to head higher - not out of fear, but out of a desire to preserve wealth against inflation.

Metals Prices Haven’t Truly Grown

While the money supply has expanded tremendously since the early 1990s, gold prices didn’t begin their most recent rally until 2002, mostly due to a relatively strong economy.  Therefore, the gains precious metals experienced in the last several years have not been true gains.  Instead, gold and silver have caught up with where they should be.  In fact, even with the money supply increasing 600% since gold last topped in 1980, gold is just a few percentage points higher than in 1980.

Rarity is Always Valuable

There is less gold and silver on the earth’s crust with each passing day.  As precious metals are used in manufacturing, the amount in existence decreases, which subsequently increases the value of each gold and silver coin owned by investors.

Silver’s supply decline has been steeper than gold, with much of the past decade’s mining products being used in the technology and photography industries.

Now or Never

While precious metals aren’t currently in a bubble, it’s impossible to deny that they might soon be.  With so many investors realizing the only way to safeguard their assets from inflation, deflation, and economic calamity is physical metals, it is certain that the price of silver will continue to rally.  From the everyday collector to the institutional investor, precious metals are now on the radar as a safe and reliable investment.  Rather than wait as precious metal prices trend higher, protect your assets by purchasing gold and silver coins today.

Tags: Dr Jeffrey, Fact Gold, Financial Meltdown, Gold, Gold And Silver, Gold And Silver Prices, Gold Prices, Hard Money, Institutional Investors, Jeffrey Lewis, Last Several Years, Metals Prices, Money Newsletter, Money Supply, oil, physical gold, Physical Metals, precious metals, Professional Money Managers, Purchasing Power, Recent Poll, Silver Coin
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Goldberg, not Rosenberg

Wednesday, December 2nd, 2009

The stock market assessment below comes from highly regarded David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates.

Gold just capped off its best month in a year - ±14% in November and 34% year-to-date. It’s not just the middle-class in China that is starting to buy gold, but the central bank, which has very deep pockets, is going to do likewise. We just came across a Bloomberg News article quoting an official from the state-owned Assets Supervision and Administration Commission (Ji Xiaonan, the Chief) as saying “we recommend China increase its gold reserves to 6,000 metric tons within three-to-five years and possibly to 10,000 tons in eight to 10 years.” China’s reserves, after a 76% buildup since 2003, currently stand at 1,054 tons, so we are talking here about the prospect of some pretty heaving buying in coming years.

If China were to lift their gold reserves to 5,000 tonnes, which is equivalent to about two years of global production, that shift in demand would boost the gold price by $800/oz to around $2,000 ($1,978) based on our models. If China moves towards 10,000 tonnes, well, that would end up taking the gold price to $2,623/ounce if our calculations are in the ball-park.

Make no mistake, we are gold bulls. Central banks have deep pockets and production of gold is stagnant so the demand-supply backdrop for bullion is bullish. At the same time, we have to pay respect for market positioning over the near-term. The market for precious metals is overextended right now after the parabolic move of the past two months. The net speculative long position has swelled to a record 273,552 contracts (100 ounces each) on the COMEX. Open interest has never been higher, at 693,661 contracts. So this is one crowded trade - as is the short-trade on the USD against all the major currencies, especially the commodity-based units.

So, we could get a meaningful gold correction at any time, and we are talking about a correction in what is still a secular bull market - the 200-day moving average is $970/oz, which means we could get as much as a 20% pullback and no fundamental trendline would be violated. We remain long-term gold bulls, and our commentary remains fundamentally bullish, but anything that could spark a countertrend rally in the U.S. dollar, which is our principal near-term concern, would put gold at a much better price point for investors than the peak we are at today.

Source: David Rosenberg, Gluskin Sheff & Associates - Breakfast with Dave, December 1, 2009.

Tags: Administration Commission, Ball Park, Bloomberg News, Bullion, Central Banks, Chief Economist, China, China Moves, Comex, Commodities, David Rosenberg, Deep Pockets, Emerging Markets, Global Production, Gluskin Sheff, Gold, Gold Bulls, Gold Price, Gold Reserves, Market Assessment, Market Positioning, Metric Tons, Open Interest, precious metals
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Paul Tudor Jones: Buying Gold and Curve Flatteners

Monday, November 2nd, 2009

Investing legend, Paul Tudor Jones’ has published his latest latest letter to investors.

Here are some excerpts:

Tudor Jones believes there is a better opportunity to buy equities in the year-end period, as he is expecting a pullback in the fall.

While 45% is nothing to ignore, one should take into account that the S&P through July 31 is still down more than 20% on a price basis year-over-year. The bottom line is that we are not inclined to aggressively chase the market here. Rather, we eye a better opportunity to be long equities into year-end on a potential autumnal pullback.

The economy will remain strong until Q2 2010 as a result of ongoing support from the government, easy monetary policy, a weak dollar, and continuing inventory de-stocking:

The forceful policy response to avert depression tail risks posed by the financial crisis has likely unleashed a wave of liquidity which is probably greater than that of 2001-2003. Our job is to identify the best performing assets of this “Great Liquidity Race.” At present, it appears those assets are gold, emerging market equities denominated in local currencies, and commodity related stocks.

Liquidity is making its way into bond purchases by banks, into equity markets, into capital flows to emerging markets and into international reserve accumulation and related diversification away from the dollar. This will be the trend over the next quarter—or two—even before discussing potential portfolio shifts within it.

He likes gold on the basis of easy money and inflationary outlook:

Dealbook says:

Winning the race, Mr. Jones posits, will be gold, emerging-market equities denominated in local currencies and commodity-related stocks. “I have never been a gold bug,” he says in the letter. “It is just an asset that, like everything else in life, has its time and place. And that time is now.” (A link to the entire letter is below.)

Tudor Jones says:

“precious metals exposure has been increasing and is currently the largest commodity exposure. As a result we have included, for this quarter, a separate discussion on gold as an appendix. I have never been a gold bug. It is just an asset that, like everything else in life, has its time and place. And now is that time.”

Tudor notes that curve flatteners provide ‘tail risk insurance’ against the trades of long gold, short the US dollar, and long equities. Tudor writes, “As deflation recedes to the background, market participants will start expecting a removal of policy accommodation. If the markets begin to price early, fast and large tightening before inflationary expectations are allowed to take hold, then curves could bear-flatten significantly from current historically high levels.”

Tudor Jones also likes the Aussie dollar, and equity selections in Brazil and Taiwan. You may read the whole letter here, below inside the Scribd window.

Tudor Third-Quarter Letter

Tags: Accumulation, Commodities, Dealbook, Easy Money, Emerging Market, Emerging Markets, ETF, Financial Crisis, Gold, Gold Bug, International Diversification, liquidity, Monetary Policy, Ongoing Support, Paul Tudor Jones, Policy Response, precious metals, Price Basis, Pullback, Related Diversification, Time And Place, Weak Dollar, Winning The Race
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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
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Doug Casey on Gold

Friday, September 25th, 2009

Doug Casey is an American free-market market economist, financial author and entrepreneur. He has been writing a monthly investment newsletter, the International Speculator since 1979 and I always find his ideas quite refreshing. He is also somewhat of a perma gold bull, but nevertheless argues his case convincingly, as gleaned from the interview below with Louis James, editor of the International Speculator.

But before getting stuck in the discussion, Adam Hewison’s (INO.com) has just produced a short technical analysis of the short-term direction of gold. Click here to access the presentation.

Here is the first section of Casey’s interview:

L: Doug, we’ve talked about cars, cows, and cash, but the investment world thinks of you as a gold bug, so let’s give that a go; why gold?

Doug: Sure. First of all, it’s because gold is actually money. It’s an unfortunate historical anomaly that people think about the paper in their wallets as money. The dollar is, technically, a currency. A currency is a government substitute for money. Gold is money.

Now, why do I say that?

Historically, many things have been used as money. Cattle have been used as money in many societies, including Roman society. That’s where we get the word “pecuniary” from: the Latin word for a single head of cattle is pecus. Salt has been used as money, also including in ancient Rome, and that’s where the word “salary” comes from; the Latin for salt was sal (or salis). The North American Indians used seashells. Cigarettes were used during WWII. So, money is simply a medium of exchange and a store of value.

By that definition, almost anything could be used as money, but obviously, some things work better than others; it’s hard to exchange things people don’t want, and some things don’t store value well. Over thousands of years, the precious metals have emerged as the best form of money. Gold and silver both, though primarily gold.

There are very good reasons for this, and they are not new reasons. Aristotle defined five reasons why gold is money in the fourth century BC (which may only have been the first time it was put down on paper). Those five reasons are as valid today as they were then. A good form of money must be: durable, divisible, consistent, convenient, and have value in and of itself.

L: Can you elaborate on that?

Doug: Yes, and from them, we can draw inferences that will help us anticipate the fate of the dollar.

First, let’s take durable. That’s pretty obvious - you can’t have your money disintegrating in your pockets or bank vaults. That’s why we don’t use wheat for money; it can rot, be eaten by insects, and so on. It doesn’t last.

Divisible. Again, obvious. It’s why we don’t use diamonds for money, nor artwork. You can’t split them into pieces without destroying the value of the whole.

L: If I paid for a new Ford GT with the Mona Lisa, what would be my change - a small canvas by Picasso?

Doug: [Laughing.] That’s right. Maybe you’d get millions of those paintings of Elvis or Jesus on velvet.

Consistent. The lack of consistency is why we don’t use real estate as money. One piece is always different from another piece.

Convenient. That’s why we don’t use, for instance, other metals like lead, or even copper. The coins would have to be too huge to handle easily to be of sufficient value.

Value of itself. The lack here is why you shouldn’t use paper as money.

Actually, there’s a sixth reason Aristotle should have mentioned, but it wasn’t relevant in his age, because nobody would have thought of it…

L: It can’t be created out of thin air.

Doug: Right. Not even the kings and emperors who clipped and diluted coins would have dared imagine that they could get away with trying to use something essentially worthless as money.

L: I think we can forgive Aristotle for the oversight.

Doug: I think so. At any rate, these are the reasons why gold is the best money. It’s not a gold bug religion, nor a barbaric superstition. It’s simply common sense. Gold is particularly good for use as money, just as aluminum is particularly good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. Not money. If you try to make airplanes out of lead, or money out of paper, you’re in for a crash.

That gold is money is simply the result of the market process, seeking optimum means of storing value and making exchanges.

But it’s not something that suits governments, because paper money is an excellent means for governments to tax people indirectly, surreptitiously, through inflation. That’s one reason central bankers love paper money, but also, phony economic theories, like those of John Maynard Keynes, hold that the government not only can but should meddle with the economy, and the ability to print paper money gives them a means to do that.

In today’s world, not only do people around the world take it for granted that paper is money, but that it should be so.

But it’s all nonsense. It’s one reason for taking a gloomy view of humanity — people will believe almost any kind of claptrap, if the story is retailed by those in authority.

After the current system collapses, as every paper money system in the past has collapsed, some form of money will have to replace it, and it’s almost certainly going to be gold.

Click here for the full interview.

Source: Conversations with Casey, September 23, 2009.

Tags: Ancient Rome, Anomaly, Cows, Doug Casey, Emerging Markets, Financial Author, Gold, Gold And Silver, Gold Bug, India, International Speculator, Investment Newsletter, Investment World, Latin Word, Market Economist, Medium Of Exchange, Money Gold, North American Indians, Pecuniary, precious metals, Roman Society, Term Direction, Wallets
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Words from the (Investment) Wise - September 20, 2009

Sunday, September 20th, 2009

Marking the one-year anniversary of the Lehman Brothers demise, risky assets last week again marched higher to the tune of economic data supporting the argument of a global economic recovery. A realization among investors that the economic transition from recession to recovery was gaining momentum, resulted in many global stock markets scaling fresh peaks for the year.

Ben Bernanke, Federal Reserve chairman, on Tuesday said the US recession “is very likely over”. However, he remained cautious about the shape of the recovery and said he expected a “moderate” recovery in 2010 with growth “not much faster than the underlying potential growth rate of the economy”, i.e. approximately 3%.

“At the moment we don’t see (the economy) getting better or worse, but that’s better than you could say six months ago,” added Warren Buffett. “The terror of last year is gone and that’s thanks in part to the government.”

Source: Tom Toles, Slate.com

Not only did the US stock market indices record up-days on every day except Thursday, but all ten economic sectors that make up the S&P 500 also closed the week in the black. Most other stock markets (mature and emerging alike), commodities, oil, precious metals, high-yielding currencies and corporate bonds also put in a stellar performance as a bullish mood prevailed.

The CBOE Volatility Index (VIX), or “fear gauge”, traded at about the same level (23.9) as before the Lehman bankruptcy in September last year. Also, government bonds and other safe-haven assets such as the US dollar and Japanese yen were out of favor as investors sought higher returns elsewhere.

As investors started assuming more risk since March, the US Dollar Index headed lower, hitting a one-year low last week and trading in a confirmed downtrend as far as primary trend indicators are concerned. The combination of low interest rates and quantitative easing has made the US dollar an attractive currency for funding carry-trade transactions (i.e. selling low-yielding currencies to finance the purchase of higher-yielding currencies). (Click here for a short technical analysis.)

The declining dollar, central bank purchases, the de-hedging by gold producers and rising inflation expectations served as catalysts for gold bullion’s strength, causing the yellow metal to close above the $1,000 level for the sixth consecutive day on Friday. While gold’s move grabbed the headlines, platinum (+42.5%) and silver (+50.5%) have actually outperformed gold (+13.9%) significantly since the start of the year.

Source: StockCharts.com

The past week’s performance of the major asset classes is summarized by the chart below - a set of numbers that indicates an increase in risk appetite.

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 (+1.8%) and MSCI Emerging Markets Index (+2.8%) both made headway last week to take the year-to-date gains to +23.8% and a staggering +62.1% respectively. These indices are still more than 30% down from the 2007 highs, but markets such as Mexico (-8.8%) and Chile (-5.8%) have almost wiped out all their financial crisis losses.

The major US indices extended their gains to two consecutive weeks, marking eight up-weeks during the past ten weeks. The year-to-date gains are as follows: Dow Jones Industrial Index +11.9%, S&P 500 Index +18.3%, Nasdaq Composite Index +35.2% and Russell 2000 Index +23.7%. Interestingly, since the Nasdaq Index was created in 1971, only 1991, 1995 and 2003 have seen bigger year-to-date gains.

While the indices have gained considerably from their lows, they still have to rally by between 6.0% (Russell 2000) and 17.2% (S&P 500) to reach the levels of the Friday (September 12, 2008) before Lehman’s collapse.

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

Top performers in the stock markets this week were Hungary (+7.4%), Macedonia (+7.3%), Ireland (+6.1%), Argentina (+5.7%) and Sri Lanka (+5.3%). At the bottom end of the performance rankings, countries included Kenya (-1.6%), Uganda (-1.5%), the Philippines (-1.3%), Singapore (-1.2%) and Slovakia (-1.2%).

Of the 98 stock markets I keep on my radar screen, 81% recorded gains, 13% showed losses and 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 Market Vectors Solar (KWT) (+10.5%), United States Natural Gas (UNG) (+9.9%), iShares Cohen & Steers Realty Majors (ICF) (+9.6%) and Claymore/MAC Global Solar Energy (TAN) (+9.0%).

On the losing side of the slate, ETFs included ProShares Short Financials (SEF) (-4.5%), ProShares Short Russell 2000 (RWM) (-4.2%), Broadband HOLDRS (BDH) (-2.9%) and CurrencyShares British Pound Sterling Trust (FXB) (-2.6%).

The cost of buying credit insurance for US and European companies eased sharply during the past two months, as shown by the tighter spreads for both the CDX (North American, investment-grade) Index (down from 118 to 103) and the Markit iTraxx Europe Index (down from 95 to 86).

Also, junk-bond yields continued declining, as shown by the Merrill Lynch US High Yield Index (and also by the good performance of the iShares iBoxx $ High Yield Corporate Bond ETF, HYG). The Index dropped by 63.4% to 798 from its record high of 2,182 on December 15, meaning the spread between high-yield debt and comparable US Treasuries was 798 basis points on Friday. This heralds the return of high-yield spreads to “pre-Lehman” levels (854 basis points on September 12, 2008).

Referring to the Federal Open Market Committee’s (FOMC) meeting next week, the quote du jour comes from straight-talking Bill King (The King Report). He said: “Traders and investors must contemplate what course of action the Fed will announce and enact after next week’s FOMC if ‘the US recession is very likely over’. If quantitative easing (QE), which is due to expire, is renewed, stocks should rally but commodities, gold and inflation plays should rally far more. The dollar should tank. China should go apoplectic. Benito will look foolish for saying ‘the recession is very likely over’. Bonds might rally initially but then look out below.

“If QE is not renewed, stocks and commodities should tank; the dollar should soar and bonds, after initially declining, should rally. China will be appeased. Benito will have validated his rhetoric with action.”

Other news is that the Federal Reserve and the Treasury are considering sweeping rules to regulate pay at banks. According to The New York Times “the rules depart from the hands-off approach that dominated bank regulation for the last three decades, but are not as strict as proposals from some European leaders”.

Also, the US Securities and Exchange Commission passed rules last week to firm up on the supervision of credit ratings agencies following a flood of criticism over their role in the financial crisis.

Next, a tag cloud of all 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”, “government”, “China” and “gold” featured prominently. “Recession” has become a footnote.

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (from where I am writing this post) are given in the table below. With the exception of the Chinese 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. On the other hand, the next potential upside target for the S&P 500 is about 1,120.

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

As stock markets continue to reach new highs, long-term mutual fund investors have reversed their strategy this month, selling shares for the first time since March, said Clusterstock. The outflows for the first two weeks of September were bigger than the inflows seen in the last three months combined.

Source: Clusterstock - Business Insider, September 17, 2009.

Bespoke highlights that the S&P 500 has now closed more than 20% above its 200-day moving average for the first time since May 1983. “This comes just six months after the Index traded the furthest below its 200-day since the Great Depression! Not even during the great bull run of the 90s did the Index get this far above its 200-DMA. This has happened only a handful of times in the history of the S&P 500,” said the report.

Source: Bespoke, September 16, 2009.

Short-term movement aside, when considering monthly data, three momentum-type oscillators (RSI, MACD and ROC) have reversed course over the past few months for the first time since the sell signals of 2007, and now indicate a positive primary trend.

Source: StockCharts.com

Putting matters in perspective from across the pond, David Fuller (Fullermoney) said: “Stock market action continues to confirm a bull market in every respect. Downside risk is probably limited to periodic mean reversions towards the rising 200-day moving averages. Such pullbacks generally offer the best buying opportunities.

“The main danger signs to look for will be an eventual tightening of monetary policy and an inverted yield curve. [PduP: The chart below shows that the next inverted yield curve is probably a long way off.] When this next happens, and both tend to be lead indicators, I will focus on introducing trailing stops for all equity positions, actual or mental, and ideally use strength to reduce equity exposure.

Source: Fullermoney.com

“Currently, I maintain that we are still in the second psychological perception stage of the current bull market, characterized by the ‘wall of worry’. With any luck, we can look forward to the third and climactic stage of a bull market cycle, in which investors become euphoric,” concluded Fuller.

For more discussion on the direction of financial markets, see my recent posts “Interview with Marc Faber“, “Is the rally ending, or does it have more to go?“, “Charts: Stocks face 15% correction in October“, “Albert Edwards: ‘I remain in the bearish camp‘”, “Bullion - a viable alternative to fiat currencies” and “More US dollar woes ahead“. (And do make a point of listening to Donald Coxe’s webcast of September 18, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
The global economic recession is over, according to the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Survey results during the first week of September improved notably across the entire global economy and most industries. Assessments of current business conditions and expectations regarding the outlook in early 2010 rose sharply.”

Source: Moody’s Economy.com

The Survey’s results were confirmed by the Organization for Economic Cooperation and Development’s index of leading indicators (covering 29 countries), which rose to 97.8 in July from 96.3 in June, reported The Wall Street Journal. The OECD said the indicators “point to broad economic recovery” and that “clear signals of recovery are now visible in all major seven economies, in particular in France and Italy, as well as in China, India and Russia”.

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

September 18, 2009
• Loan delinquency and charge-off rates

September 17, 2009
• Housing starts - multi-family units led the charge in August
• Jobless claims - initial claims decline, continuing claims advance

September 16, 2009
• The Energy Price Index lifts Consumer Price Index in August
• Cars and many other components account for the strength in factory activity
• Current account narrows in Q2

September 15, 2009
• Autos and non-auto components lift retail sales in August
• Wholesale Price Index movement largely an energy price story

It is noteworthy that industrial production increased 0.8% in August after an upwardly revised 1.0% gain in July. Asha Bangalore (Northern Trust) said: “The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) uses four variables - industrial production, nonfarm payroll employment, real personal income less transfer payments, and real manufacturing and trade sales - to determine turning points of a business cycle. The important aspect to note is that the trough of industrial production was in June 2009. Therefore, it is quite likely that the NBER will date the end of the Great Recession as June/July 2009 once additional information is available.”

Source: Northern Trust - Daily Global Commentary, September 16, 2009.

Economists surveyed by the The Wall Street Journal are increasingly confident that the US economy is growing again. They predicted that the US will grow at a 3% annual rate in the current quarter - well above the 0.6% forecast they made just three months ago - and will expand at a 2.5% pace in the fourth quarter.

Meanwhile, William White, the highly respected former chief economist at the Bank for International Settlements, warned (via the Financial Times) that government actions to help the economy in the short run may be sowing the seeds for future crises. “Are we going into a W[-shaped recession]? Almost certainly. Are we going into an L? I would not be in the slightest bit surprised,” he said, referring to the risks of a so-called double-dip recession or a protracted stagnation like Japan suffered in the 1990s. “The only thing that would really surprise me is a rapid and sustainable recovery from the position we’re in.”

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

Source: Yahoo Finance, September 18, 2009.

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

In addition to the interest rate announcement by the FOMC on Wednesday (September 23), US economic data reports for the week include the following:

Monday, September 21
• Leading economic indicators

Tuesday, September 22
• FHFA US Housing Price Index

Wednesday, September 23
• FOMC rate decision

Thursday, September 24
• Initial jobless claims
• Existing home sales

Friday, September 25
• Durable goods orders
• Michigan Sentiment Index
• New home sales

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 18, 2009.

“Success is not final, failure is not fatal: it is the courage to continue that counts,” said Winston Churchill (hat tip: Charles Kirk - do make a point of visiting his excellent site). And isn’t this so true of the investment world where mistakes are the order of the day. 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 overcome the inevitable losing trades and focus on the next money-making opportunity.

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 (from where I am leaving on my first trip to Dallas, Texas in just more than a week).

Hat tip: The Big Picture

The New York Times: Wall Street, one year later
“The Times’s Andrew Ross Sorkin, Gretchen Morgenson and Joe Nocera recount the events of the weekend that Lehman Brothers failed and discuss the lessons learned from the financial crisis.”

Source: The New York Times, September 11, 2009.

Charlie Rose: Obama’s Wall Street speech
“President Obama’s speech on Wall Street marking one year since the fall of Lehman Brothers and the global economic recovery plan with Jake Tapper of ABC News, author Jim Stewart and Andrew Ross Sorkin of The New York Times.

Source: Charlie Rose, September 14, 2009.

Financial Times: Bernanke says US recession probably over
“The US recession ‘is very likely over’, Ben Bernanke, Federal Reserve chairman, said on Tuesday as Barack Obama, US President, heralded the end of the economic ‘freefall’.

“Their comments came after data showed retail sales rose 2.7% last month, their fastest rate in more than three years. The expected boost from the popular ‘cash for clunkers’ car rebate programme was accompanied by a surprise pick-up in other spending.

“This raised hopes that US consumers might be re-emerging from the rubble of the housing market collapse, the rollercoaster ride in equities markets and rising unemployment.

“‘This is a consumer that is in a lasting full recovery mode,’ said Chris Rupkey of the Bank of Tokyo/Mitsubishi UFJ. ‘The Fed is going to need to stop talking about its exit strategy and start implementing it if today’s data keeps up.’

“Others were more cautious, pointing out that August was the back-to-school month. ‘I’d like to see if this is just a one-month bounce or an actual trend,’ said Adam York, at Wells Fargo.

“Many economists believe that consumer spending will be constrained for months by households’ limited access to credit and their desire to reduce their debts.

“Mr Bernanke, who did not comment directly on the sales report, remained cautious about the shape of the recovery.

“He said he expected a ‘moderate’ recovery in 2010 with growth ‘not much faster than the underlying potential growth rate of the economy’ - which means around 3%.”

Source: Krishna Guha, Anna Fifield, Sarah O’Connor and Alan Rappeport, Financial Times, September 15, 2009.

The Wall Street Journal: The recession is over … sort of
“Barrons.com’s Bob O’Brien comments on Ben Bernanke’s speech earlier this week in which he believes the recession is over, but not without qualifications.”

Source: The Wall Street Journal, September 16, 2009.

The Wall Street Journal: Economic confidence rebounds
“Economists and consumers are feeling better about the economy a year after the most frightening moments of the financial crisis. Forecasters surveyed by The Wall Street Journal, giving the government generally good marks for its handling of the financial crisis, now see employers slowly adding jobs over the next 12 months.

“And the latest reading of consumer spirits shows signs of optimism. But most economists still expect the unemployment rate will climb to 10.2%, from today’s 9.7%, before falling early next year.

“‘We are in a technical recovery, but risks remain abundant,’ said Diane Swonk of Mesirow Financial. ‘It will still take some luck and skill to get Main Street to feel some of the relief Wall Street has felt.’

“Main Street is beginning to feel some relief, though, according to the Reuters/University of Michigan preliminary reading of consumer sentiment for September, released Friday.

“The index rose to 70.2 in September from to 65.7 in August, the first increase since June. Consumers felt better about current conditions, and about the future.

“The 51 forecasters surveyed over the past week, not all of whom answered every question, are increasingly confident that the US economy is growing again.

“They predicted in the new Wall Street Journal survey that the US will grow at a 3% annual rate in the current quarter - well above the 0.6% forecast they made just three months ago - and will expand at a 2.5% pace in the fourth quarter.

“While they predict the US will add jobs over the next 12 months, they see a net increase of only 200,000 jobs over that period, and predict unemployment to be a still-high 9.3% in December 2010.

“Job-market weakness is expected to keep the Fed from boosting interest rates, now near zero, until August 2010, the economists say.

“The Organization for Economic Cooperation and Development’s forecasting gauge bolsters the optimists’ case. Its index of leading indicators, which covers 29 of its member countries, rose to 97.8 in July, from 96.3 in June.

“The Paris research organization said Friday the indicators ‘point to broad economic recovery’. It said ‘clear signals of recovery are now visible in all major seven economies, in particular in France and Italy, as well as in China, India and Russia’.

“As they look back on a year of extraordinary government actions aimed at avoiding an even worse recession, economists in The Wall Street Journal survey give good grades to the response of the Bush and Obama administrations and the Federal Reserve - a median score of 80 out of 100.”

Source: Phil Izzo, Sara Murray and Justin Lahart, The Wall Street Journal, September 14, 2009.

MoneyNews: Buffett - economy has not turned up
“The US economy has not begun to climb out of the worst recession since the Great Depression, but the ‘terror’ that followed last year’s near-collapse of the financial system is gone, due in part to government intervention, Warren Buffett told Reuters on Tuesday.

“Buffett maintained a positive outlook on the government’s much criticized Troubled Asset Relief Program (TARP) for banks, saying it may ultimately turn a profit for the government.

“‘At the moment we don’t see (the economy) getting better or worse, but that’s better than you could say six months ago,’ said the billionaire known as The Sage of Omaha for his long history of successful investments. ‘The terror of last year is gone and that’s thanks in part to the government.’

“US President Barack Obama said on Tuesday that measures undertaken by his administration to rescue the economy - including a $787 billion stimulus package - were working, but warned a complete recovery would take ’some time’.

“Federal Reserve Chairman Ben Bernanke also gave a fairly upbeat view, saying the longest and deepest recession since the 1930s was likely over, but added it would ‘feel like a very weak economy for some time’.”

Source: MoneyNews, September 16, 2009.

Financial Times: Economist warns of double-dip recession
“The world has not tackled the problems at the heart of the economic downturn and is likely to slip back into recession, according to one of the few mainstream economists who predicted the financial crisis.

“Speaking at the Sibos conference in Hong Kong on Monday, William White, the highly-respected former chief economist at the Bank for International Settlements, also warned that government actions to help the economy in the short run may be sowing the seeds for future crises.

“‘Are we going into a W[-shaped recession]? Almost certainly. Are we going into an L? I would not be in the slightest bit surprised,’ he said, referring to the risks of a so-called double-dip recession or a protracted stagnation like Japan suffered in the 1990s.

“‘The only thing that would really surprise me is a rapid and sustainable recovery from the position we’re in.’

“The comments from Mr White, who ran the economic department at the central banks’ bank from 1995 to 2008, carry weight because he was one of the few senior figures to predict the financial crisis in the years before it struck.

“Mr White repeatedly warned of dangerous imbalances in the global financial system as far back as 2003 and - breaking a great taboo in central banking circles at the time - he dared to challenge Alan Greenspan, then chairman of the Federal Reserve, over his policy of persistent cheap money.

“On Monday Mr White questioned how sustainable the signs of life in the global economy would prove to be once governments and central banks started to withdraw their unprecedented stimulus measures. ‘The green shoots are certainly out there - the question is what kind of fertiliser is being used on them,’ he said.

“Worldwide, central banks have pumped thousands of billions of dollars of new money into the financial system over the past two years in an effort to prevent a depression. Meanwhile, governments have gone to similar extremes, taking on vast sums of debt to prop up industries from banking to car making.

“These measures may already be inflating a bubble in asset prices, from equities to commodities, he said, and there was a small risk that inflation would get out of control over the medium term if central banks miss-time their ‘exit strategies’.”

Source: Robert Cookson and Sundeep Tucker, Financial Times, September 14, 2009.

Financial Times: Lending in Europe continues to shrink
“The credit crunch in Europe worsened over the summer as corporate bond finance issuance failed to plug the gap left by a sharp contraction of bank lending.

“Net lending by banks went further into negative territory in July as companies paid back more loans than they took out new ones.

“Loans outstanding contracted by a net €25 billion ($36 billion) in the month, the fifth successive month of an increasing shrinkage of supply.

“At the same time, there was a retreat in the recent record corporate bond issuance.

“Bond issuance in July declined for the first time since March, by €20 billion month on month to €27 billion, although bankers are convinced that it was only seasonal.

“Bankers said the July trends had continued into August and would affect smaller companies most severely.

“Morgan Stanley, which compiled the credit crunch numbers from central bank data and Dealogic, said the scant availability of bank lending would penalise smaller companies that have no access to bond markets.

“‘As Europe’s commercial banks de-lever, lending is likely to be squeezed,’ said Huw van Steenis, banks analyst.

“According to Morgan Stanley, there was €319 billion of corporate bond issuance in the first seven months of the year and a decline of €33 billion in European bank-originated loans.

“That marked a reversal of the balance of corporate funding from the same time last year, when bank loans totalled €356 billion compared with corporate bond issuance of only €119 billion.

“Banks across Europe have insisted in recent months any decline in lending is due to a fall-off in demand, not supply.”

Source: Patrick Jenkins, Financial Times, September 13, 2009.

Financial Times: OECD warns 25 million jobs at risk from crisis
“Up to 25 million people in high-income countries will have lost their jobs by the end of next year as the recession pushes the unemployment rate towards a record 10%, the Organisation for Economic Co-operation and Development forecast on Wednesday.

“The Paris-based OECD said that, while recent signs of economic recovery might mean unemployment peaked earlier and at a slightly lower level than its forecast, governments must intervene ‘quickly and decisively’ to prevent the sharp rise turning into long-term joblessness.

“Its annual employment outlook underlines fears that a recovery without jobs might be in prospect, even if the return to economic growth seen in some countries in the third quarter is sustained.

“‘Most OECD countries are already facing a jobs crisis. This is likely to get worse before it gets better,’ said Stefano Scarpetta, the report’s lead author and head of the organisation’s employment division.

“The OECD said 15 million jobs were lost between the end of 2007 and July this year and 10 million more could go by the end of next year in the 30-nation area if the recovery failed to gain momentum. A total increase of that magnitude would be equivalent to the population of a country larger than Australia.

“In 2007 the unemployment rate in the OECD hit a 25-year low of 5.6%, but it rose to a postwar high of 8.5% this July.”

Source: Brian Groom, Financial Times, September 16, 2009.

Financial Times: China turns to WTO in trade dispute
“Barack Obama’s decision last week to impose emergency tariffs on Chinese tyres has fuelled an increasingly familiar Sino-US war of words over trade.

“Beijing launched an investigation on Monday into whether US poultry and car parts were being unfairly dumped in the Chinese market. It also requested formal consultations at the World Trade Organisation into the US tariffs - the first step in trying to have them declared illegal.

“Whether it will succeed is unclear. The particular ’safeguard’ measure that the US president invoked was, after all, written specifically to allow the US to block Chinese imports as part of the price for China joining the WTO in 2001.

“However, trade experts and lawyers say the episode does show the increasingly sophisticated legal strategies used by Beijing in its many disputes with trading partners, and the way it maximises political effect while trying to limit the actual economic damage.

“Opinion is divided as to whether this dispute - while breaking ground by using a particular trade law for the first time - is likely by itself to set off a protectionist spiral.

“Gao Yongfu, an expert in trade law at Shanghai Institute of Foreign Trade, said: “I think it unlikely that this dispute will be limited to just one industry - it’s likely to spread to others.”

“Prof Gao said other trading partners, including the European Union, were likely to follow suit, broadening if not deepening the restrictions on trade.

“Yet other trade lawyers and economists noted that China had threatened to retaliate in a way that had high political salience but modest economic impact.

“Beijing has built a reputation for rapid but controlled retaliation during trade disputes. One Washington trade lawyer said: ‘China always responds, so I don’t think this escalates. It just repeats each time the US does something.’”

Source: Alan Beattie and Geoff Dyer, Financial Times, September 14, 2009.

Chart of the day (Clustrstock): Consumer credit collapse
“Hoping for a consumer-led recovery? Don’t hold your breath. The latest data from the Federal Reserve shows that the year-over-year decline in total consumer credit is collapsing at an accelerating rate. God forbid consumers go back to living within their means.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - Business Insider, September 9, 2009.

MoneyNews: Geithner - tax hikes not likely
“Treasury Secretary Timothy Geithner acknowledged Tuesday the federal government had to take some ‘deeply offensive’ steps to help the country get past the financial crisis a year ago.

“But he also said in a nationally broadcast interview that things are ‘dramatically different’ now, although it’s too early to say the economy is in recovery.

“‘A year ago we really were on the verge of a full-sale run’ on banks, along the lines of the 1930s Depression, Geithner said in an interview broadcast on ABC’s ‘Good Morning America’. He said ‘the biggest fear now, the biggest challenge, is to make sure we change the rules of the game so it doesn’t happen again’.

“Asked about projections of a $1.6 trillion deficit and a growing US debt obligation to other countries, Geithner said the Obama administration still wants to avoid an increase in income taxes on the middle class. The secretary noted Barack Obama’s pledge against such a hike during his presidential campaign and said Obama remains ‘very committed’ to it.

“He also said it was too early to say just when the government might let allow expiration of an emergency lending program for financial institutions (TARP) and said he also didn’t know how soon Washington could extricate itself from direct involvement in the auto industry, although he said it likely won’t be within a year.

“Geithner said the administration cannot suggest any guarantee of financial stability, but said ‘what we have an obligation to do is to put that in place here and around the world. … That’s our obligation.’

“He acknowledged that to a large degree, Washington’s intervention in the private markets hasn’t gone over well with large elements of the public and said ‘the government had to do some deeply offensive things to undo the damage. … But we’re going to get out of this as soon as possible.’

“On the budget deficits, Geithner said, ‘I think Americans understand we have an unsustainable fiscal position. We have to bring these deficits down over time.’ He said the country must ‘get our fiscal house in order’ and stressed that Obama is vehemently opposed to a general income tax increase for people who make under $250,000 a year.

“The secretary said that while things are better than they were a year ago, ‘I would say there’s no recovery yet. We define recovery … as people back to work, people able to get a job again, businesses investing again … and we’re not at that point.’

“‘We’re going to do what it takes to get this economy going again,’ he said. ‘We’re going to look carefully at any sensible program.’”

Source: MoneyNews, September 15, 2009.

BCA Research: US retail sales - too soon to open the champagne
“A slew of positive economic surprises have propelled stocks to new rally highs. However, the equity rally has entered a more risky phase, with breadth likely to narrow going forward.

“The improvement in household sentiment in recent months and the recent release of the retail sales report offer some hope for a recovery in final demand, but it is still far too soon to determine that a sustainable consumer revival is beginning. Importantly, the uptick in consumer spending outside of autos and gas stations occurred in the context of heavy discounting. This signals that consumer thrift remains well entrenched and that retailers are being forced to slash prices in order to boost sales, to the detriment of margins.

“We remain cautiously optimistic on the equity market, but worry that breadth will narrow as profit expectations for domestically-geared sectors could be disappointed. Investors should stay concentrated in globally-focused companies.”

Source: BCA Research, September 16, 2009.

Asha Bangalore (Northern Trust): Housing starts - multi-family units led the charge in August
“Starts of new homes increased 1.5% to an annual rate of 598,000 in August, with a 25% increase in starts of multi-family units accounting for all the gain. The level of housing starts is the highest since November 2008.

“On a year-to-year basis, starts of new homes have dropped nearly 28%, which is a noticeable deceleration in the pace of activity from the 55% record decline seen in January 2009.”

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

MoneyNews: Gross - housing recovery no cure
“Housing will not rebound to its former exuberance once the economy rebounds, says Bill Gross, manager of bond giant Pimco.

“Gross said investors will not trust their homes to give them good returns as they did in the past, and that housing will not lead the economy forward.

“‘Housing cannot lead us out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest,’ Gross writes in his September outlook.

“Investors were buoyed by new home sales increasing by 9.6% in July, according to the Commerce Department. Yet the number of Americans owning homes could fall to 65% from a peak of 69%, reported Fortune magazine.

“Americans should not expect a robust bull market, Gross said. The new economy will pay off its debt, increase its savings, and see more ‘delevering, deglobalization, and regulation,’ he said.”

Source: Ellen Chang, MoneyNews, September 17, 2009.

MoneyNews: Millions more foreclosures loom
“As many as six million Americans remain at risk of foreclosure over the next three years, according to a recent press release about the government’s Home Affordable Refinancing Program (HAMP).

“‘We recognize that any modification program seeking to avoid preventable foreclosures has limits, HAMP included,’ wrote Assistant Secretary for Financial Institutions Michael S. Barr.

“‘Even before the current crisis, when home prices were climbing, there were still many hundreds of thousands of foreclosures. Therefore, even if HAMP is a total success, we should still expect millions of foreclosures.’

“Some of these foreclosures, Barr observes, will result from investor borrowers who did not qualify for the program, or because borrowers did not respond to government outreach.

“‘Still others will be the product of borrowers who bought homes well beyond what they could afford and so would be unable to make the monthly payment even on a modified loan,’ Barr says.

“The Home Affordable Refinancing Program was intended to help homeowners whose existing mortgages were up to 105% of their current house value, but has since been expanded to help those with mortgages up to 125% of current value.

“‘Overall, the GSEs (government sponsored enterprises Fannie Mae, Freddie Mac, and Ginnie Mae) have refinanced more than 2.7 million loans since the announcement of the Administration’s comprehensive housing plan,’ Barr notes.”

Source: Julie Crawshaw, MoneyNews, September 15, 2009.

Asha Bangalore (Northern Trust): Current account narrows in Q2
“The current-account deficit of the US economy narrowed to $98.8 billion in the second quarter from $104.5 billion in the first quarter. As a percent of nominal GDP, the current account deficit was 2.8% in the second quarter, down from a 2.9% mark in the first quarter of 2009 and record high of 6.5% in the fourth quarter of 2005. The trade deficit widened in July (-$31.9 billion vs. -$27.5 billion in June) which raises the probability of a wider current account deficit in the third quarter.

“In the second quarter, the surplus on income declined, marking the fifth quarterly drop in the last six quarters. Foreign-owned assets in the US rose $16.4 billion in the second quarter after recording declines in the fourth quarter of 2008 (-$11.9 billion) and the first quarter (-$67.8 billion).”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 16, 2009.

Asha Bangalore (Northern Trust): Cars and many other components account for the strength in factory activity
“Industrial production increased 0.8% in August after an upwardly revised 1.0% gain in July (previously estimated as a 0.5% increase). The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) uses four variables - industrial production, nonfarm payroll employment, real personal income less transfer payments, and real manufacturing and trade sales - to determine turning points of a business cycle. The important aspect to note is that the trough of industrial production was in June 2009. Therefore, it is quietly likely that the NBER will date the end of the Great Recession as June 2009/July 2009 once additional information is available.

“Factory production increased 0.6% in August, after an upwardly revised 1.4% increase in July (previously estimated as a 1.0% gain). Production of autos rose 5.5% in August, following a 20.1% jump in the prior month. Primary metals; machinery; and electrical equipment, appliances, and components all posted gains between 0.5% and 1% during August. The operating rate of the factory sector rose to 66.6% in August, after establishing a record low of 65.1% in June 2009.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 16, 2009.

Asha Bangalore (Northern Trust): Energy Price Index lifts Consumer Price Index in August
“The Consumer Price Index (CPI) moved up 0.4% in August after holding steady in July. The 9.1% increase in gasoline prices accounted for the sharp increase in the headline number. Excluding energy, the CPI increased only 0.1% in August compared with no change in July. Food prices rose 0.1% in August following a 0.3% decline in the prior month. The Energy Price Index recorded a 4.6% gain in August vs. a 0.4% decline in July. The decline in energy prices in the early weeks of September suggests a drop of the Energy Price Index for the month. On a year-to-year basis, the CPI declined 1.5% in August vs. a 2.1% in the twelve months ended July.

“The core CPI, which excludes food and energy, rose 0.1% in August, putting the year-to-year gain at 1.4%. The deceleration of the core CPI and declining trend of the overall CPI is indicative of inflation being a non-issue for several months.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 16, 2009.

Asha Bangalore (Northern Trust): Wholesale Price Index movement largely an energy price story
“The Producer Price Index (PPI) of Finished Goods moved up 1.7% in August following a 0.9% drop in the prior month. The wide swings of this index are largely due to similar noticeable movements of the Energy Price Index. According to the Labor Department, over 90% of the increase in the wholesale finished goods price index during August was the result of higher energy prices, which rose 8.0%. The 23% jump in gasoline price was the biggest culprit. This is most likely to be reversed in September, given the drop in gasoline prices during the first two weeks of the month.

“The food price index was up 0.4% after recording a 1.5% drop in July. A large part of the increase in food prices was due to the 5.9% jump in prices of fresh fruits and melons. Excluding food and energy, the core PPI rose 0.2% in August compared with a 0.1% drop in July. The 0.8% increase of the light motor vehicle index in August accounted for over fifty percent of the gain in the core PPI. The 0.7% increase of the Passenger Car Price Index also played a role in lifting the core PPI.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 15, 2009.

The New York Times: Fed considers sweeping rules to regulate pay at banks
“The Federal Reserve and the Treasury are preparing broad new rules that would force banks to rein in practices that made multimillionaires out of many financial executives during the housing bubble, officials said.

“The rules depart from the hands-off approach that dominated bank regulation for the last three decades, but are not as strict as proposals from some European leaders and suggestions from some members of Congress angered by the financial troubles of the last year.

“Fed officials would give banks wide leeway in how they structure their rewards. They would not prohibit million-dollar pay packages or address issues of fairness. Rather, the rules are intended to restrict pay plans that encourage reckless behavior by rewarding only short-term gains.

“And because the rules would be applied through the confidential bank examination process, it would be hard for consumers and investors to judge how strictly the rules were being applied.

“The effort is also meant to be a credible alternative to the call by some European leaders for specific limits on bonuses to financial executives, an idea opposed by the Obama administration. Officials from Europe and the

“Treasury are negotiating over compensation and other financial industry regulations in advance of a summit meeting next week in Pittsburgh of leaders from the Group of 20 industrialized and large emerging countries.

“The Obama administration opposes strict caps on pay, arguing that the size of the bonuses are not as important as the risk to the financial health of the bank that bonuses linked to performance can create.

“The simple proposition should be that you don’t want people being paid for taking too much risk, and you want to make sure that their compensation is tied to long-term performance,” said Timothy Geithner, the Treasury secretary, in an interview by telephone.”

Source: Edmund Andrews and Louise Story, The New York Times, September 19, 2009.

Financial Times: SEC tightens grip on ratings agencies
“The US Securities and Exchange Commission passed rules on Thursday to tighten supervision of credit ratings agencies following a torrent of criticism over their role in the financial crisis.

“Credit ratings agencies, which are usually paid by the issuers they rate, came under fire during the crisis because they gave top ratings to hundreds of billions of dollars of bonds backed by risky mortgages and other loans that are now in many cases worthless.

“The SEC said on Thursday that ratings agencies must reveal more information on past ratings so that investors could compare relative performance. Banks will have to share the underlying data used to determine ratings, so that competing agencies can offer unsolicited ratings for structured finance products.

“The SEC said it would remove references to ratings in some of its rules as part of efforts to reduce overall reliance on ratings by investors.

“It also decided to get public feedback on whether ratings agencies should be subject to potential legal liability under securities law and what the possible consequences might be.

“Indeed, most lawsuits against ratings agencies have failed because their ratings are an ‘opinion’ and therefore subject to free-speech protection. The issue has become a key factor in the debate on the future of the industry.

“Fresh proposals were also put forward governing disclosure, including whether any “preliminary ratings” were obtained from other ratings agencies - in other words, whether there was ‘ratings shopping’.”

Source: Joanna Chung and Aline van Duyn, Financial Times, September 17, 2009.

The Wall Street Journal: Fed likely to keep buying mortgage instruments
“The Federal Reserve, which convenes its policy meeting next week, is likely to stay the course to buy $1.45 trillion in mortgage-linked securities despite potential resistance from a few regional Fed presidents.

“Central-bank officials plan to discuss winding down those purchases over the coming months to limit disruption to the market when the buying comes to an end.

“Some regional Fed policy makers have suggested the Fed might halt the program before it finishes its purchases of $1.25 trillion in mortgage-backed securities and $200 billion in Fannie Mae and Freddie Mac debt announced in the past year. But they are a small minority across the Fed system.

“Top Fed officials believe such a move would tighten overall monetary policy at a time when they still worry about the durability of the economic recovery. The Fed has completed about two-thirds of its purchases, almost $1 trillion worth, and is likely to complete the rest unless prospects for the economy improve radically in the coming months.

“At the Federal Open Market Committee’s September 22-23 meeting, the central bank’s policy makers - including the 12 regional Fed presidents - will assess the early signs of improvement now taking shape across the economy. Officials are encouraged by the rebound in financial-market conditions and initial indications that the housing market is pulling out of its deep dive.

“But they are hesitant to bank on a strong recovery. The sizable growth expected in the third quarter is due in part to short-term effects such as companies replenishing inventories and the government’s ‘cash for clunkers’ auto-rebate program. Higher saving by households is casting doubt on consumer spending. And even the moderate growth that Fed officials expect next year wouldn’t be enough to bring down the unemployment rate substantially.

“‘The economy seems to be brushing itself off and beginning its climb out of the deep hole it’s been in,’ San Francisco Fed President Janet Yellen said in a speech Monday. ‘But I regret to say that I expect the recovery to be tepid. What’s more, the gradual expansion gathering steam will remain vulnerable to shocks.’”

Source: Sudeep Reddy, The Wall Street Journal, September 16, 2009.

Bloomberg: Pimco’s Gross boosts government debt to 5-year high
“Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., increased holdings of government-related debt last month to the most in five years and cut mortgage securities.

“Gross boosted the $177.5 billion Total Return Fund’s investment in Treasuries, so-called agency debt and other bonds linked to the government to 44% of assets, the most since August 2004, from 25% in July, according to Pimco’s website. The fund cut mortgage debt to 38%, the lowest level since February 2007, from 47%.

“‘We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly,’ Gross wrote at the start of the month in his September investment outlook for the Newport Beach, California, company.

“The Total Return Fund handed investors a 12.2% gain in the past year, beating 92% of its peers, according to data compiled by Bloomberg. The one-month return is 1.8%, outpacing 69% of its competitors.”

Source: Wes Goodman and Susanne Walker, Bloomberg, September 16, 2009.

Bespoke: High-yield spreads fall below pre-Lehman levels
“For the first time since the recovery off the March lows, high yield credit spreads fell below their ‘pre-Lehman’ levels. Based on data from Merrill Lynch indices, high yield bonds are currently yielding 835 basis points more than comparable Treasuries. This compares to a level of 854 bps on 9/12/08, which was the Friday before Lehman’s bankruptcy.

“While credit market benchmarks have mostly recovered to ‘pre-Lehman’ levels, equities still have a ways to go. Even after the historically strong rally off the March lows, all three major indices and all ten major S&P 500 sectors remain below their ‘pre-Lehman’ levels. While the S&P 500 has gained nearly 60% from its lows, the index would still have to rally an additional 17.4% to reach its level from the Friday before Lehman’s bankruptcy.”

Source: Bespoke, September 16, 2009.

CNN Money: Insiders sell like there’s no tomorrow
“Can hundreds of stock-selling insiders be wrong?

“The stock market has mounted an historic rally since it hit a low in March. The S&P 500 is up 55%, as US job losses have slowed and credit markets have stabilized.

“But against that improving backdrop, one indicator has turned distinctly bearish: Corporate officers and directors have been selling shares at a pace last seen just before the onset of the subprime malaise two years ago.

“While a wave of insider selling doesn’t necessarily foretell a stock market downturn, it suggests that those with the first read on business trends don’t believe current stock prices are justified by economic fundamentals.

“‘It’s not a very complicated story,’ said Charles Biderman, who runs market research firm Trim Tabs. ‘Insiders know better than you and me. If prices are too high, they sell.’

“Biderman, who says there were $31 worth of insider stock sales in August for every $1 of insider buys, isn’t the only one who has taken note. Ben Silverman, director of research at the InsiderScore.com web site that tracks trading action, said insiders are selling at their most aggressive clip since the summer of 2007.

“Silverman said the ‘orgy of selling’ is noteworthy because corporate insiders were aggressive buyers of the market’s spring dip. The S&P 500 dropped as low as 666 in early March before the recent rally took it back above 1,000.

“‘That was a great call,’ Silverman said. ‘They were buying when prices were low, so it makes sense to look at what they’re doing now that prices are higher.’”

Source: Colin Barr, CNN Money, September 12, 2009.

Bespoke: S&P 500 new highs expanding … from a low base
“Back in late February and early March, we made several references that even though the S&P 500 was trading down to new lows, the number of stocks making new lows wasn’t expanding, which is very positive for the market. As shown in the chart below, at the October low, 84% of the stocks in the S&P 500 made a new low. Then in November, 63% of stocks hit new lows. At the March low, however, only 36% of the stocks in the S&P 500 made new lows.

“Just as the smaller number of stocks making new lows shrunk towards the end of the bear market, as the market rises, investors should be looking for an expansion in the number of stocks making new highs. As shown in the above chart, new highs are expanding, albeit from a low base. In today’s trading, 23 stocks (highlighted below) in the S&P 500 hit a new 52-week high. This is the best daily reading since May 2008. Going forward, if the market continues to rally, investors should watch the new high list for confirmation of the rally. If the new high list fails to keep expanding, it could be an early sign that a correction is in the cards.”

Source: Bespoke, September 15, 2009.

Bespoke: Short interest at lowest level since February 2007
“It just keeps getting lonelier on the short side. As of the end of August, the average short interest as a percentage of float for stocks in the S&P 1500 stood at 6.6%, representing the lowest level since February 2007. Over the last six months, the balance of power has shifted from the sellers to buyers. With the short side now being the loneliest trade, will the roles reverse again over the next six months?”

Source: Bespoke, September 14, 2009.

Bespoke: Financials, Industrials and Materials at most overbought levels in at least a year
“While September was supposed to be a month where the market would at least take a breather, halfway through the month, stocks have done anything but rest. This month, the S&P 500 and most sectors have consistently been trading to new highs for the year on a seemingly daily basis. As a result, the 10-day A/D line for the S&P 500 (not pictured) is near its most overbought levels of the last year. Additionally, Financials, Industrials and Materials are currently at their most overbought levels in at least a year. While these levels do not necessarily mean a decline is imminent, they do indicate that some consolidation is to be expected.”

Source: Bespoke, September 17, 2009.

Doug Kass (TheStreet.com): Bearish arguments are roaring
“I would argue that the bulls are ignoring the emergence of a number of secular headwinds. Here are 10 of them:

1. Deep cost cuts have been mainstay of corporations over the last few years. Cost cuts are a corporate lifeline (like fiscal stimulus), but both have a defined and limited life. Ultimately, top-line growth is needed.

2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the labor force. The consumer remains the most significant contributor to domestic growth. Unemployment should remain high, exacerbated by many retiring later in life because their nest eggs have been reduced.

3. The consumer entered the current downcycle exposed and levered to the hilt, and net worth (and confidence) has been damaged and will need to be repaired through time and by higher savings and lower consumption. (The consumer is hurting. Last week I met with a midsized bank’s lending team. The bank is seeing a big mix change toward rising use of their debit cards (where money is in the bank) at the expense of credit cards (where money is then owed).)

4. The credit aftershock will continue to haunt the economy. The unregulated shadow banking industry is dead, as is the securitization market. All signs indicate that banks will likely remain reluctant to lend to individuals and small businesses. Just try to get a jumbo mortgage today.

5. The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.

6. While the housing market has stabilized, its recovery will be probably remain muted. More important, there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

7. Commercial real estate has only begun to enter a cyclical downturn. It might not be as deep as many expect, but it won’t provide much of a contribution to growth.

8. While the public-works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye - most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

9. Municipalities have historically provided economic stability during times of economic weakness - no more. They are broadly in disrepair. State sales taxes are being raised all over the country, and so are sin taxes (to shore up municipal finances) on cigarettes, booze and maybe even sugar products.

10. The most important nontraditional headwind is the inevitability of higher marginal tax rates. How will higher individual tax rates affect an already deflated consumer? How will corporations react to higher tax rates? Will rising taxes be P/E multiple benders?

“The liquidity that grew out of the massive government stimulation and the growth in the monetary base is reaching the equity market and our economy. It has been greeted by cheers and almost unnoticeable, brief and shallow pullbacks in stocks, producing a degree of price momentum that is almost reminiscent of the ‘good old days’ in 1999/early 2000. Market participants appear now to have embraced the notion that we are in an economic ’sweet spot’ and that a below-average but self-sustaining domestic recovery is being endorsed.

“With the perspective of the large market rise and dramatic change in sentiment (from dire to positive), there is now little room for disappointment.”

Source: Doug Kass, TheStreet.com, September 14, 2009.

Bill King (The King Report): Be careful about liquidity rally
“The liquidity rally concept is the rationalization that is inducing investors and traders to buy stocks. Nothing else matters right now.”

Source: Bill King, The King Report, September 14, 2009.

Chart of the day (Clusterstock): Fear disappears from the market

“More evidence that investors have gotten very complacent in this market. Not only does the market continue to rally, but the VIX, sometimes called the fear index, is at the lows of the year. There was a brief spike before September, but since then it’s collapsed.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - Business Insider, September 15, 2009.

Andrew Garthwaite (Credit Suisse): Too early to sell
“September may historically be the worst month for equity returns, but it is still too early to go underweight on stocks, says Andrew Garthwaite, global equity strategist at Credit Suisse.

“‘This is the best phase of the economic cycle,’ he says. ‘GDP growth continues to be revised up, yet inflation remains muted. We have introduced a mid-2010 target for the S&P 500 of 1,150.’

“Mr Garthwaite points to earnings upgrades and undemanding valuations and also notes that many economic and market variables are back to pre-Lehman levels.

“Furthermore, there is still plenty of quantitative easing to come, with part of the additional liquidity likely to end up in stocks.

“‘We do not exclude a period of near-term equity consolidation, given that some of our tactical indicators are sending a signal of caution.

“‘But other indicators suggest it is too early to sell. Risk appetite peaks six weeks after it hits euphoria, equity sentiment is in line with its average and insider buying is low but this was the same in 2004. The time to go ‘underweight’ strategically will be when we get the second leg down of a W-shaped recovery.

“‘We see three possible triggers for this: first, a rise in US interest rates, which is not likely to come until the second half of 2010; second, a funding crisis - unlikely until bank loan growth rises strongly; or third, clear signs of China overheating.’”

Source: Andrew Garthwaite, Credit Suisse (via Financial Times), September 8, 2009.

CNBC: Biggs - putting your portfolio to work
“How to invest now, with Barton Biggs, Traxis Partners and CNBC’s Maria Bartiromo.”

Source: CNBC, September 15, 2009.

Bloomberg: Dollar diminishing makes US favorite for high-yield
“Betting against the dollar is becoming the trade investors can’t afford to ignore.

“The US Dollar Index fell last week to the lowest level in a year as price swings in foreign exchange declined, encouraging investors to borrow greenbacks at record low interest rates and buy assets in countries offering yields as much as 8.1 percentage points higher than US deposit rates. Borrowing costs in dollars as measured by London interbank offered rates fell below those of yen and Swiss francs for an extended period for the first time since 1994 during the past three weeks.

“Those carry trades are the most profitable since before 2000, according to data compiled by Bloomberg. Borrowing dollars and then selling them is adding pressure on a currency that’s already weakened 14% since March as the budget deficit exceeded $1 trillion, the government sells a record amount of debt and the Federal Reserve floods the financial system with $1.75 trillion to pull the economy out of a recession.

“‘The dollar is the big funding currency,’ said Jonathan Clark, vice chairman of New York-based FX Concepts Inc., the world’s largest currency hedge fund, with $9 billion in assets under management. ‘The reason why people are borrowing the US dollar for carry trade is A: It’s very cheap to fund, and B: The expectation is it’s going to go down.’”

Source: Oliver Biggadike and Ron Harui, Bloomberg, September 14, 2009.

CNBC: Jim Rogers - “I expect a currency crisis or semi-crisis”
“Jim Rogers, CEO of Rogers Holdings, told CNBC Monday that when Lehman Brothers failed he thought ‘thank goodness they’re finally letting somebody collapse’. He said that ‘when somebody fails, you let them fail’, and that former US Treasury Secretary Hank Paulson ’should have let ten people go bankrupt’.”

Click here for the article.

Source: CNBC, September 14, 2009.

Ian Stannard (BNP Paribas): Swiss National bank intervention
“The Swiss National Bank’s meeting on Thursday could provide the ideal opportunity for a further bout of intervention to weaken the franc, believes Ian Stannard, currency strategist at BNP Paribas.

“‘The SNB is likely to continue to warn about deflation risks, justifying the need to maintain non-conventional measures,’ he says.

“Mr Stannard notes that BNP Paribas’ Swiss franc trade-weighted index (TWI) is back at the highs of the past six months, which form the upper end of the trading range that has been in place since March.

“‘This extreme level of the TWI coincides with the previous assumed rounds of intervention by the SNB in June.

“‘Given that the SNB’s objective has been to prevent a further appreciation of the franc, the strength of the TWI must be a concern.’

“He also suggests that while the focus of attention has been on the level of the euro against the franc - given the importance of the Swiss trading relationship with the eurozone - this could start to change.

“‘Despite the franc TWI being at its highs, the euro is still above the levels at which the SNB introduced its intervention policy.

“‘But the dollar has continued to trend lower against the franc and is now testing the lows from December 2008.

“‘This suggests that the SNB may also include dollar-franc to a greater degree in any further rounds of intervention.’”

Source: Ian Stannard, BNP Paribas (via Financial Times), September 16, 2009.

Bloomberg: Canadian dollar climbs to 11-month high on growth optimism
“Canada’s dollar rose to the strongest level since October versus its US counterpart as speculation the global recession is over encouraged appetite for higher-yielding assets.

“‘Risk is back in the market,’ said Andrew Chaveriat, a technical analyst at BNP Paribas SA in New York. The Canadian dollar is ‘catching up a bit’, he added.

“The gain in Canada’s dollar prompted speculation the nation’s central bank is intervening to weaken it. A Bank of Canada spokeswoman, Stephanie Bento, said any intervention would be announced on the central bank’s website.

“‘We did hear those rumors early this morning,’ said Blake Jespersen, director of foreign exchange in Toronto at BMO Capital Markets, a unit of Canada’s fourth-largest bank. ‘We think it’s 100 percent untrue. I don’t think the bank has the ammunition or the desire to intervene. This is a story about US dollar weakness across the board.’

“The nation’s central bank hasn’t done transactions in foreign-exchange markets to affect the currency’s value since 1998, even with the dollar setting record highs and lows against the greenback over the past decade.”

Source: Chris Fournier, Bloomberg, September 17, 2009.

Richard Russell (Dow Theory Letters): Anti-gold interests facing defeat
“Jason Hamlin, founder of GoldStockBull, has put forward four major developments which he thinks all gold-believers should be aware of:

(1) China (today everything seems to depend on China) is encouraging its citizens to buy (accumulate) gold and repatriate any gold held in London. As recently as 2002, the possession of gold in private hands was prohibited in China - now we’re seeing a dramatic reversal of policy. ‘It’s glorious to buy and hold gold’ is the official stance in China.

(2) Barrick Gold Corp. has decided to begin closing its huge gold hedge book. This will entail Barrick buying millions of ounces of gold which they have shorted. Barrick is preparing for a higher gold price. The word I hear is that Barrick has bought 2 million ounces of gold and is expected to buy another 3 million ounces. This is supposed to cut its hedge book by half.

(3) COMEX Commercial traders [usually gold mining companies] have taken the largest net short position ever against gold and silver. Normally this huge addition to supply would knock the precious metals down. But this has not happened, at least, so far. Evidently, buying in gold and silver has been powerful enough to pressure the commercial shorts. They will have to put out more shorts (a dangerous move) or be forced to cover.

(4) Gold and silver have slipped into backwardation. This occurs when the price of a commodity for immediate (spot) delivery is higher than its price for future delivery. One interpretation is that people who control the supply of the metals can’t be persuaded to part with their supply, and this suggests that there is more demand for immediate physical delivery than there is an immediate supply of metals.

“With the news that China and Russia are scrambling to build up their supply of gold, this could mean that the demand for gold is intense.

“Adding to the above, the central banks have now turned into net buyers of gold rather than sellers.

“All in all, the precious metals situation is now fascinating, and the anti-gold interests (those who create fiat currency, i.e. the central banks and the inflationists) may, at last, be facing an inglorious defeat.”

Source: Richard Russell, Dow Theory Letters, September 17, 2009.

Reuters: Central banks seen becoming net gold buyers-expert
“Central banks are expected to buy 6 million to 10 million ounces of gold annually due to currency uncertainties after being net sellers in past decades, Jeffrey Christian, managing director of CPM Group, told the Denver Gold Forum on Monday.

“In a keynote speech kicking off North America’s biggest gold conference, which runs through Wednesday, Christian gave what he said was a conservative forecast for gold to average $914 an ounce over the next 10 years.

“‘What we are seeing is that central banks are making the transition from large net sellers to large net buyers,’ Christian said.

“‘You will see a net buying of 6 (million) to 10 million ounces per year by central banks, and that is an extremely conservative projection,’ he said.

“Christian said that European central banks appeared to be done with their gold selling, and that central banks in emerging countries which have been building up foreign reserves were now diversifying into gold due to volatility in the dollar and other major currencies.

“Recently, China and other emerging economies have signaled growing interest in gold rather than stockpiling their currency reserves in US dollar-denominated assets.”

Source: Reuters, September 14, 2009.

MoneyNews: Gold expert - sell, sell, sell
“One of London’s leading gold experts has urged his clients to dump their gold and silver holdings.

“John Reade, an analyst at UBS, told investors to erase all their positions until the latest upward price surge ends, Ambrose Evans-Pritchard writes in the London Telegraph.

“Gold has climbed amid the dollar’s drop to a one-year low.

“Reade says futures contracts on New York’s Comex exchange are flashing warning signals. The Comex experienced a surge of 6.4 million ounces in net long contracts last week. Such jumps in the past have on average presaged a 5% drop in gold prices over the next month.

“‘We recommend that nimble investors take profits on any long gold and silver positions, looking to re-enter after a correction,’ Reade says.

“He sees gold slipping to $950 over the next month and then resuming its rally next year.

“The last time Comex long contracts approached last week’s levels was in February 2008, when gold hit its record high and then crashed.”

Source: Dan Weil, MoneyNews, September 15, 2009.

Bespoke: Baltic Dry remains flat as markets continue to rally
“Even as China has recovered significantly from its correction and US markets charge higher, the Baltic Dry Index remains in a downtrend. As shown in the first chart below, the Baltic Dry peaked at the start of June and has headed steadily lower since then. China’s Shanghai Composite peaked about a month later, but it has rallied nicely since the start of September. The Baltic Dry led the fall in China during the summer, so is it now suggesting that China’s recent bounce is a pump fake, or is it just lagging this time around?”

Source: Bespoke, September 17, 2009.

Martin Wolf (Financial Times): Wheel of fortune turns as China outdoes west
“China has emerged as the most significant winner from the global financial and economic crisis. At the end of 2008, many questioned whether China would achieve its growth target of 8% in 2009. Who now dares to do so?

“Cushioned by its more than $2,100 billion (€1,440 billion, £1,260 billion) of foreign currency reserves, huge trade and current account surpluses and a robust fiscal position, Beijing has been able to deploy all its levers over the financial system and the economy.

“Meanwhile, as one senior Chinese participant at the World Economic Forum’s annual meeting of ‘the new champions’, in Dalian, noted, ‘the teachers have made big mistakes’. Indeed, any visitor to Asia will recognise the west’s reputation for financial and economic competence is in tatters, while that of China has soared. The wheel of fortune is turning.

“Three immediate questions arise. How has China responded to the crisis? Is its resurgent growth sustainable? How far will its recovery help the world economy?

“The answer to the first question is: astonishingly. According to data reported at the end of last week, industrial output expanded 12.3% in the 12 months to August, up from a 10.8% increase in July. This is the fastest growth for a year.

“Behind this is growth of bank credit at close to 30%, year-on-year, since March 2009. It is no surprise, then, that fixed-asset investment has also been growing at over 30%, year-on-year, since March and by 33% in the year to August.

“Is this growth surge sustainable? In a word, yes. Inevitably, the torrid growth of bank credit and money is spilling over into asset prices, particularly equities. But there is little danger of excessive inflation in an economy with an appreciating currency, fully embedded in a world economy still threatened more by deflation than by inflation, at least in the near term.

“Finally, however successful China is in promoting domestic demand, it will not be the locomotive for the world economy. True, China’s merchandise trade surplus has indeed been narrowing: it was $35 billion in the second quarter, 40% lower than a year earlier. China’s current account surplus is also shrinking: it may be down to 6% of gross domestic product this year, from 11% in 2007.

“Yet, since it still only generates some 7% of world output, China is too small to act as the world’s locomotive. Even halving its external surplus would add only 0.4% to aggregate demand in the rest of the world.”

Source: Martin Wolf, Financial Times, September 13, 2009.

Financial Times: Brussels fears deficits will exceed forecasts
“European governments are at risk of recording even higher budget deficits this year than was thought likely four months ago, the European Commission warned on Monday.

“Presenting its latest economic forecasts for 2009, the Commission said preliminary information indicated that deficits in the 27-nation European Union could be above the average 6% of gross domestic product estimated in May.

“‘This appears to be mainly caused by stronger than expected revenue shortfalls in a number of countries, as output growth and the size of discretionary stimulus measures are broadly in line with the spring forecast,’ the Commission said.

“The warning served as a reminder that the most savage recession in the EU’s 52-year history will inflict lasting damage on the bloc’s public finances and average long-term economic growth.

“Policymakers at the EU’s headquarters believe the emergency measures taken to save the financial system and fight the recession have destroyed all progress made in the first 10 years of European monetary union towards consolidating the public finances.

“According to the Commission’s May forecasts, public debt in the 16-nation eurozone will soar to 77.7% of GDP this year and 83.8% in 2010. Both figures are far higher than the 60% threshold set under EU treaty law for countries aspiring to adopt the euro.

“Private sector economists calculate the picture will be dramatically worse if governments take no remedial action. According to Laurence Boone, economist at Barclays Capital, eurozone public debt would shoot up to 105% of GDP by 2015 if no action were taken and annual inflation would average 2% between 2011 and 2015. Greece’s debt would be 149%, Ireland’s 144%, Spain’s 135% and that of France 106%.

“Some independent economists say the economic damage will end up being worse in Europe than the US, which most European governments hold responsible for having caused the crisis in the first place.”

Source: Tony Barber, Financial Times, September 14, 2009.

Tags: Ben Bernanke, BRIC, Canada, Cboe Volatility Index, Commodities, Corporate Bonds, Economic Sectors, Economic Transition, Emerging Markets, ETF, Federal Reserve Chairman, Gaining Momentum, Global Stock Markets, Gold, Government Bonds, India, Japanese Yen, Lehman Brothers, Low Interest Rates, oil, precious metals, Risky Assets, Stock Market Indices, Tom Toles, Us Dollar Index, Us Stock Market, Volatility Index Vix, Warren Buffett
Posted in Emerging Markets, Gold, Markets | 1 Comment »

The Discomfort of Diversification

Wednesday, August 26th, 2009

When Harry Markowitz, an aspiring graduate student, had his article entitled Portfolio Selection published in the Journal of Finance in 1952, he could not have foreseen that his insight into diversification would earn him the Nobel Prize. His idea was simple but profound – “it is not enough to invest in many securities…it is necessary to avoid investing in securities with high covariances among themselves.” Putting eggs in lots of different baskets isn’t enough; one has to select baskets which do not move in tandem.

Proper diversification blends asset classes and investment strategies that have low covariances meaning as some fall in value others will tend to rise. 2008 was a case in point. Although equities plummeted and corporate bonds faltered worldwide, a number of assets and investment strategies experienced positive performance as depicted in the following chart.

Government bonds, particularly longer maturities, managed futures and dedicated short hedge funds and gold all rose in response to falling interest rates, plunging stock prices, and the flight to the safe-haven of the U.S. dollar and precious metals. What these assets and strategies have in common are historically low or even negative correlations to equities; in this light, their strong diversification effect in a year of epic stock losses should be no surprise. Investors with allocations suitable to their risk profiles were undoubtedly thankful.

Six months later, the investment landscape has changed. Stock markets have soared and, as evidenced in the following chart, with the exception of gold, last year’s diversifiers are posting negligible or negative returns.

Yesterday’s heroes have become today’s losers. This experience typifies the veiled corollary of Markowitz’s insight. Proper diversification is discomforting - it entails constructing a portfolio with combinations of asset classes and strategies that will tend to fall in value when others tend to rise and vice-versa. In other words, having some portion of a portfolio invested in today’s losers is an essential element of sound investment management.

Unfortunately, investors are ill-equipped to deal with this disappointing truth. Behavioural finance experts have found that investment decision-making is characteristically marred by cognitive errors including myopia – the tendency to be short-sighted; loss aversion – the predisposition to find losses much more painful than gains; and mental accounting – the tendency to categorize and evaluate economic outcomes in isolated groupings rather than as part of the whole. The result is that many investors react emotionally to any disappointing performance and impatiently sell losers and chase winners, often at the most inopportune times. They forget that the essence of diversification demands a continual exposure to the losing asset classes of the day.

At times, diversification is not just discomforting; it is downright painful. When growth stocks soared in the late 1990’s, many investors found the lagging returns of value stocks and REIT’s intolerable. Yet, as illustrated in the following graph which compares the annualized rolling six-month returns of growth stocks (in red) to value stocks (in green) and REIT’s (in blue), those laggards rapidly became winners as the tech crash pummelled growth stocks while value stocks and REIT’s experienced, for the most part, positive returns.

Investors should know that although diversification works, it is discomforting because it inevitably entails having a portfolio allocation to losing asset classes and strategies. Winston Churchill once cleverly opined, “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.” To borrow his shrewd witticism, we can say that diversification is the worst form of investing, except for all those other forms that have been tried from time to time.

Tacita Capital Inc. (”Tacita”) is a private, independent family office and investment counselling firm that specializes in providing integrated wealth advisory and portfolio management services to families of affluence. We understand the challenges of affluence and apply the leading research and best practices of top financial academics and industry practitioners in assisting our clients reach their goals.

Tacita research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it and is not intended to replace individually tailored investment advice. The asset classes/securities/instruments/strategies discussed may not be suitable for all investors and certain investors may not be eligible to purchase or participate in some or all of them. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Tacita recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor.

Tacita research is prepared for informational purposes. Neither the information nor any opinion expressed constitutes a solicitation by Tacita for the purchase or sale of any securities or financial products. This research is not intended to provide tax, legal, or accounting advice and readers are advised to seek out qualified professionals that provide advice on these issues for their individual circumstances.

Tacita research is based on public information. Tacita makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to inform any parties when opinions, estimates or information in Tacita research changes.

All investments involve risk including loss of principal. The value of and income from investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. Management fees and expenses are associated with investing.

Tags: Asset Classes, Corollary, Corporate Bonds, Gold, Government Bonds, Hedge Funds, Investment Landscape, Investment Strategies, Journal Of Finance, Maturities, Negative Correlations, Nobel Prize, Portfolio Selection, precious metals, Proper Diversification, Risk Profiles, Safe Haven, Short Hedge, Stock Losses, Stock Markets, Stock Prices
Posted in Gold, Markets | No Comments »

Words from the (Investment) Wise (July 26, 2009)

Sunday, July 26th, 2009

“Goodbye safe havens, hello risky assets” seemed to be the theme during the past week as investors placed their bets on a global economic recovery, propelling stocks and other risky assets higher amid better-than-expected earnings reports and tentative signs of stabilization in the US job and housing markets.

Source: Jerry Holbert, Comics.com, July 23, 2009.

Not only did the Dow Jones Industrial Index on Thursday breach 9,000 for the first time since January and the Nasdaq Composite Index notch up a streak of 12 consecutive advancing days, but other global stock markets, commodities, oil, precious metals, high-yielding currencies and corporate bonds also put in a stellar performance as a bullish mood prevailed.

Bonds and other safe-haven assets such as the US dollar and Japanese yen were out of favor as investors sought higher returns elsewhere. Also, the CBOE Volatility Index (VIX), or “fear gauge” was at its lowest level (23.1) since before the Lehman collapse in September.

The past week’s performance of the major asset classes is summarized by the chart below - a set of numbers that indicates an increase in risk appetite.

Source: StockCharts.com

A summary of the movements of major stock markets for the past week, as well as various other measurement periods, is given below. As the second-quarter corporate results in the US rolled in, the American and most other markets closed the week in solid positive territory.

The MSCI World Index (+4.6%) and MSCI Emerging Markets Index (+5.2%) last week again added to the rally’s gains to take the year-to-date returns to +11.7% and a massive +45.3% respectively. Strikingly, the World Index advanced for ten straight sessions through Friday, whereas the Emerging Markets Index gained on nine of the past ten trading days.

The major US indices are all back in the black for the year to date, with each index having fallen for only one day last week. Prior to a slight decline on Friday, the Nasdaq Composite Index experienced its best winning streak since 1992 as it rose for 12 sessions in a row.

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

Stock market returns for the week ranged from top performers Romania (+11.1%), Russia (+9.5%), Egypt (+8.8%), Hong Kong (+7.9%) and Poland (+7.8%) to Greece (-3.6%), Bermuda (-2.5%), Jamaica (-2.0%), Côte d’Ivoire (-1.9%) and Bangladesh (-1.0%) at the other end of the scale.

Of the 97 stock markets I keep on my radar screen, a majority of 82% recorded gains, 15% showed losses and 3% unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

As an aside, the capitalization of China’s stock market is currently $3.2 trillion compared with $11.2 trillion for the US market, according to data compiled by Bloomberg. Mark Mobius, head of emerging markets at Templeton Asset Management, said (via MoneyNews) China might surpass the US as the world’s largest stock market in as little as three years, as China’s state-owned companies will sell new shares and the nation’s 1.4 billion people will put more of their money into the market.

Back to the corporate reporting season in the US. Of the 142 S&P 500 companies that have so far announced quarterly results, 111 came out ahead of earnings expectations, 10 in line and 21 below. While the earnings announcements thus far have been impressive at the headline level, the reports become less striking once one digs a bit deeper to discover that the earnings numbers often only beat estimates due to cost-cutting.

At the top line revenues are still deflating, indicating no pricing power. Specifically, 72 companies posted revenue that failed to live up to expectations. But the prospects are looking up as for the first time in quite a while many more companies are raising guidance versus lowering guidance.

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included Claymore/MAC Global Solar Energy (TAN) (+17.9%), PowerShares Biotech & Genome (PBE) (+17.4%) and Market Vectors Solar Energy (KWT) (+15.9%). Among the country ETFs, Market Vectors Russia (RSX) (+ 12.5%) performed splendidly.

On the losing side of the slate, ETFs included “all things short” such as ProShares Short MSCI Emerging Markets (EUM) (-6.2%), ProShares Short QQQ (PSQ) (-5.0%) and ProShares Short Russell 2000 (RWM) (-4.9%).

As far as credit is concerned, the cost of buying credit insurance for US and European companies eased sharply during last week’s trading, as shown by the narrower spreads for both the CDX (North American, investment-grade) Index (down from 131 to 118) and the Markit iTraxx Europe Index (down from 107 to 95).

CDX (North America, investment-grade) Index

Source: Markit

The quote du jour this week comes from Bill King (The King Report) who said: “Sorry, Mr. President - you ‘wasted a good crisis’. You, Ben, Hank, W, Little Timmy and Democratic Congressional leaders told Americans that the world would end unless US taxpayers mortgaged whatever little future remained in order to provide record stimulus now. You and your ilk said there was no time to delay. Remember you said ‘catastrophe’ would occur if there was no stimulus. You and your team boasted that millions of jobs would be created. No jobs yet. But Goldman Sachs and other insiders minted more money and numerous crony capitalists were able to salvage as much net worth as possible.

“Americans have yet to express the appropriate and proportional opprobrium at the ruling class. But as night follows day, they will; and the longer the delay, the more intense the reaction will be.

“As we keep asserting, the underlying structural problems in the US economy and financial system have not even remotely been addressed. There will be no significant recovery until the necessary restructuring occurs. And there can be no necessary restructuring until the requisite hellacious purge occurs.”

Other news is that President Obama’s healthcare reform got delayed as mounting concerns were voiced about costs. Elsewhere, CIT - a company which provides finance to almost one million small and medium-sized companies in the US - on Monday received a $3 billion private rescue package, enabling the troubled finance group to avoid bankruptcy. Also, the Federal Deposit Insurance Corp (FDIC) closed six more banks on Friday, bringing the tally of US bank failures in 2009 to 64.

Next, a quick textual analysis of my week’s reading. No surprises here, with all the usual suspects such as “banks”, “economy”, “market” and “funds” featuring prominently.

The key moving-average levels for the major US indices, the BRIC countries and South Africa (my home country) are given in the table below. All the indices trade above their respective 50- and 200-day moving averages.

Importantly, the 50-day lines are in all instances also above the 200-day lines and therefore not threatening the bullish “golden crosses” established when the 50-day averages broke upwards through the 200-day averages.

The June highs and July 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.

For more on key levels and the most likely short-term direction of the S&P 500 Index, Adam Hewison’s (INO.com) short technical analysis provides valuable insight. Click here to access the presentation. (Adam also covered the outlook for crude oil, gold and the dollar/yen exchange rate in recent analyses. Click the links to view these.)

Interestingly, sentiment is still showing plenty of skepticism. “If twelve straight days of gains in the Nasdaq won’t bring out the bulls, what will?” asked Bespoke. According to the most recent survey by the American Association of Individual Investors (AAII), bears (42.4%) among individual investors still outnumber bulls (37.6%). As far as newsletters are concerned, bullish writers outnumber bearish writers by a slim margin (36.7% versus 35.6%), as surveyed by Investors Intelligence.

Source: Bespoke, July 23, 2009.

The 10-day average of daily advancers minus decliners is a useful indicator of stock market breadth and helps to identify inflection points. The chart below, courtesy of Bespoke, shows the 10-day advance/decline line for the S&P 500 Index. “… the recent rally has put the A/D line well into overbought territory and at a level that has indeed marked a peak during prior rallies in the past year. After 12 up days for the Nasdaq and an average gain of 13% for S&P 500 stocks since July 10, it’s time for a breather,” said Bespoke.

Source: Bespoke, July 23, 2009.

The long-awaited Dow Theory bull signal finally arrived on Thursday. This came about as a result of the Dow Jones Industrial Average and the Dow Jones Transportation Average both breaking through their previous rally peaks (registered on 12 and 11 June respectively).

Richard Russell, “Mr Dow Theory” and author of the Dow Theory Letters, forthwith replaced the bear on the first page of his daily newsletter with a long-horned Texas bull. The long-timer said: “I believe we are now dealing with an extended bear market rally (some will call it a cyclical bull market). But I’m operating on the thesis that a primary (secular) bear market is still in force (although it has been suspended for a while). In my opinion, the true final bottom for this secular bear market lies somewhere ahead.

“Remember, on March 9 very few of the items characteristic of a true bear market bottom were seen. There was no extreme pessimism, there were no huge bargains in stocks, and the public continued to be hopeful. On this evidence, I concluded that the final and true bottom of the bear market had not been seen.”

While Dow Theorists delight in the bull signal, it is appropriate not to lose sight of the economic picture, as aptly summarized by David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates: “Well, the S&P 500 surged 15% in the second quarter and what we did was go back in the history books to see what happens to the economy the very next quarter typically after such a big bounce and the answer is … just over 3% real GDP growth. So consider that de facto what is being discounted at this time for current quarter growth - it better be a humdinger of an inventory build.

“Now, for the market to build on such a rapid advance in the current quarter, history again suggests that we would need to see 5.5% real GDP growth, which we give near-zero odds of occurring. Hence our call for a sputtering stock market through year end. Too much growth - and hope - are priced in at this point.”

Although I maintain that stock markets are in a broad bottoming-out phase, I am concerned that prices have moved too far ahead of economic reality. I am therefore adopting a cautious approach in anticipation of the market working off the overbought condition and fundamentals reasserting themselves.

For more discussion on the direction of financial markets, see my recent posts “Video-o-rama: Dow back above 9,000“, “Earnings - not what they seem?“, “Dow Theory calls a bull market“, “Coppock shows bottom in Treasuries“, “Is the yield curve indicating better tidings?“, and “US dollar about to pop?“. (And do make a point of listening to Donald Coxe’s webcast of July 24, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
“Global business confidence continues to make steady gains. There was a substantive improvement last week in businesses’ broad assessments of current conditions to its strongest level since just after the start of the current financial crisis nearly two years ago. Sentiment in the US also improved notably last week,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Despite the steady improvement in confidence it remains consistent with ongoing global recession.”

Source: Moody’s Economy.com

Ifo reported that its Business Climate Index for industry and trade in Germany rose again in July. “The firms are no longer quite as dissatisfied with their current business situation as in the previous month. They are again less skeptical regarding business developments in the coming half year. It seems that the economy is gaining traction.”

Source: Ifo, July 24, 2009.

However, Rebecca Wilder (News N Economics) warns: “… a compilation of indicators shows that the recovery is tentative at best - more likely, a global bottom has not yet been found. The leading indicators are stronger in some countries; exports are still declining at an annual pace of 20%+ but stabilizing; and volatile retail sales growth rates are, well, quirky.”

Stephen Roach, chairman of Morgan Stanley Asia, is also downbeat about the global economic outlook, saying (via MoneyNews): “Sorry to break the news, but the financial crisis is not over. You’ve got plenty more write-offs of bad paper to come. Developed economies haven’t broken out of recession yet. Seventy-five percent of the world’s economies today are still contracting, and the biggest piece on the demand side of the global economy is the American consumer, who is dead in the water.”

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

July 24
• Tracking a few of the Fed’s extraordinary programs

July 23
• June Existing Home Sales report - sales, inventories and prices moving in the desired direction
• Initial jobless claims increase; decline in continuing claims is misleading

July 22
• Housing market update - mortgage applications and FHFA House Price Index

July 21
• Fed’s exit strategy - a deft and fortunate Fed?

July 20
• Leading Economic Indicators - history suggests economic recovery is around the corner

The Conference Board’s Index of Leading Economic Indicators came in above expectations in June, gaining 0.7% against May and rising for the third consecutive month. However, David Rosenberg (Gluskin Sheff & Associates), cautioned not to get all excited about this green shoot. “… the ‘here and now’ indicator (the coincident index) is still showing declines (now down eight months in a row) and the level, at 100.3, is the lowest since September 2004. As the chart below shows, recessions do not end until this metric carves out a bottom (irrespective of the coincident/lagging ratio).”

Source: David Rosenberg, Gluskin Sheff - Breakfast with Dave, July 23, 2009.

In his semiannual Monetary Policy Report to Congress on Tuesday, Fed chairman Ben Bernanke said: “The FOMC anticipates that economic conditions are likely to warrant maintaining the Federal funds rate at exceptionally low levels for an extended period. I want to be clear that we have a very long haul here because, even if the economy begins to turn up in terms of production, unemployment is going to stay high for quite a while, so it’s not going to feel like a really strong economy.”

Is Bernanke’s scenario the one the stock market is discounting?

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

Source: Yahoo Finance, July 24, 2009.

The US economic highlights for the coming week include the following:

Source: Northern Trust

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

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, July 24, 2009.

“As a general rule, the most successful man in life is the man who has the best information,” said Benjamin Disraeli, British Prime Minister and novelist in the 19^th century. Let’s hope that the news items and quotes from market commentators included in the “Words from the Wise” review will assist Investment Postcards readers to assimilate appropriate information for taking correct investment decisions.

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 the sun is making the winter days very pleasant).

Source: Nate Beeler, July 22, 2009.

CNBC: Warren starring on the web
“The most famous investor of all time is now cartoon character, with Warren Buffett, Berkshire Hathaway chairman/CEO.”

Source: CNBC, April 24, 2009.

Chart of the Day (Clusterstock): The amazing expanding bailout
“Tarp watchdog Neil Barofsky says the total size of the bailout has now hit $23.7 trillion, when all the guarantees are factored in. Of course, the government doesn’t just provide a bailout total, so different parties may come up with different numbers. But one thing’s clear: ever since the first bailout, the estimate has grown and grown and grown and grown and grown. Let’s hope today’s number is as big as it gets.”

Click here for Bloomberg’s take on this story.

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - The Business Insider, July 20, 2009.

MoneyNews: Banks still on the hook for $470 billion
“Banks have failed to make adequate provision for the losses on loans and securities they face before the end of next year, a new report from Moody’s Investors Service says.

“As a result, US banks may incur about $470 billion of losses and writedowns by the end of 2010, potentially causing them to be unprofitable next year.

“Plus, higher credit and funding costs may force a re-pricing of credit, Moody’s said.

“‘Large loan losses have yet to be recognized in the banking system,’ the report noted.

“‘We expect to see rising provisioning needs well into 2010.’

“‘The fundamentals of financial institutions are still traveling on a downward slope,’ Moody’s said. ‘No-one should consider recent improvements as assurance that the current rebound can be sustained.’

“The report also noted that banks would be additionally challenged by having to deal with tighter regulation.

“The problem isn’t confined to the United States.

“Christian Clausen, CEO of Nordea Bank, says Nordic lenders have yet to reach the pinnacle of their bad-debt problems.

“‘The risk for somewhat higher loan losses has increased,’ Clausen told Dow Jones Newswires, referring to both Nordea and to the Nordic banking sector in general.

“Meanwhile, German newspapers report that the German government may force banks to take state aid to ward off a credit crunch later this year.”

Source: Julie Crawshaw, MoneyNews, July 21, 2009.

Financial Times: California spending cuts spark fury
“California erupted in protest on Tuesday as teachers, local governments and public sector workers attacked the billions of dollars of spending cuts that form the basis of the state’s controversial budget deal.

“The agreement to close California’s record $26.3 billion deficit was reached after Arnold Schwarzenegger, the state’s governor, agreed swingeing cuts, including $6 billion off education spending.

“It comes as the state has been forced to write IOUs to creditors after running out of money. Public employees have had to take unpaid leave and the state’s credit rating has been slashed to near junk status, giving it the worst rating in the US.

“The budget deal should alleviate some pressure. But opponents of Mr Schwarzenegger’s plan are likely to resist the billions of spending cuts he has identified.

“‘We used to have the best schools in the country but education in California is taking 60% of the cuts,’ said David Sanchez, president of the California Teachers’ Association.

“As much as $4.7 billion will be taken from cities and municipalities, heaping more pressure on local efforts to fight the slump.

“Antonio Villaraigosa, mayor of Los Angeles, said it was a ‘moment of shame’ for California, adding the state had ‘abdicated and abrogated its commitment to cities, school districts and counties’.

“Unemployment in California is running at more than 11.5%, while businesses are leaving the state, lured by more appealing tax regimes in states such as Colorado and Texas.”

Source: Matthew Garrahan, Financial Times, July 21, 2009.

Financial Times: Fiscal problems of US states to continue
“The fiscal problems of US states will continue even though lawmakers have received federal stimulus funds and made sweeping cuts to close shortfalls in their budgets for recent years, according to a report by a leading bipartisan research group.

“States had to close a $142.6 billion gap as legislatures enacted their budgets for the latest fiscal year, which began on July 1 for 46 of 50 states, said a report from the National Conference of State Legislatures released on Monday.

“That followed a cumulative shortfall of $113.2 billion for the previous year.

“The cumulative state budget shortfall during the last recession, which spanned fiscal years 2002 to 2006, was $263.8 billion, according to the report. The totals for fiscal 2008 through 2010, plus the projected numbers for years 2011 and 2012, already show a gap of at least $348.2 billion.”

Source: Nicole Bullock, Financial Times, July 20, 2009.

Financial Times: CIT board approves $3 billion rescue package
“CIT’s board on Monday approved a two-year, $3 billion rescue package with a group of lenders enabling the troubled US finance group to avoid a bankruptcy filing, after round-the-clock weekend talks.

“One party to the financing said: ‘This paves the way for an orderly restructuring of the balance sheet with time and capital. And it will give CIT’s customers plenty of capital.’

“The company, which provides finance to nearly 1 million small and medium-sized companies in the US, and its creditors had to move quickly to arrest a slide into bankruptcy and prevent its best customers from defecting for fear the lender could no longer support them.

“The rescue finance will not come cheaply. The yield on the paper is expected to be about 11%, generous enough to give potential lenders an incentive to provide capital out of court.

“Many creditors, led by banks such as JPMorgan Chase, had hoped to provide financing in the context of a bankruptcy filing, which would give them a first call on all CIT’s assets. But such debtor-in-possession financing might not have offered such a lucrative yield.

“The rescue financing will come as a relief to the government: had CIT filed for bankruptcy protection, the Treasury would probably have lost the $2.3 billion of bail-out funds CIT received last year. It would also have been a huge embarrassment for the Fed, which had described CIT as adequately capitalised when it approved its banking application.”

Source: Henny Sender and Francesco Guerrera, Financial Times, July 20, 2009.

Financial Times: FSA takes tougher line on regulation
“Regulators from the Financial Services Authority are sitting in on bank board meetings, demanding more data and questioning brokers’ business plans as part of the harder line they have adopted in the wake of the credit crunch.

“The City regulator has also expanded its list of strategically important institutions, which it subjects to close supervision, from 50 to 75.

“Individual directors say they are being interviewed more frequently, and the FSA is asking not only about their qualifications but also about how they do their jobs and the judgments they have made. Business proposals are being scoured in a fashion that would have been unthinkable two years ago.

“FSA officials say the tighter oversight is a result of efforts to improve supervision in the wake of the failure of Northern Rock and other banking sector woes. It is part of a larger plan that also includes a proposal to increase fines and hiring 280 more supervisory personnel.

“‘There’s a lot more detailed investigation and requests for numbers, a lot more fundamental analysis of the building blocks. We are a lot less reliant on what the firms are telling us,’ said Lyndon Nelson, FSA head of risk.

“While some in the industry welcome the FSA’s efforts to do more to control risk, others are uncomfortable with having observers at their board meetings and some question whether the regulatory staff are up to the task.

“‘They don’t work. They don’t read. We send them stuff and we can tell that they haven’t read it,’ says the chief executive of one midsized City institution.

“Mr Nelson said: ‘There have been times when bankers may have questioned us but we have worked hard to improve the quality of our people through both training and recruitment.’”

Source: Brooke Masters, Financial Times, July 19, 2009.

CNBC: Marc Faber says ultimate crisis still coming
“The world has not seen the end of the financial crisis and the recent surge in markets was a result of excess liquidity coming from central banks, Marc Faber told CNBC in an interview.

“‘If you pump money into the system and you create large fiscal deficits, you create volatility,’ Faber, author of the Gloom, Boom and Doom Report, told CNBC in remarks reported on its website. ‘We’ve seen an intermediate low in March, we’ll rally for a year or so or maybe 18 months - the ultimate crisis will happen much later, and the ultimate crisis would clean the system,’ he added.

“Faber, who did not forecast a precise time for that crisis, told CNBC that firing half the government workers in the world would be one way of dealing with the crisis. ‘If you shift government activity to the private sector the economy becomes more dynamic,’ Faber said.”

Source: CNBC, July 17, 2009.

MoneyNews: Roach - financial crisis isn’t over
“While many experts have turned optimistic about the global financial system in recent months, Stephen Roach, chairman of Morgan Stanley Asia, isn’t one of them.

“‘Sorry to break the news, but the financial crisis is not over. You’ve got plenty more write-offs of bad paper to come,’ Roach told CNBC.

“Developed economies haven’t broken out of recession yet, he said.

“‘Seventy-five percent of the world’s economies today are still contracting, and the biggest piece on the demand side of the global economy is the American consumer, who is dead in the water,’ Roach said.

“Stock markets, along with many bonds, have rallied sharply in recent weeks. But Roach said markets have overdone it, given the ‘anemic character of the recovery’.

“The rally largely reflects the excess of liquidity poured into the financial system by central banks, he said.

“‘Liquidity is seeking return, and right now these markets are priced for a recovery that’s going to end up disappointing,’ he said.

“Some experts are excited by recent news of better-than-expected corporate earnings. But those anticipating high profits ‘are going to be in for a rude awakening,’ Roach said.

“Economist Gary Shilling agreed with Roach. ‘I expect the recession to run into the early part of next year,’ he told Bloomberg.

“Excess home inventories and retrenchment in consumer spending will restrain the economy, he said.”

Source: Dan Weil, MoneyNews, July 17, 2009.

Bloomberg: Bernanke gets top marks from global investors in poll
“Global investors give Federal Reserve Chairman Ben Bernanke top marks for combating the worst financial crisis since the Great Depression and overwhelmingly favor his reappointment amid optimism that the world economy is on the mend.

“Sixty-one percent of investors surveyed in the first Quarterly Bloomberg Global Poll say the world economy is stable or improving and almost 75% take a favorable view of the 55-year-old chairman. By almost a three-to-one margin, they say Bernanke has earned another four-year term when his current one expires in January.

“‘He’s the best, maybe around the world,’ said Wallace Lin, an investment manager with Euro Asset Management in Hong Kong, who participated in the poll. Investors ranked Bernanke higher than his counterparts at other major central banks, including European Central Bank President Jean-Claude Trichet.

“The vote of confidence strengthens Bernanke’s hand as he faces congressional criticism that the Fed overstepped its authority by helping to rescue failing financial institutions in the midst of the crisis. It also gives his bid for another term a boost. President Barack Obama has praised Bernanke’s performance atop the central bank without saying whether he wants him to stay.

“‘If he weren’t renominated, it could have potentially very serious and severe repercussions on the stock market and the economy,’ said Jack Liebau, a poll participant and president of Pasadena, California-based Liebau Asset Management Co.

“Investors consider recession a bigger threat to the US economy than rising prices over the next two years, the poll showed. Sixty-one percent cite recession as the greater risk, compared with 37% who name inflation.

“Martin Feldstein, a professor of economics at Harvard University who was considered for the position of Fed chairman before Bernanke took over in 2006, praised the policy maker. Bernanke has ‘done a very good job and I think he should be reappointed’, Feldstein said in an interview yesterday on Bloomberg Television.

“The first Quarterly Bloomberg Global Poll is a survey of investors and analysts on six continents. It is based on interviews from July 14 to July 17 with a random sample of 1,076 Bloomberg subscribers, who represent leading decision makers in markets, finance and economics.”

Source: Rich Miller, Bloomberg, July 22, 2009.

Financial Times: Bernanke outlines Fed’s exit strategy
“Yields on US Treasuries fell sharply on Tuesday as Ben Bernanke outlined the Federal Reserve’s plan to extricate itself from its policy of near-zero interest rates but stressed the economy was too fragile to implement it soon.

“Following increasing pressure from investors and politicians, the Fed chairman set out the central bank’s ‘exit strategy’ for its policies, which have pumped huge amounts of liquidity into the economy and prompted fears about inflation.

“Mr Bernanke stressed however that in spite of glimmers of improvement in the economy, the Fed intended to keep interest rates extremely low for an ‘extended period’.

“‘I want to be clear that we have a very long haul here because, even if the economy begins to turn up in terms of production, unemployment is going to stay high for quite a while, so it’s not going to feel like a really strong economy,’ he said in his biannual report to Congress.

“The Fed expects the economy to start growing again at the end of this year but thinks the unemployment rate - now at 9.5% - will remain elevated through 2011.

“Outlining the Fed’s exit plans, Mr Bernanke said the bank could raise the interest paid on reserve balances to help set a floor under interest rates, and use ‘reverse-repo’ agreements in which it would sell securities from its portfolio with an agreement to buy them back later.

“Mr Bernanke also mounted a defence of the independence of the Fed amid calls for greater scrutiny.”

Source: Sarah O’Connor, Tom Braithwaite, Michael Mackenzie and Dave Shellock, Financial Times, July 21, 2009.

MoneyNews: John Tamny - Bernanke will kill recovery
“Most experts, including investment legend Warren Buffett and former General Electric CEO Jack Welch, say Federal Reserve Chairman Ben Bernanke has done an excellent job handling the financial crisis and should be reappointed.

“But economist John Tamny isn’t among them. He thinks Bernanke’s views are insufficiently monetarist to merit his reappointment.

“‘Rather than defining inflation as something monetary in nature, the Bernanke Fed has reverted to Phillips Curve logic, suggesting inflation results from too much economic growth and too many people working,’ Tamny writes in Forbes.

“‘It would be hard to contemplate a more impoverishing notion than the one that says economic growth is the cause of inflation, and economic weakness is its cure,’ he argues.

“‘What this means is that should the US economy reverse direction in such a way that unemployment falls, the Bernanke Fed would use rate machinations to pour cold water on it as a way of keeping unemployment higher than it otherwise might be,’ Tamny explains.

“‘For this reason alone, Obama should not re-nominate Bernanke.’

“Tamny also blames Bernanke for the 9.5% unemployment rate, though most others attribute the rise in joblessness to the recession that resulted from the financial crisis.

“As for Bernanke supporters, Buffett told CNNMoney.com, ‘I don’t see how you could have anybody better than Ben Bernanke.’”

Source: Dan Weil, MoneyNews, July 20, 2009.

Bloomberg: Fed has become “embroiled” in politics, Poole says
“The Federal Reserve is ‘embroiled’ in politics and has ’stretched beyond reason’ its authority to make loans, said William Poole, who served as president of the St. Louis Fed from 1998 to 2008.

“‘I don’t think independent can mean the Fed can do whatever it wants under any circumstance,’ Poole, a senior economic adviser to Palo Alto, California-based Merk Investments, said in an interview today on Bloomberg Radio. ‘The Fed has chosen to make loans to certain firms and not others.’

“Traditionally, central banks ‘deal in government securities’, and control ‘overall liquidity’ and ‘overall interest rates’, Poole said. The Fed is ‘embroiled in fundamentally political questions’, he said.

“In the aftermath of last year’s credit market collapse, the Fed instituted a series of emergency lending programs. Fed policy makers decided at their meeting June 24 to maintain plans to buy as much as $1.75 trillion of Treasuries and housing debt to lower interest rates.

“The central bank ‘has not made loans of this sort since the Great Depression’, Poole said. ‘The Federal Reserve has responded very aggressively to this crisis we are living through’ and ‘has doubled its balance sheet’.

“The Fed’s role in financial market oversight has since come under scrutiny, with the administration of President Barack Obama proposing, among other things, that the Fed’s ability to make emergency loans be subject to approval by the US Treasury.

“‘It’s important that the Fed be independent on monetary policy, but I worry about what independence might mean in other contexts,’ Poole said. ‘The Fed, it seems to me, has stretched beyond reason its authority to make loans to the private sector, such as the MBS (mortgage-backed securities) purchase program, the lending on commercial paper from large corporations, the bailouts.’”

Source: Vincent Del Giudice and Max Raskin, Bloomberg, July 22, 2009.

Financial Times: Senate delay hits health reform push
“President Barack Obama’s bid to push healthcare reform, his signature policy, through Congress suffered a significant blow on Thursday when the leading Democrat in the US Senate said it would miss a White House deadline to pass the legislation by August.

“The comments by Harry Reid, Senate majority leader, come despite heightened efforts by Mr Obama to win public support for his top legislative priority, including a prime-time press conference on Wednesday night and a ‘town hall’ meeting in Ohio on Thursday.

“The debate is increasingly encompassing topics such as tax increases, restrictions in health services and legislative delay rather than the president’s preferred theme of the long-term need for fundamental reform. Recent polls have also indicated a deep division among the US public about the merits of reform.

“‘It’s better to have a product based on quality and thoughtfulness rather than try to jam something through,’ Mr Reid said on Thursday, adding that senators took the decision to delay on Wednesday night in response to Republican calls for more time.

“While Senate passage before the August recess had looked increasingly unlikely in recent days, the move frustrates Mr Obama’s drive for a vote in both houses in Congress ahead of the summer break.

“Such a course would have cleared the way for negotiations on the reform once Congress returned in September, since the House of Representatives and the Senate would still have to settle their differences over the legislation.

“But now, before that can happen, the administration will have to focus on rounding up votes, even after the break. Momentum has ebbed away from a measure Mr Obama hopes will be his legacy, amid concerns voiced by moderates from both parties about costs.”

Source: Daniel Dombey, Financial Times, July 23, 2009.

The Wall Street Journal: Man who wounded health care overhaul effort could also save it
“Douglas Elmendorf, director of the Congressional Budget Office, told Congress that the president’s sweeping health care plan did not slow spending. Economics Editor David Wessel says that this could be seen as the president’s ‘emperor with no clothes’ moment.”

Click here for the article.

Source: The Wall Street Journal, July 23, 2009.

Asha Bangalore (Northern Trust): Leading Economic Indicators - history suggests economic recovery is around the corner
“The Index of Leading Economic Indicators (LEI) increased 0.7% in June vs a revised 1.3% gain in May and a 1.2% jump in April. The June increase puts the year-to-year decline at 1.18%. The trough for the year-to-year change appears to have occurred in December 2008 (-3.98%). The year-to-year change of the LEI tracks the trough of the business cycle with a small lead. The mean and median leads of the year-to-year change in the LEI with reference to the troughs of the business cycle are 6.1 months and 7.0 months, respectively.

“Based on history, it appears that a recovery in the latter half of 2009 is gaining support. The longest lead was in the 1981-82 recession and the smallest was during the mini-1980 recession.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, July 20, 2009.

Asha Bangalore (Northern Trust): Initial jobless claims increase
“Initial jobless claims increased 30,000 to 554,000 during the week ended July 18, after three consecutive weekly gains. Distortions from seasonal factors based on prior history of auto industry layoffs have played a major role in the seasonally adjusted tally of the past few weeks. It is important to note that auto industry layoffs occurred sooner than expected and that the underlying trend of initial jobless claims is pointing south.

“However, continuing claims, which lag initial claims by one week, fell 88,000 to 6.225 million after a drop of 591,000 in the prior week. But these readings are misleading because unemployed individuals qualify for the Emergency Unemployment Compensation (EUC) Program and Extended Benefit Program after availing of 26 weeks of unemployment compensation in the regular state program, and continuing claims data do not reflect these recipients.

“The main conclusion is that the rate of firing, as reflected in the initial jobless claims data, has slowed but the line for unemployment insurance continues to advance. The downward trend of initial jobless claims, a leading indicator, is the important aspect of the report.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, July 23, 2009.

Bill King (The King Report): Core retail sales at new low
“Though the government reports ‘core’ PPI and CPI to mitigate inflation and the Street and financial media eagerly swallow the ploy, the beancounters won’t report ‘core’ retail sales because inflation, principally in gasoline and food prices, boosts retail sales and gives the illusion of growth.

“The Atlanta Fed is now reporting Core Retail Sales. The chart below shows why the Street and government don’t want to report it - it made a new low in June.”

Source: Bill King, The King Report and Atlanta Fed, July 17, 2009.

Asha Bangalore (Northern Trust): Existing home sales report - moving in the desired direction
“Sales of all existing homes rose 3.6% to an annual rate of 4.89 million in June, the third consecutive monthly gain. Sales of single-family existing homes increased 2.4% to an annual rate of 4.32 million in June, also the third monthly increase. The small and sustained increase in sales of existing homes is noteworthy.

“The median price of an existing single-family home at $181,800 during June is down 14.98% from a year ago. The largest year-to-year drop was recorded in April (-16.8%). The moderation in the pace of price declines is significant.

“The seasonally unadjusted inventory of all existing homes declined to a 9.4-month supply from a 9.8-month supply.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, July 23, 2009.

Barry Ritholtz (The Big Picture): Seven reasons why housing isn’t bottoming yet
“There are a plethora of reasons why I believe we are nowhere near a bottom in housing prices or activity. Here are a few:

“Prices: By just about every measure, Home prices on a national basis remain elevated. They are now far off their highs, but still remain about ~15% above their historic metrics. I expect prices will continue lower for the next 2-4 quarters, if not longer, and won’t see widespread real increases for many years after that; Indeed, I don’t expect to see nominal increases for anytime soon.

“Mean Reversion: As prices revert back towards historical means, there is the very high probability that they will careen past the median. This is the pattern we see after extended periods of mispricing. Nearly all overpriced asset classes revert not merely to their historic trend line, but typically collapse far below them. I have no reason to believe housing will be any different;

“Employment & Wages: “The rate of unemployment is very likely to continue to rise for the next 4-8 quarters, if not longer. This removes an increasing number of people from the total pool of potential home buyers. There is another issue - wages, and they have been flat for the past decade (negative in real terms), crimping the potential for families to trade up to larger houses - a big source of real estate activity.

“Foreclosures: We likely have not seen the peak in defaults, delinquencies and foreclosures. Many more foreclosures - which are healthy in the long run but wrenching during the process of dislocation - are very likely. These will pressure prices yet lower. And loan mods are not working - they are redefaulting in less than a year between 50-80%, depending upon the mod conditions themselves.

“Inventory: There is a substantial supply of ’shadow inventory’ out there which will postpone a recovery in home prices for a significant period of time. These are the flippers, speculators, builders and financers that are sitting with properties that they do not want to bring back to market yet. Given the extent of the speculative activity during the boom years (2002-06), and the number of foreclosures so far, my back of the envelope estimates are there are anywhere from 1.5 million to as many as 3 million additional homes that could come to market if prices were more advantageous.”

Click here for the full article.

Source: Barry Ritholtz, The Big Picture, July 20, 2009.

Forbes: Commercial real estate - from bad to worse
“Veteran property investor Tom Barrack expects a refinancing crunch over the next few years to cause misery.

“Two years after the credit markets began to freeze up, a crisis looms in the $3 trillion commercial real estate market. Investors who need new funding find themselves without any willing lenders while fundamentals like rising vacancy rates and plunging rents worsen.

“California billionaire Tom Barrack sees opportunity in the wreckage. The chief executive of Los Angeles-based Colony Capital, who made tidy profits by buying up soured up real estate debt during the S&L crisis, talked with Forbes about the troubled commercial real estate market and the broader economy.

“What’s going on in commercial real estate?

“Barrack: It’s bad and it’s getting worse at the moment. The $700 billion commercial mortgage-backed securities (CMBS) market still has no new money for buyers or refinancing. About a third of that is due at the end of 2010 and 2011 and the majority between 2010 and 2012. So you have $750 billion in refinancing needed over the next 24 months and you don’t have one lender.

“Why is it so hard to get new funding?

“Partly because new equity is needed from the owner to provide any loan because the underlying real estate is 30%-50% less valuable than it was at the time of origination. Where is that going to come from? Everybody’s tapped out. All the real estate guys have gone from G4’s to electric golf carts.

“The object of the drill for everyone in commercial real estate - and this is everyone in the world - is just get to the other side of Death Valley. If you can make it to the other side of Death Valley, there’s hope. But even when the economy does start to roll out, commercial real estate takes a while behind the tail of that economy to catch up.”

Click here for the full article.

Source: Maurna Desmond, Forbes, July 14, 2009.

Chart of the Day (Clusterstock): Now this is a misery index!
“Remember the Misery Index? It adds together unemployment and inflation to get a quick and dirty measure of, well, misery. But by this measure, since we’re in deflation, the current recession doesn’t look so bad.

“So Huffington Post came up with its index, which uses the broader measure of unemployment (U6), along with a more narrow basket of prices on essential goods, adding in other things like food stamps and credit card delinquencies. We think HuffPo’s does a much better job of capturing the current misery than the old one.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - The Business Insider, July 22, 2009.

Financial Times: Banks use Tarp funds to boost lending
“A large majority of US banks claim that government bail-out money has allowed them to write new loans to customers, while a minority has used it to buy rivals, according to a report by the programme’s watchdog.

“The audit by Neil Barofsky, special inspector-general for the troubled asset relief programme (Sigtarp), reveals a continuing argument with the US Treasury over how much information should be disclosed by recipients of the money.

“Some 83% of the 360 recipients surveyed by the Sigtarp team said that they had used funds from the government for lending.

“That may provide a boost to both the banks and the Treasury after a week in which Goldman Sachs, one former recipient of Tarp funds, was criticised for preparing to pay large bonuses.

“Some 43% said that they had bolstered their capital cushion, 31% made other investments, 14% repaid debt and 4% made acquisitions.

“While Mr Barofsky’s team celebrated the data as a step towards transparency, the Treasury has declined repeatedly to force banks to report their use of Tarp funds.

“Herb Allison, former chief executive of Fannie Mae now heading the Treasury programme, said in a letter in the report: ‘It is not possible to say that investment of Tarp dollars resulted in particular loans, investments or other activities by the recipient.’

“The Treasury maintains that recipients should not be restricted in their use of Tarp funds, which have been paid as part of this year’s $700 billion programme to shore up the US banking system.”

Source: Tom Braithwaite, Financial Times, July 19, 2009.

Financial Times: US rating agencies escape overhaul
“Credit rating agencies would face a raft of new disclosure rules and restrictions but would not be forced to overhaul their business models under proposed US legislation sent to Congress on Tuesday.

“The plan by the US Treasury is aimed at reducing conflicts of interest at rating agencies, boosting the regulatory authority of the US Securities and Exchange Commission over the agencies and reducing the financial system’s reliance on credit ratings.

“But critics said the plan, an element of the Obama administration’s broader financial regulatory blueprint, fell far short of what was needed. The proponents of an overhaul of ratings agencies charge that they overlooked the risks of investing in complex, ’structured’ securities linked to risky mortgages, many of which carried triple A stamps of approval.

“Barney Frank, head of the chairman of the House financial services committee, on Tuesday endorsed measures that would overturn requirements that require the use of the credit ratings agencies.

“‘There are a lot of statutory mandates that people have to rely on credit rating agencies. They’re going to all be repealed,’ he told Reuters.

“The business models at Moody’s Investors Services, Standard & Poor’s and Fitch Ratings - which are paid by the companies whose debt securities they rate - remain largely intact.”

Source: Joanna Chung and Aline van Duyn, Financial Times, July 22, 2009.

Chart of the Day (Clusterstock): American banks on thin ice
“The financial crisis has passed in the sense that the sheer panic is gone. The structural issues remain, though.

“Today’s chart is a wonky way of gauging banking industry health, based on a data series collected by the Fed. It shows the percentage of assets held at banks whose allowance for loan losses exceeds their total non-performing loans - a key sign of health. In other words, the vast majority of banking sector assets — over 80% - are currently in institutions where loan loss allowances (ALLL) are below total non-performing loans.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - The Business Insider, July 21, 2009.

Financial Times: Hedge funds see surge in investment
“Hedge funds have seen a huge increase in investment in the second quarter, as investors rush to capitalise on the industry’s resurgence.

“More than $142.5 billion has been allocated to hedge funds over the past three months, one of the industry’s biggest inflows of client money to date, according to data published on Tuesday by Hedge Fund Research, a leading provider of industry data.

“Hedge funds have enjoyed strong performance over the year to date, with the average strategy returning around 9%. Many larger funds have performed even better, with some delivering returns of up to 30% on clients’ investments.

“Net, more than $100 billion has flowed into funds since the industry’s nadir in March, bringing the current industry capital - the amount of money invested in funds - to $1,430 billion.

“The number is still far lower than its peak of $1,930 billion, however.”

Source: Sam Jones, Financial Times, July 21, 2009.

BCA Research: Global bonds - pause in the structural bear
“The near-term outlook for government bonds remains relatively benign as the economy is in a transition phase between a severe recession and a modest recovery. The longer-term outlook is more ominous.

“Government bond yields have backed up decisively from their December lows on the sharp rebound in leading growth measures as well as business and consumer confidence. However, yields will now need evidence that real economic activity is beginning to recover in order to ratchet significantly higher.

“On this score, we are constructive towards the macro outlook and expect that the developing inventory cycle will gain momentum in the months ahead, supporting business activity. But until the G7 consumer is ready to increase spending, even modestly, the benchmark 10-year Treasury yield is likely to stay below 4%.

“In contrast, we remain bearish on the longer-term outlook for government bonds, due to poor valuations and mushrooming government indebtedness in many economies. Clients with extended investment horizons should be below benchmark duration. Bottom line: Upside for government bond yields is likely to be limited over the next few months, but the cyclical and structural outlook remains bearish.”

Source: BCA Research, July 22, 2009.

David Fuller (Fullermoney): Long-term government bonds at interesting juncture
“US Treasury Bond yields are at an interesting level and the next move of consequence is likely to be extremely important.

“I though the 10-year yield bottomed in 2003 and was building a large base, but the economic collapse changed all that. At just above 2% at year-end 2008 it was obviously discounting a depression but that meltdown has been retraced with the help of quantitative easing.

“I think the US government would like to hold yields near current levels, at least until an economic recovery has gained traction. Technically, we have a medium-term uptrend in long-dated government yields.

“I think the next significant move will be upwards, although I do not know when but watch for a sustained move above 4% for the 10-year Treasury as confirmation of further upside.

“If the advocates of deflation Japan style are right, yields may not advance very much for many years. I do not think they are right but the charts will show us.”

Source: David Fuller, Fullermoney, July 23, 2009.

Bloomberg: Pimco says “overweight duration”, buy US Treasuries
“Pacific Investment Management Co., manager of the world’s largest bond fund, said it will buy five- to 10-year Treasury securities, reversing a policy to steer clear of US debt.

“‘With Treasury yields near the top of our expected range, Pimco plans to overweight duration and take exposure to the five- to 10-year portion of the yield curve,’ Pimco said today in a report on its website.

“The strategy may be a change for the Newport Beach, California-based firm, which has avoided Treasuries in recent months. Bill Gross, manager of Pimco’s Total Return Fund, the world’s largest, has said before today that he has no interest in buying Treasuries.

“Investors should buy emerging-market currencies to protect themselves against the risk that US policy makers will allow the dollar to slide should they lack the skill to ‘drain the system of emergency liquidity at the appropriate time’, Pimco said.

“‘In light of an expected long-run erosion in the value of the US dollar, Pimco will look to take positions in select emerging market currencies that we believe have the most compelling appreciation potential,’ Pimco said in the report. ‘For now, these include primarily the currencies of Brazil and Mexico.’”

Source: Dakin Campbell and Valerie Rota, Bloomberg, July 20, 2009.

Financial Times: Investors regain appetite for credit risk
“An important barometer of European appetite for risk in the credit market on Tuesday improved to a level not seen since just before the collapse of Lehman Brothers last year.

“The Markit iTraxx Europe, the continent’s main credit default swap index, which tracks the 125 most liquid names in the investment-grade class, fell below the 100 basis points mark for the first time since September 2008. It closed at 97.37 basis points.

“CDS are over-the-counter derivatives that offer insurance against the non-payment of unsecured debt, usually corporate or sovereign bonds. The cost of cover is measured in basis points, each point being equivalent to €1,000 payable annually on €10 million of debt.

“The recent tightening of CDS indices comes on the back of a strong rally in European equities, which have risen for seven consecutive sessions.

“Gary Jenkins, head of fixed income research at Evolution, said: ‘It’s a reflection of the fact that credit remains the asset class of choice. Companies are focused on cash flow generation, debt reduction and improving balance sheet strength, which is close to being the perfect backdrop for credit.’

“In spite of some fears that uncertainty surrounding the economic outlook will continue to pose challenges for credit, the market is likely to take heart from the an upsurge in companies raising money via a spate of bond and rights issues. Following the implosion of Lehman, the cost of insuring against the risk of default on European corporate debt shot up by almost 20% in two days and continued rising until it peaked at 215 basis points last December.”

Source: Ed Hammond, Financial Times, July 21, 2009.

Bespoke: High-yield spreads back below ‘02 bear market highs
“Merrill Lynch’s Index of the spread between high yield bonds and comparable Treasuries has just recently moved back below the highs seen during the prior bear market (’00-’02). At 1,041, spreads are down 52.29% from record highs seen last December, making it much easier for companies to do business. Spreads still have a little bit further to drop to get below levels seen just before the Lehman bankruptcy, but the current downtrend should have enough momentum to break through to the downside.”

Source: Bespoke, July 20, 2009.

Bloomberg: Fund managers switch from money markets to stocks
“Investment managers are showing an appetite for more risk, moving cash from money-market funds into equities on expectations economic recoveries will gain traction.

“The chart of the day shows benchmark MSCI equity indexes for North America, Europe and Asia Pacific excluding Japan, and assets in money-market funds tracked by the Investment Company Institute. Global equities as measured by the MSCI World Index rose 46% from a more than 13-year low in March. Since then, money-market fund holdings sank 6.6% through March 15 from near a 20-year high, data compiled by Bloomberg show.

“‘There is still a lot of money sitting on the sidelines waiting to be invested as the global economic situation stabilizes,’ said Pauline Dan, chief investment officer at Samsung Investment Trust Management in Hong Kong, which overseas $67.6 billion in assets. ‘It’s reasonable to expect that some of this money is going back into equities to seek returns.’”

Source: Jonathan Burgos, Bloomberg, July 23, 2009.

Bespoke: Goldman Sachs raises year-end price target - should we care?
“Goldman Sachs’ David Kostin raised his year-end S&P 500 price target from 940 to 1,060 this morning [Monday]. While this means Kostin has become more bullish since issuing his prior target, it’s important to remember that he started 2009 with a year-end price target of 1,100 (which would have been a 2009 gain of 18.6%). A couple of weeks before the March 9 index bottom, Kostin lowered that 1,100 target to 940 on February 26. At that time, the S&P 500 was already down more than 15% for the year at 752. Now that the S&P has moved back up to meet his 940 year-end level, he has upped the target to 1,060, which would be a gain of 12.55%.

“Below we highlight a chart and table showing Goldman’s year-end price targets going back to the start of 2008. At the start of 2008, Goldman’s Abby Cohen (who was replaced with Kostin in March of last year) predicted the S&P 500 would finish 2008 up 15.74% at 1,675. By the end of 2008, that price target was 85.44% above the actual year-end S&P 500 price level. When Kostin replaced Cohen in March of ‘08, he lowered Goldman’s 2008 price target from 1,675 to 1,380, which at the time would have meant a change of 4.33%. That target ended up being 52.78% above the index’s actual year-end level. On July 21, 2008, Kostin actually raised Goldman’s year-end 2008 target from 1,380 to 1,400, but then the market crashed in September and early October, and Kostin was forced to lower the target all the way to 1,000.

“From the time Kostin upped his ‘08 target from 1,380 to 1,400 to the time he lowered the target from 1,400 to 1,000, the S&P 500 fell 28%. In terms of market calls, 2008 was just as tough of a year for Goldman as it was for most.

“Today’s news that Goldman has raised its year-end 2009 price target is making headlines and potentially impacting the market on the upside. But based on both Cohen’s and Kostin’s recent calls amidst the current market environment, their prognosticating alone should not suffice to arouse the bulls.”

Source: Bespoke, July 20, 2009.

Bespoke: Bottom and top line beat rates - not everything is positive
“Yesterday we highlighted the earnings per share beat rate for US companies that have reported their quarterly numbers since July 8. In the first chart below, we have updated the numbers to include today’s reports. As shown, the beat rate increased a bit more today up to 72.3%. The highest beat rate we’ve seen since 2001 was 73% in Q3 ‘06, so this quarter definitely has a shot to top that.

“But while the bottom line numbers are coming in much better than expected, top line numbers have been weak. In the second chart below, we highlight the revenue beat rate so far this earnings season. Of the US companies that have reported revenues, only 49.1% have come in better than expected. While almost everything about this earnings season has been positive so far (including stock market performance), the revenue numbers are one area where things still look pretty bad.”

Source: Bespoke, July 22, 2009.

Reuters: Corporate cost-cuts - early gains soon turn to pain?
“Much of Corporate America has slashed costs to stay in the black during the recession, but wielding the knife too heavily could also remove the ability to grow in a recovery.

“‘If you cut into flesh long enough, eventually you find bone,’ said David Rosenberg, chief economist at Gluskin Sheff in Toronto. ‘Cost cutting is not a bottomless pit.’

“Firing people, introducing hiring freezes, halting investments, trimming budgets or even skimping on office supplies are time-tested ways to prove the old adage that a penny saved is a penny earned.

“A slew of companies reported better-than-expected first-quarter results because aggressive budget slashing more than made up for falling sales. According to Rosenberg, 40% of companies missed their top line expectations in the first quarter.

“And as the bulk of results for the most recent quarter hits in the next two weeks, many US companies are expected to do the same again. Some already have.

“‘So far, earnings season is good, but if you were to call it revenue season, it’d be more of a mixed bag,’ said Peter Boockvar, an equity strategist at Miller Tabak & Co in New York. ‘What this shows is that companies are able to deal with cost structure, but that the revenue is light shows that we’re still in a difficult economic environment.’”

Source: Nick Carey, Reuters, July 21, 2009.

Barry Ritholtz (The Big Picture): Financial profits and rising debt era
“Last week, we looked at the Total Credit Market Debt to GDP ratio. Here’s another variation of the chart looking at two differing periods - pre-1981 and post-1981. Note that as debt rose, so too did financial firm profits.”

Source: Barry Ritholtz, The Big Picture, July 23, 2009.

Andrew Goodwin (SVG European Focus Fund): Banks to lead recovery
“While some people still deem banks as toxic and uninvestable, Andrew Goodwin, fund manager of the SVG European Focus Fund, believes European financials will lead the market recovery.

“‘At the moment, banks continue to present a huge buying opportunity,’ he says. ‘Banks offer the best earnings and valuation leverage in the stock market today and these should lead the market and economic recovery.’

“He says the sector became massively oversold at the start of the year as fears of a large-scale banking collapse intensified.

“‘This drove valuations down to all-time lows,’ Mr Goodwin notes. ‘But those with disciplined investment processes have continued to buy through the chaos and beyond, and can now take advantage of the large discounts to book value at which they are trading.’

“He argues that the market frequently underestimates the future profit potential of banks, especially as operating profits remain robust.

“‘In late 2002, at the height of the Japanese banking crisis, investing in Japanese banks was considered ‘mad’, yet these investments went on to make some spectacular returns.

“‘Now European banks are deemed by many as similarly in ‘crisis’ and many investors are keeping a wide berth, but several have delivered strong performances and there are various indicators which suggest there is significant upside yet to come.’”

Source: Andrew Goodwin, SVG European Focus Fund (via Financial Times), July 21, 2009.

David Fuller (Fullermoney): Monetary policy a tailwind for stock markets
“There are problems a plenty for the US economy, which is why Bernanke indicated twice in WSJ article that, ‘… economic conditions are not likely to warrant tighter monetary policy for an extended period’. Consequently monetary policy will remain a tailwind for the US stock market.

“Fed policy will influence other central banks so global monetary policy should remain a tailwind for all stock markets, at least well into 2010. Stronger economies are likely to tighten monetary policy before the US, with China at the head of this list.

“Medium to longer-term risks for stock markets, in addition to market jitters during the first anniversary of last year’s meltdown, and the considerably greater risk posed by an eventual tightening of monetary policy, would include slow GDP growth which weighs on corporate profits once labour-shedding productivity increases have been largely completed.

“A softer USD, which we are likely to see, would be another tailwind for Wall Street by increasing export earnings and making US equities cheaper for overseas investors. However, an accelerated decline in the USD and/or a break beneath last year’s lows would most likely have the opposite effect by creating market turmoil.

“Commodity price inflation will be an increasing risk as global GDP growth gradually increases in 2010. The biggest problem, should it occur, would be another spike in energy prices. The canary in the coalmine signalling higher inflationary expectations would be rising long-dated government bond yields.”

Source: David Fuller, Fullermoney, July 21, 2009.

Bespoke : China on run of a lifetime
“China’s Shanghai Composite is currently up 81%, and as shown in the chart below, down days in recent months have been few and far between. Even though rest of the BRIC (Brazil, Russia, India, China) countries have posted big gains year to date, China has broken away from the pack. Overbought has become the new norm for the Chinese equity market, and anyone that has bet on a pullback has gotten absolutely crushed. Remember, however, that the sharper the increase usually means the sharper the fall, so when a correction does finally come, watch out.”

Source: Bespoke, July 22, 2009.

MoneyNews: Mobius - Chinese stock market could surpass US
“Templeton Asset Management emerging markets head Mark Mobius said China’s stock market might surpass the United States as the world’s largest by value in as little as three years.

“The reasons are China’s state-owned companies will sell new shares and the nation’s 1.4 billion people will put more of their money into the market.

“‘The Chinese population is just dipping its toe into equities and they’ve got a long way to go,’ Mobius told Bloomberg, adding that state-owned companies are ‘coming up with more huge’ initial public offerings.

“Currently, China’s market is valued at $3.2 trillion, compared with $11.2 trillion for the US market, according to data compiled by Bloomberg.

“Though Mobius considers China’s mainland-traded stocks, known as ‘A’ shares, to be ’somewhat overvalued’, he thinks the market will move higher as earnings climb.

“‘We can expect corrections along the way’ for emerging markets, Mobius said. ‘I would expect a more steady, jagged movement upwards.’

“China’s stocks are up sharply this year, and valuations are already high, the Wall Street Journal reported.”

Source: Julie Crawshaw, MoneyNews, July 20, 2009.

Bloomberg: High frequency trading
“The battle between high frequency traders and institutional investors - interview with Former NASDAQ Chairman Alfred Berkeley.”

Source: Bloomberg (via You Tube), July 23, 2009.

Financial Times: China to deploy foreign reserves
“Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.

“‘We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,’ he told Chinese diplomats late on Monday.

“Mr Wen said Beijing also wanted Chinese companies to increase its share of global exports.

“The ‘going out’ strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China.

“Qu Hongbin, chief China economist at HSBC, said: ‘This is the first time we have heard an official articulation of this policy … to directly support corporations to buy offshore assets.’

“China’s outbound non-financial direct investment rose to $40.7 billion last year from just $143 million in 2002.

“Mr Wen did not elaborate on how much of the $2,132 billion of reserves would be channelled to Chinese enterprises but Mr Qu said this was part of a strategy to reduce its reliance on the US dollar as a reserve currency.

“‘This is reserve diversification in a broader sense. Instead of accumulating foreign exchange reserves and short-term financial assets, the government wants the nation to accumulate more long-term corporate real assets.’”

Source: Jamil Anderlini, Financial Times, July 21, 2009.

Mansoor Mohi-uddin (UBS): Sterling still faces headwinds
“The pound has gained a reprieve this year after its sharp plunge in 2008 - but is the real sterling crisis still to come?

“Mansoor Mohi-uddin, managing director of foreign exchange strategy at UBS, points out that the 1976 sterling crisis followed on from sharp exchange rate falls in 1974-75.

“And he says there are clear parallels for sterling now with the mid-1970s, given the UK’s bleak economic outlook and with monetary and fiscal policies very loose.

“‘In 1976 the pound collapsed because policymakers failed to tighten fiscal policy as the economy recovered,’ Mr Mohi-uddin says. ‘This caused investors to flee sterling as they became unwilling to fund the UK’s fiscal and current account deficits. As a result, the IMF had to bail out Britain.’

“To avoid a sequel, the UK must tighten fiscal policy when the economy recovers and raise interest rates, he says.

“‘Fortunately, politicians should tackle the UK’s huge budget deficit after the next election. Moreover they are unlikely to alter Bank of England independence. But if a hung parliament in 2010 or high unemployment paralyses fiscal policy, sterling will face major risks again. Even without an outright crisis, the conduct of economic policy will remain challenging over the next 12 months as the election looms and politicians face persistently high jobless rates.’”

Source: Mansoor Mohi-uddin, UBS (via Financial Times), July 20, 2009.

Chris Turner (ING): RBA may rein in Aussie dollar
“The Reserve Bank of Australia’s strong track record in market intervention suggests the Australian dollar’s upside could be limited, says Chris Turner, head of foreign exchange strategy at ING.

“‘The minutes of the last RBA meeting revealed the central bank had been strategically selling the Australian dollar in June,’ he says. ‘While strategic intervention - or ‘replenishing FX [foreign exchange] reserves’ - is prevalent in Asia and now in Switzerland, we are interested because of the RBA’s previous success in reining in the currency.’

“So what is driving the RBA’s decision to replenish FX reserves? Mr Turner says that just as in early 2004, the RBA believes the dollar has strengthened a little too fast, too early in the global recovery cycle.

“‘Perhaps the RBA believes the improving US outlook and expectations for Federal Reserve tightening in 2010 can start to provide some real resistance to further Australian dollar strength against its US counterpart.

“That might be an aggressive conclusion, yet the RBA [has] previously timed the market well.’

“He says the RBA’s FX activity runs counter to the view it will be the first in the G10 to raise rates as an Asian expansion boosts Australia’s economy. ‘We would certainly not argue with that view,’ he says.”

Source: Chris Turner, ING (via Financial Times), July 23, 2009.

David Fuller (Fullermoney): Outlook for gold
“Basically, gold seems to be on schedule for an upside breakout in August or September. However, I am not interested in faith-based analysis so rather than issue a wish list of reasons why this may occur, I would rather identify chart levels that would potentially negate the bullish outlook. Call it a worry list, justified on the basis that if we are not rationally looking out for what could go wrong with our favourite positions, we are not thinking.

“As one who is long both bullion futures and gold shares, I would prefer not to see another downward dynamic such as occurred following the brief look at $1,000 last February or following the more recent early-June high. I would not like to see this month’s reaction low near $905 taken out, and I would be seriously concerned if the April low near $865 was breached.

“Since gold has been tracking the S&P 500 Index recently, I would be concerned if Wall Street fell back sharply in a deeper reaction and base extension phase. This medium-term risk, as investors ponder the anniversary of last year’s meltdown, does concern me despite recent strength. I would also be concerned if the USD firmed within its narrow ranges evident against most other currencies since early June.

“To repeat, this is my wish list for the next few months. On a longer-term basis, I think the bull case for gold bullion, as a store of wealth in a fiat currency world, is more obvious than at any other period in my lifetime.”

Source: David Fuller, Fullermoney, July 20, 2009.

Bloomberg: China may overtake India in gold demand, Council says
“China may overtake India to become the world’s top gold consumer this year, the World Gold Council said, as the nation became the first of the major economies to rebound from the global recession.

“Jewelry demand in China expanded in the first quarter while dropping in India, Marcus Grubb, a managing director at the London-based council, said today at a conference in Hong Kong. Chinese gold demand will keep rising, he said.

“China’s economy grew 7.9% in the second quarter after a 4 trillion yuan ($586 billion) stimulus package spurred record lending and consumption. India’s gold purchases slumped 54% in the six months ended June after a decline in the rupee pushed up the cost of owning bullion, cooling demand from housewives and jewelers, the Bombay Bullion Association said.

“‘There is a possibility that China might overtake India as the world’s largest gold consumer this year,’ Hou Huimin, deputy head of the China Gold Association, said by phone from Beijing today. ‘India’s gold consumption is reportedly dropping this year due to the financial crisis.’

“Total demand from India in the first quarter fell 83% to 17.7 metric tons, from 107.2 tons a year earlier, according to figures from the World Gold Council. Purchases in China rose 1.8% to 105.2 tons from 103.3 tons. Total Chinese demand for gold was six times that of India in the first quarter, the council said in May.

“China consumed nearly 400 metric tons of gold last year, while demand in India was more than 650 tons, according to council data, which cited statistics from GFMS Ltd.”

Source: Sophie Leung, Bloomberg, July 24, 2009.

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Words from The (Investment) Wise (July 6 – 12, 2009)

Sunday, July 12th, 2009

As I reluctantly start packing my bags after a most enjoyable two weeks of R&R in Europe (see my posts on Slovenia and Switzerland), “Words from the Wise” comes to you a bit more cryptically than usual. However, a full dose of excerpts from interesting news items and quotes from market commentators is included.

Despite having crisscrossed Heidi’s country, I have yet to find the elusive Swiss gnomes to glean what they make of financial markets at this juncture. Meanwhile, the past week has been characterized by a fresh wave of risk aversion, as uncertainty over the global economic outlook took its toll on stock markets, commodities and precious metals, and investors favored safe-haven assets such as government bonds and the Japanese yen.

The S&P 500 Index, Dow Jones Industrial Index and the Reuters/Jeffries CRB Index - all now in corrective mode - closed down for a fourth consecutive week, while US Treasuries recorded gains for a fifth straight week and the Japanese yen for four out of the past five weeks.

The yen is often seen as a global barometer of risk aversion. The graph below demonstrates the strong inverse relationship between the movements of the yen (against the euro, in this case) and those of the Dow Jones World Index. As shown, a falling yen indicates risk tolerance (and a willingness to buy risky assets) and a rising yen shows risk aversion (and an indisposition towards risky assets). A downturn in the yen exchange rate could be a good indicator to keep an eye out for confirmation of better times ahead for stocks and commodities.

Source: StockCharts.com

Also featuring prominently in investment discussions during the week were the viability of the Public-Private Investment Program (PPIP) and the merits of a second stimulus package - calls for this comes at a time when estimates of trillion-dollar fiscal deficits and unsustainable debt levels are raising inflation expectations and putting upward pressure on long-term yields, thus partly undoing the Fed’s monetary easing.

Source: Eric Allie, July 8, 2009.

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

Source: StockCharts.com

A summary of the movements of major stock markets for the past week, as well as various other measurement periods, is given below. As the second-quarter earnings results in the US start rolling in, the American and most other markets closed the week in negative territory, with the Shanghai Composite Index being one of the few major benchmarks to make headway.

With the exception of the Nasdaq Composite Index, the major US indices are all back in the red for the year to date.

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

Stock market returns for the week ranged from top performers Nepal (+5.3%), Croatia (+3.0%), Uganda (+3.0%), Ecuador (+2.9%) and the Philippines (+2.4%) to India (-9.4%), Egypt (-8.5%), Argentina (-8.2%), Russia (-8.1%) and Kuwait (-7.6%) at the other end of the scale.

Of the 98 stock markets I keep an eye on, a majority of 64% recorded losses, 34% showed gains and 2% were 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 “all things short” such as ProShares Short MidCap 400 (MYY) (+3.5%), ProShares Short SmallCap 600 (SBB) (+3.2%) and ProShares Short S&P 500 (SH) (+2.0%). Among the long ETFs, WisdomTree Dreyfus Japanese Yen (JYF) (+3.7%), CurrencyShares Japanese Yen (FXY) (+3.7%) and iShares MSCI Taiwan (EWT) (+2.9%) performed well.

On the losing side of the ledger, ETFs were centered in the energy sectors, including PowerShares Solar Energy (PBW) (-12.3%), Claymore Solar Index (TAN) (-12.1%) and United States Oil (USO) (-10.1%). Market Vectors Russia (RSX) (-12.6%) also had a rough ride.

The quote du jour this week comes from Richard Russell, 84-year-old doyen of newsletter writers who has been scribing the Dow Theory Letters for the past 50 years. Russell said: “The whole bailout campaign stinks to high heaven. It was created and run by Wall Street - FOR Wall Street. Again, I say, personally, I wouldn’t have lifted a finger to bail Wall Street out. Let all these Wall Street thieves stew in their own toxic juices. Thieves should be out on the street or in jail, not luxuriating in government bailout money.

“In the end, the bailouts will simply extend the bear market in stocks and the economy. The Wall Streeters will be richer, and the nation will be poorer, choking on trillions in debt that will keep future generations struggling to deal with the sins of Wall Street. Too bad Obama didn’t have the courage (or knowledge) to tell the nation what was going on. Obama should have said, ’sit tight’ and ‘this too shall pass’. Unfortunately, after the trillions spent in bailouts, ‘this too will not pass’.

Next, a quick textual analysis of my week’s reading. No surprises here, with all the usual suspects such as “market”, “banks”, “economy” and “financial” featuring prominently. Although (interest) “rates” had some prominence, other key words such as “dollar” and “China” were relatively quiet.

Back to equities: The key moving-average levels for the major US indices are given in the table below. The S&P 500 Index on Tuesday breached the important 200-day line to the downside (for the third time in 26 trading days), joining the Dow Jones Industrial Average and the Dow Jones Transportation Index in bearish mode. The US indices are also all trading below their respective 50-day moving averages.

I have also added the BRIC countries and South Africa (my home country) to the table. All these markets are above the 200-day averages, having previously broken out of base formations. However, with the exception of China, the emerging markets have all recently broken below their 50-day moving average support lines. Importantly, the 50-day lines are in all instances still above the 200-day lines and therefore not yet threatening the bullish “golden crosses” established when the 50-day averages broke upwards through the 200-day averages.

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

Additionally, the Dow Industrial Average and S&P 500 Index on Tuesday also broke through the “neckline” of a head-and-shoulders formation - a bearish event. For more on this, key levels and the most likely short-term direction of the S&P 500 Index, Adam Hewison’s (INO.com) short technical analysis provides valuable insight. Click here to access the presentation. The analysis was done on Tuesday, but is still as relevant today as it was a few days ago. (Adam also covered the outlook for crude oil and the dollar/yen exchange rate in recent analyses. Click the links to view these.)

The first meaningful pullback since the March 9 low has brought the bears out of the woods. According to Bespoke, the weekly poll of the American Association of Individual Investors (AAII) shows bearish sentiment currently at 54.65% - higher than any other point since March 5.

Source: Bespoke, July 9, 2009.

“The onus is now on bulls to keep stocks buoyant. The technical breakdown of stocks is complete. Unless stocks rally robustly for several days - not just a one-day surge - stocks are likely to test 850 on the S&P 500 and then the very important 825 level …,” added Bill King (The King Report).

Richard Russell, highlighted the latest statistic from Lowry Research, saying: “Turning to the current market, what to me is most significant is that Lowry’s Buying Power Index (demand) is collapsing. As a matter of fact, it’s now below the level that it was on March 9. Meanwhile, the Selling Pressure Index (supply), after moving sideways for months, is now trending higher. This is a bearish combination and calls for a very defensive stance. On top of everything else, total NYSE volume is fading, particularly on days when the broad market is higher. It’s obvious that buyers of stocks are becoming scarce. Despite ‘Green Shoots’ nonsense, the stock market doesn’t like what it sees. And neither do I.”

The last word on stocks goes to Teun Draaisma, highly regarded equity strategist at Morgan Stanley, who argued that there were “plenty of opportunities to make money beyond the market direction call” by pursuing a strategy that he described as “the middle ground”, as reported by the Financial Times.

“Macro and the next big market move have become everyone’s favourite investment topic over the past two years. We suspect it is time to move on to the micro of sectors, stocks and styles,” he said.

Draaisma’s large “middle ground” of investment opportunities includes “the forgotten market” Japan and “sectors that are cheap and under-owned with improving fundamentals” such as utilities, telcos and energy. Also “buying stocks with a management change, financial restructuring or a change of focus can be very lucrative”.

The technicals undoubtedly look ugly, and investors will now focus on the second-quarter earnings reports as a test of whether stock prices have run away from fundamental reality. While investors wait for Mr Market to show his hand, a cautious approach is warranted but that should not preclude one from finding stocks that look cheap.

For more discussion on the direction of stock markets, see my recent posts “Stock markets rolling over“, “How to play a stock market correction“, “Technical talk: S&P 500 - expect retest sequence“, “Rosenberg interview: Cold truth about the economy and markets” and “Video-o-rama: Fresh wave of risk aversion“. (And do make a point of listening to Donald Coxe’s webcast of July 10, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
“Global business sentiment continues to improve. At the start of July confidence is as strong as it has been since the start of last October. Expectations regarding the outlook towards the end of this year rose strongly again last week to their highest level since spring 2006,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Business sentiment remains consistent with a global recession, but the downturn is quickly moderating.”

Edward Hugh (Global Economic Perspectives) said: “Global manufacturing took another step towards growth in June - but the process was, as ever, uneven. The JPMorgan Global Manufacturing PMI posted 46.9, its highest reading since last August. Only 4 PMIs - those for China, India, Turkey and Sweden - posted growth readings in June (although Sweden is not included in the JPMorgan survey). There was a general easing in the rates of contraction recorded elsewhere. The next two to three months will now be critical in order to decide whether the [manufacturing] sector is going to move over to expansion mode, and if it does, at what pace.”

Source: Global Economic Perspectives

The IMF’s World Economic Outlook reported that the global economy was beginning to emerge from the recession but “stabilization is uneven and the recovery is expected to be sluggish”. Economic growth was projected at 0.5 percentage points higher than in April 2009 or a 1.4% contraction in 2009 and 2.5% growth in 2010. Advanced economies were expected to contract by 3.8% in 2009 and expand by 0.6% in 2010, whereas emerging markets would slow sharply, growing by only 1.5% in 2009 before rebounding to 4.7% in 2010.

Source: IMF’s World Economic Outlook, July 8, 2009.

Interestingly, the report also published financial stress indices for advanced and emerging economies, showing these have receded markedly since the beginning of 2009. However, the report mentioned that “improvements are far from uniform across markets and countries” and “bank lending conditions are expected to remain tight and external financing conditions constrained for a considerable time”.

Source: IMF’s World Economic Outlook, July 8, 2009.

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.)

July 10
• The $787 billion fiscal stimulus package - facts lost in policy rhetoric
• Trade gap posts significant improvement in May
• Consumer outlook turns a bit sour once again

July 9
• Initial Jobless Claims report - distortions from seasonal adjustments

July 8
• CEO Business Confidence moves up in the second quarter
• Mortgage Purchase Index suggests an increase in home sales during June and possibly July
• Consumers continue to borrow less but pace of decline is notable

July 6
• ISM Survey points to moderation in pace of decline in economic activity

Also, late payments on home-equity loans rose to a record in the first quarter as 18 straight months of job losses and a slumping economy left more borrowers unable to pay their debts, the American Bankers Association reported (via Bloomberg). Delinquencies on home-equity loans climbed to 3.52% of all accounts from 3.03% in the fourth quarter.

Summarizing the US economic outlook, with specific reference to the stimulus plan, Asha Bangalore (Northern Trust) said: “At the present time, it is necessary to assess if the stimulus package is working in the preferred direction and if modifications and enhancements are called for, but it is imprudent to declare that it is not successful and a sheer waste of tax dollars or that a bigger package is necessary.

“In recent days, much to the chagrin of economic bears, a wide range of economic reports point to improving economic conditions. Without doubt more bullish economic data are necessary to confirm that the economy is on firm footing. The intensity and nature of the economic and financial market crisis that has been under way suggests that economic miracles will not materialize in a short period, which means that a weak economic report does not translate into going back to the drawing board in a panic.”

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

Source: Yahoo Finance, July 10, 2009.

The US economic highlights for the coming week include the following:

Source: Northern Trust

Click the link below for the following economics reports:

• Wells Fargo Securities: Weekly Economic & Financial Commentary (July 10, 2009)
• Wells Fargo Securities: Monthly Outlook (July 2009)

“If you get all the facts, your judgment can be right; if you don’t get all the facts, it can’t be right,” said Bernard Baruch. Let’s hope that the news items and quotes from market commentators included in the “Words from the Wise” review will assist Investment Postcards readers to focus on the facts rather than having to wade through a plethora of noise.

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 Veysonnaz, a quaint Alpine village in the south-western part of Switzerland from where I will be heading back to Cape Town early next week.

Faith in the US dollar is waning - the greenback’s role as the world’s main reserve currency is being challenged by the Chinese …

Source: Economist.com, July 9, 2009.

MoneyNews: Pope calls for new world financial order
“Pope Benedict XVI called Tuesday for a new world financial order guided by ethics, dignity and the search for the common good in the third encyclical of his pontificate.

“In ‘Charity in Truth’, Benedict denounced the profit-at-all-cost mentality of the globalized economy and lamented that greed had brought about the worst economic downturn since the Great Depression.

“‘Profit is useful if it serves as a means toward an end,’ he wrote. ‘Once profit becomes the exclusive goal, if it is produced by improper means and without the common good as its ultimate end, it risks destroying wealth and creating poverty.’

“The document, in the works for two years and repeatedly delayed to incorporate the fallout from the crisis, was released one day before leaders of the Group of Eight industrialized nations meet to coordinate efforts to deal with the global meltdown.

“The release was clearly designed to give world leaders a strong moral imperative to correct errors of the past, ‘which wreaked such havoc on the real economy’, and make a more socially just and responsible world financial order.

“‘The economy needs ethics in order to function correctly - not any ethics, but an ethics which is people centered,’ he wrote.”

Source: MoneyNews, July 7, 2009.

Wolfgang Münchau (Financial Times): Liquidity injections alone are not enough
“Monetary policy’s various guises from near-zero short-term interest rates, to massive liquidity injections, to quantitative easing and its relatives have so far had no traction in this crisis. While the global economy is no longer shrinking at quite the speeds seen at the beginning of the year, it is still trapped in a bad recession.

“The main reason for its longevity is the state of the banking sector. The European Central Bank has recently pumped €442bn in one-year liquidity into the system, but the money is not reaching the real economy. Japanese-style stagnation is no longer possible - it is already here. The only question is how long it will last. Even in an optimistic scenario, global economic growth will be weighed down by a combination of credit squeeze, rising unemployment, rising bankruptcies, rising default rates, and balance sheet adjustment in the household and financial sectors.

“I would expect the US to have something approaching a genuine recovery at some point in the next decade, but probably not in 2010 or 2011. Judging by the co-ordination failure at the level of the European Union, the persistent failure to deal with the continent’s 40 or so cross-border banks at European level, and in particular Germany’s inability to sort out its toxic-asset contaminated Landesbanken, the economic prospects for the eurozone are infinitely worse.

“From comments by senior central bankers in the US and Europe, I am sure they understand the gravity of the situation very well. Janet Yellen, present of the Federal Reserve Bank of San Francisco, warned last week that the recovery would be agonisingly slow, that unemployment could stay high for many years, and that interest rates might stay low for a long time.

“I would also interpret the decidedly downbeat statement last week by Jean-Claude Trichet, president of the European Central Bank, as a sign that the ECB is getting more worried - when others are getting more optimistic. In Europe, there is some evidence that the credit crunch has deteriorated in recent weeks. Much of that evidence is anecdotal, but these anecdotes are disquieting.

“Companies who file for bankruptcy increasingly blame the banks, and the number of bankruptcies is rising rapidly. Only a fool would take comfort from the strength in economic indicators. During a financial crisis, these indicators could be a metric of its respondents’ degree of delusion.

“The problem is that the trillions of dollars and euros in liquidity are not getting through. There is no point in blaming the banks.”

Click here for the full article.

Source: Wolfgang Münchau, Financial Times, July 5, 2009.

Lucian Bebchuk (The Wall Street Journal): The fall of the toxic-assets plan
“The plan for buying troubled assets - which was earlier announced as the central element of the administration’s financial stability plan - has been recently curtailed drastically. The Treasury and the FDIC have attributed this development to banks’ new ability to raise capital through stock sales without having to sell toxic assets. But the program’s inability to take off is in large part due to decisions by banking regulators and accounting officials to allow banks to pretend that toxic assets haven’t declined in value as long as they avoid selling them.

“The toxic assets clogging banks’ balance sheets have long been viewed - by both the Bush and the Obama administrations - as being at the heart of the financial crisis. Secretary Geithner put forward in March a ‘public-private investment program’ (PPIP) to provide up to $1 trillion to investment funds run by private managers and dedicated to purchasing troubled assets. The plan aimed at ‘cleansing’ banks’ books of toxic assets and producing prices that would enable valuing toxic assets still remaining on these books.

“The program naturally attracted much attention, and the Treasury and the FDIC have begun implementing it. Recently, however, one half of the program, focused on buying toxic loans from banks, was shelved. The other half, focused on buying toxic securities from both banks and other financial institutions, is expected to begin operating shortly but on a much more modest scale than initially planned.

“What happened? Banks’ balance sheets do remain clogged with toxic assets, which are still difficult to value. But the willingness of banks to sell toxic assets to investment funds has been killed by decisions of accounting authorities and banking regulators.

“Earlier in the crisis, banks’ reluctance to sell toxic assets could have been attributed to inability to get prices reflecting fair value due to the drying up of liquidity. If the PIPP program began operating on a large scale, however, that would no longer been the case.

“Armed with ample government funding, the private managers running funds set under the program would be expected to offer fair value for banks’ assets. Indeed, because the government’s funding would come in the form of non-recourse financing, many have expressed worries that such fund managers would have incentives to pay even more than fair value for banks’ assets. The problem, however, is that banks now have strong incentives to avoid selling toxic assets at any price below face value even when the price fully reflects fair value.

“A month after the PPIP program was announced, under pressure from banks and Congress, the US Financial Accounting Standards Board watered down accounting rules and made it easier for banks not to mark down the value of toxic assets. For many toxic assets whose fundamental value fell below face value, banks may avoid recognizing the loss as long as they don’t sell the assets.”

Click here for the full article.

Source: Lucian Bebchuk, The Wall Street Journal, July 10, 2009.

Financial Times: EU plans new push on bank reform
“New European Union laws to drive banks to strengthen capital cushions will be unveiled in October, the Financial Times has learnt, as EU member states intensify a regulatory assault aimed at preventing a repeat of the global financial crisis.

“A draft report expected to be backed by EU finance ministers in Brussels on Tuesday says that there is a ’strong case’ for curbing existing rules on banks’ funding needs, which critics say exacerbate the ups and downs of economic cycles.

“The report recommends accounting reforms and other policy measures to build more resilient capital ‘buffers’ during good economic times.

“The aim of the new laws would be to make it easier for banks to build up provisions in good times without having to assign the money to specific impaired assets. These funds could then be used to weather future economic storms.”

Source: Nikki Tait, Chris Bryant and Patrick Jenkins, Financial Times, July 6, 2009.

The Wall Street Journal: GM takes new direction
“General Motors kicked off a new era following its exit from bankruptcy protection on Friday, with Chief Executive Frederick ‘Fritz’ Henderson promising to transform the auto maker into a leaner and more customer-focused company.

“The new company will put a premium on speed, accountability and risk taking, and root out the layers of management that had hobbled decision making, he said at a news conference.

“‘Business as usual is over at GM,’ Mr. Henderson said. He said the company was scrapping a number of senior posts and has disbanded two committees of top executives that made key decisions for the company’s automotive operations. Mr. Henderson expects hundreds of middle managers to be let go in the weeks ahead, and the company’s sales and marketing operation will be reorganized.

“‘Our culture to this point has been an impediment,’ Mr. Henderson, a 25-year GM veteran, said. ‘This is all about flattening the management structure.’

“Mr. Henderson said he is adopting some techniques used by the alliance of Renault SA and Nissan Motor Co., led by Carlos Ghosn. Several of GM’s highest-ranking executives studied Mr. Ghosn’s approach in 2006 while GM’s board weighed a potential merger with Nissan-Renault.

“Mr. Henderson and his top lieutenants also are planning to hit the road in August to talk to dealers and consumers to gain insight into the US market. In the past, GM based much of its decision making on market-research studies, focus groups and strategy meetings among executives. Dealers said the company needs to reconnect with consumers.”

Source: John Stoll and Sharon Terlep, The Wall Street Journal, July 11, 2009.

Financial Times: Transformed GM
“Dan McCrum, FT’s US Lex columnist, talks about the new transformed GM as the carmaker emerges from bankruptcy.”

Source: Financial Times, July 10, 2009.

MoneyNews: IMF - global recession ending
“The global economy is starting to pull out of its deepest recession since World War Two but recovery will be sluggish and policies need to remain supportive, the International Monetary Fund said on Wednesday.

“In an update of its World Economic Outlook, the IMF said the global economy is likely to contract 1.4% this year, a touch steeper than the 1.3% decline it expected in April.

“However, it now sees world economic growth of 2.5% in 2010, compared with an April projection of 1.9%.

“‘Financial conditions have improved more than expected, owing mainly to public intervention, and recent data suggest that the rate of decline in economic activity is moderating, although to varying degrees among regions,’ the IMF said.

“The IMF said while the world’s advanced economies are expected to recover slightly next year, growth will remain below potential until later in 2010, suggesting unemployment will continue to rise.

“It said the US economy will contract 2.6% this year, slightly less than it thought in April, with growth resuming in 2010 albeit at a mere 0.8%.

“It said the euro-area economy would shrink by 4.8% in 2009, a downward revision of 0.6% from its April forecast. Next year, the IMF said the euro-area would contract 0.3%, slightly less than it forecast in April.

“Japan’s economy is expected to contract by 6% this year, with growth resuming slightly to around 1.7% next year, the IMF said.

“Emerging and developing countries are likely to regain growth momentum during the second half of 2009, it said.

“In a separate updated report, the fund underscored the need for sustained economic stimulus.

“‘Financial conditions have improved, as unprecedented policy intervention has reduced the risk of systemic collapse and expectations of economic recovery have risen,’ it said in an update to its global financial stability report.

“‘Nonetheless, vulnerabilities remain and complacency must be avoided.’”

Source: MoneyNews, July 8, 2009.

Bloomberg: G-8 says recovery is too weak to withdraw stimulus
“Group of Eight leaders said the economic recovery from the steepest recession since World War II was too fragile for them to consider reversing efforts to pump money into the economy.

“President Barack Obama pressed for the door to remain open to more stimulus measures as a renewed stock-market drop stirred concern that $2 trillion spent worldwide so far hasn’t jolted consumers and businesses back to life.

“‘The G-8 needed to sound a second wakeup call for the world economy,’ British Prime Minister Gordon Brown told reporters yesterday in L’Aquila, Italy, after the opening sessions of the leaders’ annual gathering. ‘There are warning signals about the world economy that we cannot ignore.’

“Divergences over what to do next and calls from developing nations to do more to counter the slump underscored the G-8’s limited room for maneuver. The biggest borrowing spree in 60 years has failed to halt rising unemployment and left investors doubting the strength of the recovery.

“‘We’ve been advocating stimulate now, consolidate later,’ Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, told Bloomberg Television today from the summit. ‘You’re not going to remove the stimulus now. It’s too early.’”

Source: Helene Fouquet and James Neuger, Bloomberg, July 9, 2009.

Telegraph: Shipping flashes early warning signals again
“Port statistics are revealing. They were a leading indicator before the production collapse in the Japan, Europe, and the US over the winter, and they may be telling us something again.

“Amrita Sen at Barclays Capital says the number of Baltic Dry ships waiting to berth - mostly in China and Australia - has begun to fall after peaking at 154 in mid-June.

“The Capesize Iron Ore Port Congestion Index is replicating the pattern seen a year ago just before the commodity boom tipped over.

“‘The anecdotal evidence we are hearing is that vessel queues have been falling. There are reports of cancelled tonnage from China pointing to a slowdown in Chinese buying of coal and iron ore.

“‘We are definitely expecting a correction. People have been building stocks of iron ore too quickly in anticipation of the stimulus package in China,’ she said.

“The Baltic Dry Index measuring freight rates jumped 450% in the first half of the year on the China rebound, but has begun to fall back over the last two weeks. (Sen doubts freight rates will recover much since 1000 new ships are hitting the market this year and again next year, compared to 300 in normal years. There is obviously a horrendous shipping glut).”

Source: Ambrose Evans-Pritchard, Telegraph, July 8, 2009.

Bloomberg: Obama adviser says US should mull second stimulus
“The US should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was ‘a bit too small’, said Laura Tyson, an outside adviser to President Barack Obama.

“The current plan ‘will have a positive effect, but the real economy is a sicker patient,’ Tyson said in a speech in Singapore today [Tuesday]. The package will have a more pronounced impact in the third and fourth quarters, she added, stressing that she was speaking for herself and not the administration.

“Tyson’s comments contrast with remarks made two days ago by Vice President Joe Biden and fellow Obama adviser Austan Goolsbee, who said it was premature to discuss crafting another stimulus because the current measures have yet to fully take effect. The government is facing criticism that the first package was rolled out too slowly and failed to stop unemployment from soaring to the highest in almost 26 years.

“‘The economy is worse than we forecast on which the stimulus program was based,’ Tyson, who is a member of Obama’s Economic Recovery Advisory board, told the Nomura Equity Forum. ‘We probably have already 2.5 million more job losses than anticipated.’

“‘The money is just really starting to come out in more significant amounts now,” Tyson said. “The stimulus is performing close to expectations but not in timing.’”

Source: Shamim Adam, Bloomberg, July 7, 2009.

The Wall Street Journal: Economists say no to a second stimulus
“The Wall Street Journal’s latest forecasting survey shows most economists oppose another round of stimulus (43 against, 8 for), despite forecasts for lingering double-digit unemployment until at least June 2010. WSJ’s Phil Izzo and Kelsey Hubbard discuss.”

Source: The Wall Street Journal, July 9, 2009. (Click here for a Financial Times article entitled “We do not need a second stimulus plan”.)

Financial Times: Fed warns on Congressional scrutiny
“The Federal Reserve warned on Thursday that a growing congressional threat to curtail its independence would destabilise markets and raise the cost of servicing US debt for ‘current and future generations’.

“Ron Paul, the Texas Republican, has gathered the support of a majority of the House of Representatives for a bill that would audit the Fed’s monetary policy decisions. He told a Congressional hearing he wanted the power to prevent the Fed being ’secret and clandestine and serving special interests’.

“The Fed is struggling to face down a political backlash from different parts of Congress amid scepticism over its policies designed to restart the flow of credit and the award of new powers to curb systemic risks.

“Donald Kohn, vice-chairman of the Fed, argued at the House financial services subcommittee hearing that any sense of political interference would negatively affect markets. ‘Any substantial erosion of the Federal Reserve’s monetary independence likely would lead to higher long-term interest rates as investors begin to fear future inflation,’ he said.

“Not only did Mr Kohn argue that the Fed should be given the power to regulate large systemically significant companies, but he argued against giving up responsibility for consumer protection, asking Congress to overturn the Obama administration’s proposal to create a new Consumer Financial Protection Agency.

“‘I would hope that the Congress might think about whether there are ways of strengthening the Federal Reserve’s commitment to consumer regulation as an alternative to creating a new regulator,’ he said.”

Source: Tom Braithwaite, Financial Times, July 9, 2009.

Philip Aldrick (Telegraph): US lurching towards “debt explosion” with long-term interest rates on course to double
“In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5%.

“The impact would be devastating by making it punitively expensive to finance national borrowings and leading to what Tim Congdon, founder of Lombard Street Research, called a ‘debt explosion’. Mr Laubach’s study has implications for the UK, too, as public debt is soaring. A US crisis would have implications for the rest of the world, in any case.

“Using historical examples for his paper, New Evidence on the Interest Rate Effects of Budget Deficits and Debt, Mr Laubach came to the conclusion that ‘a percentage point increase in the projected deficit-to-GDP ratio raises the 10-year bond rate expected to prevail five years into the future by 20 to 40 basis points, a typical estimate is about 25 basis points’.

“The US deficit has blown out from 3% to 13.5% in the past year but long-term rates are largely unchanged. Assuming Mr Laubach’s ‘typical estimate’, long-term rates have to climb 2.5 percentage points.

“He added: ‘Similarly, a percentage point increase in the projected debt-to-GDP ratio raises future interest rates by about 4 to 5 basis points.’ Economists are predicting a wide range of ratios but Mr Congdon said it was ‘not unreasonable” to assume debt doubling to 140%. At that level, Mr Laubach’s calculations would see long-term rates rise by 3.5 percentage points.

“Mr Congdon said the study illustrated the ‘horrifying’ consequences for leading western economies of bailing out their banks and attempting to stimulate markets by cutting taxes and boosting public spending. He said the markets had failed to digest fully the scale of fiscal largesse and said ‘current gilt yields [public debt] are extraordinary low given the size of deficits’.

“Should the cost of raising or refinancing public debt in the markets double, ‘the debt could just explode’, he said, adding that it would come to a head in ‘five to 10 years’.”

Source: Philip Aldrick, Telegraph, July 6, 2009.

Nouriel Roubini (Forbes): Brown manure, not green shoots
“The June employment report suggests that the alleged green shoots are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10% by later this summer - around August or September - and will be closer to 10.5%, if not 11%, by year-end. I expect the unemployment rate is going to peak at around 11% at some point in 2010, well above historical standards for even severe recessions.

“It’s clear that even if the recession were to be over anytime soon - and it’s not going to be over before the end of the year - job losses are going to continue for at least another year and a half. Historically, during the last two recessions, job losses continued for at least a year and a half after the recession was over. During the 2001 recession, the recession was over in November 2001, and job losses continued through August 2003 for a cumulative loss of jobs of over 5 million; this time we are already seeing more than 6 million job losses and the recession is not over.

“The details of the unemployment report are even worse than the headline. Not only are there large job losses right now, but as a way of sharing the pain, firms are inducing workers to reduce hours and hourly wages. Therefore, when we’re looking at the effect of the labor market on labor income, we should consider that the total value of labor income is the product of jobs, hours and average hourly wages - and that all three elements are falling right now. So the effect on labor income is much more significant than job losses alone.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, July 9, 2009.

BCA Research: US economy - it looks like a recovery
“The US economy is transitioning to a recovery path, though it will be bumpy and subdued compared with past cycles.

“The ISM for the non-manufacturing sector reinforced that the economy is stabilizing following the ’sudden stop’ that occurred in the fourth quarter of last year. The new orders index rose to a post-Lehman high and is probing expansionary territory, indicating companies are regaining some confidence in final demand. This is corroborated by the continuing rise in the employment component, which shows that businesses are slowing the pace of job cuts, despite June’s disappointing payroll figures.

“The ISM surveys signal that the economy is on the cusp of a recovery. Investor conviction, however, will only come with evidence that the US consumer is beginning to spend a bit more freely, which we expect to see over the next several months.”

Source: BCA Research, July 8, 2009.

Asha Bangalore (Northern Trust): CEO Business Confidence moves up in the second quarter
“The Conference Board’s CEO Business Confidence Survey increased to 55 in the second quarter from 30 in the first quarter. The cycle low for the index is 24. The CEO Confidence Index advanced three quarters has a strong positive correlation (0.62) with the year-to-year change in equipment and software spending. Based on this historical evidence, capital spending most likely posted its worst performance in the first quarter of 2009.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, July 8, 2009.

Asha Bangalore (Northern Trust): Trade gap posts significant improvement in May
“The trade deficit narrowed to $26 billion in May from $28.79 billion in April. Readings close to the May trade gap were last seen in November 1999.

“After adjusting for inflation, the trade deficit of goods narrowed to $36.2 billion. This is the smallest trade deficit since December 1999 ($35.31 billion). The significant improvement in the trade deficit is a big plus for second quarter real GDP and for the long term status of the economy.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, July 10, 2009.

Asha Bangalore (Northern Trust): ISM Survey points to moderation in pace of decline in economic activity
“The ISM Non-Manufacturing survey results for June indicate improving conditions in the non-manufacturing sector, with the composite index climbing 3 points to 47.0. Indexes tracking business activity (49.8 versus 42.4 in May), new orders (48.6 versus 44.4), and employment (43.4 versus 39.0) moved up in June. These readings are below 50.0 implying that the sector continues to contract but each index is moving closer to the line of demarcation between contraction and expansion suggesting that the pace of decline is moderating.

“Both the non-manufacturing and manufacturing composite indexes have a strong positive correlation with the quarter-to-quarter change in real GDP. The recent moderation in these composite indexes points to a moderation in the pace at which real GDP is declining.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, July 6, 2009.

Bill King (The King Report): Labor situation much worse than headline numbers depict
“Net of the Concurrent Seasonal Factor Bias and net of distortions built into the reporting by the Birth-Death Model, the June jobs loss likely exceeded 700,000.

“John Williams (Shadow Government Statistics) on the goofy B/D Model: ‘The system was not designed to accommodate recessions, but the benchmark revisions tended to show a pattern of fairly consistent overstatement with the annual revisions, regardless of the business cycle. During the reporting cycle covering the 1990 to 1991 recession, a particularly large downward benchmark revision in previously reported payrolls levels was blamed partially on the BLS assuming that companies that had stopped reporting during the recession still were in business, with proportionate payroll employment attributed to them by the BLS. The problem was that much of the non-reporting reflected companies going out of business. The bulk of that modeling was based on periods of economic growth.

“‘The unadjusted annual decline in June payrolls was the deepest since a similar decline at the trough of the 1958 recession, but still shy of the 4.9% trough seen in the 1949 downturn. When the 1949 annual low growth is broken, possibly next month, the annual percentage contraction in payrolls will be the most severe since the production shutdown following World War II.’”

Source: John Williams, Shadow Government Statistics (via The King Report), July 6, 2009.

Asha Bangalore (Northern Trust): Initial Jobless Claims report - seasonally distortion
“Initial jobless claims fell 52,000 to 565,000 for the week ended July 4. Seasonal distortions arising from the smaller-than-expected layoffs in the auto sector and the holiday shortened week are cited as reasons for the large drop in the seasonally adjusted data.

“Using seasonally unadjusted jobless claims numbers eliminates the problem of interpreting data with seasonal distortions. Seasonally unadjusted data indicate that on a year-to-year basis, initial jobless claims advanced 56% in June versus larger gains in the prior months. The peak appears to have occurred in February (86% yoy increase). The chart below points out that the worst in the labor market is most likely behind us.

“Continuing claims, which lag initial claims by one week, increased 159,000 to 6.883 million and the insured unemployment rate rose to 5.1% from 5.0% in the prior week.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, July 9, 2009.

Yahoo Finance: Retailers report weak June sales
“Escalating job worries and rainy weather dampened shoppers’ appetite for buying summer staples like shorts and dresses, resulting in sharper-than-expected sales declines for many merchants in June and increasing concerns about the back-to-school shopping season.

“As retailers reported their monthly figures Thursday, the weakness cut across all sectors but hit mall-based clothing stores particularly hard.

“Same-store sales - sales at stores open at least a year - are considered a key indicator of a retailer’s health.

“‘Consumers are under severe pressure on the job front, so discretionary spending is just not happening,’ said Ken Perkins, president of retail consulting firm Retail Metrics.

“… financial worries are clearly discouraging shoppers too. The latest federal jobs report, which showed wages shrinking and higher job losses than expected in June, is increasing concerns about consumers’ ability to spend in the months ahead.”

Source: Anne D’Innocenzio, Yahoo Finance, July 9, 2009.

Asha Bangalore (Northern Trust): Consumer outlook turns a bit sour once again
“The University of Michigan Consumer Sentiment Index fell to 64.6 in the early-July survey from 70.8 in June. Both the Current Conditions Index (70.4 versus 73.2 in June) and the Expectations Index (60.9 versus 69.2 in June) dropped in July. The decline in the Consumer Expectations Index is a big negative for the July Index of Leading Economic Indicators. The latest outlook of consumers has turned grim after showing improvements during five of the six months ended June.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, July 10, 2009.

Asha Bangalore (Northern Trust): Consumers continue to borrow less but pace of decline is notable
“Consumer credit declined at an annual rate of 1.5% in May, after a 7.8% plunge in April and a 7.3% drop in March. The consumer deleveraging trend commenced in August 2008. The small decline in borrowing after a larger drop in prior months suggests that household balance sheets are mending which is a big plus for consumer spending, albeit not immediately. The important point is that the preferred trend in consumer borrowing is emerging.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, July 8, 2009.

Clusterstock: Hey, America, get ready to support your parents
“While the official retirement age in the US is 66, the majority of workers retire at 64 and draw their pensions for 16 years on average. Currently, there are about four American workers for every person who is 65 and over, and retired. This ratio will change significantly in the next 40 years putting a strain on our pension system as there will be about two workers per retiree.

“But the US and the UK still have better odds than aging Japan, which will have 1:1 ratio by 2050.”

Source: Kamelia Angelova, Clusterstock, July 10, 2009.

Asha Bangalore (Northern Trust): Mortgage Purchase Index suggests an increase in home sales during June
“The Mortgage Purchase Index of Mortgage Bankers Association increased 6.7% to 285.6 during the week ended July 3. The important news is that this index has risen in seven of the last ten weeks. The Pending Home Sales Index (PHSI) has risen in each of the four months ended May. The upshot is that it should not be surprising to see an increase in home sales in June when the sales reports are published later in the month. The chart below indicates the positive relationship between home sales and the Purchase Index. The PHSI points to a likely increase in home sales in July; the Purchase Index of the next few weeks should help to confirm this forecast.

“Multiple applications for the same property and a reduction in the number of mortgage bankers distorted the Purchase Index in 2007. The Mortgage Refinance Index also advanced 15.2% in the latest weekly tally.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, July 8, 2009.

Bloomberg: Delinquencies on US home-equity loans reach record
“Late payments on home-equity loans rose to a record in the first quarter as 18 straight months of job losses and a slumping economy left more borrowers unable to pay their debts, the American Bankers Association reported.

“Delinquencies on home-equity loans climbed to 3.52% of all accounts from 3.03% in the fourth quarter, and late payments on home-equity lines of credit climbed to a record 1.89%, the group reported today. An index of eight types of loans rose for a fourth straight quarter, to 3.23% from 3.22% in October through December, the group said.

“‘The number one driver of delinquencies is job losses, which we’ve seen build and build,’ James Chessen, the group’s chief economist, said in a telephone interview. ‘Delinquencies won’t come down without a dramatic improvement in the economy and businesses will have to start hiring again.’”

Source: Margaret Chadbourn, Bloomberg, July 7, 2009.

Bloomberg: Distressed commercial property in US doubles to $108 billion
“Commercial properties in the US valued at more than $108 billion are now in default, foreclosure or bankruptcy, almost double than at the start of the year, Real Capital Analytics said.

“There were 5,315 buildings in financial distress at the end of June, the New York-based real estate research firm said in a report issued today. That’s more than twice the number of troubled properties at the end of 2008.

“Hotels and retail properties are among the most ‘problematic’ assets following bankruptcy filings by mall owner General Growth Properties and Extended Stay America, according to the report. The scarcity of credit is causing property defaults in all regions and among every investor type, Real Capital said.

“‘Perhaps more alarming than the rapid growth in the distress totals is the very modest rate at which troubled situations are being resolved,’ the report said.

“About $4.1 billion of commercial properties have emerged from distress, according to Real Capital.

“‘In far more situations, modifications and short-term extensions are being granted, but these can hardly be considered resolved, only delayed,” the study said.”

Source: David Levitt, Bloomberg, July 8, 2009.

Bloomberg: Goldman trading-code investment put at risk by theft
“Goldman Sachs Group Inc. may lose its investment in a proprietary trading code and millions of dollars from increased competition if software allegedly stolen by a former employee gets into the wrong hands, a prosecutor said.

“Sergey Aleynikov, an ex-Goldman Sachs computer programmer, was arrested July 3 after arriving at Liberty International Airport in Newark, New Jersey, US officials said. Aleynikov, 39, who has dual American and Russian citizenship, is charged in a criminal complaint with stealing the trading software. Teza Technologies LLC, a Chicago-based firm co-founded by a former Citadel Investment Group LLC trader, said it suspended Aleynikov, who started there on July 2.

“At a court appearance July 4 in Manhattan, Assistant US Attorney Joseph Facciponti told a federal judge that Aleynikov’s alleged theft poses a risk to US markets. Aleynikov transferred the code, which is worth millions of dollars, to a computer server in Germany, and others may have had access to it, Facciponti said, adding that New York-based Goldman Sachs may be harmed if the software is disseminated.

“‘The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,’ Facciponti said, according to a recording of the hearing made public today. ‘The copy in Germany is still out there, and we at this time do not know who else has access to it.’

“The proprietary code lets the firm do ’sophisticated, high-speed and high-volume trades on various stock and commodities markets,’ prosecutors said in court papers. The trades generate ‘many millions of dollars’ each year.”

Source: David Glovin and Christine Harper, Bloomberg, July 6, 2009.

Bloomberg: Stealing secrets from Goldman Sachs
“Former Goldman programmer Sergey Aleynikov arrested for theft charges on July 3.”

Source: Bloomberg (via YouTube), July 9, 2009.

Bespoke: Investment grade corporate bonds holding up well
“Even though equity markets have pulled back since the June 12 top, investment grade corporate bonds have continued to perform well. Below is a year-to-date price chart of LQD, which is an ETF that tracks the investment grade corporate bond market. Since bottoming in early March, the ETF has been in a very strong uptrend, bouncing off of the bottom and top of an upward sloping channel as it has worked its way higher. While the S&P 500 is off more than 7% from its recent high, LQD is on the verge of breaking out to a six-month high.”

Source: Bespoke, July 9, 2009.

Barry Ritholtz (The Big Picture): S&P 500 vs CDs (1994-2008)
“Imagine two people who added $10,000 to their investment accounts on January 1, every year for the past 15 years.

“One of them is risk averse. They put the money into Certificates of Deposits, getting a few percentage points each year, but the principal is insured.

“The other is less risk averse; they put money into an S&P 500 Index each year.

Stocks versus Certificates of Deposit (1994-2008)

“CDs in 2009 yield 1%-2%, as the market fell and then rally; if the S&P doesn’t perform well for the rest of this year, CDs will have more gains again.

“As of March, bonds had outperformed stocks from 1968 to 2009 - 40 years.”

Source: Barry Ritholtz, The Big Picture, July 7, 2009.

Bespoke: Oversold market reaching extremes
“The graphic below shows the current levels as well as the one week change in the trading ranges of the S&P 500 and its ten sectors. The circles represent where the sectors and index currently stand, while the tail represents where it was one week ago. When the circle is in the red zone, the sector or index is overbought (light red = overbought, dark red-extreme overbought). Readings in the green zone indicate that the index or sector is oversold (light green = oversold, dark green = extreme oversold). For this analysis, overbought and oversold measures are defined as one standard deviation above or below the index’s 50-day moving average.

“Following the recent declines, the S&P 500 has now moved into oversold territory for the first time since March 11. On a sector basis, only two (Health Care and Consumer Staples) are currently above their 50-DMAs, while eight are below. Of the eight trading below their 50-days, six are currently oversold, and four of those (Consumer Discretionary, Energy, Industrials, and Materials) have reached ‘extreme’ oversold levels (two standard deviations below 50-DMA). Like the overall market, it has been a while since this many sectors were ‘extremely’ oversold. You have to go all the way back to the March 9 low to find a day when more sectors were oversold. If you’re bearish, this is the break you’ve been looking for, while if you’ve been waiting for a correction to get in, now is your chance.”

Source: Bespoke, July 8, 2009.

Bespoke: Just 24% of S&P 500 stocks are above their 50-day moving averages
“After resting above 75% for most of the past three months, the percentage of stocks above their 50-day moving averages in the S&P 500 has tanked to just 24%. There are currently zero stocks in the Energy and Telecom sectors that are trading above their 50-days. Industrials are the third worst at 3%, followed by Financials at 6% and Materials at 7%. Utilities, Consumer Staples and Health Care are all above 60%, so there has been quite a bit of rotation during this market pullback. The last time the overall numbers were this weak, all sectors were down in the dumps.”

Source: Bespoke, July 8, 2009.

Financial Times: Morgan Stanley lifts equities
“Improvements in market conditions over the past few weeks have led Teun Draaisma, equity strategist at Morgan Stanley, to shift from an ‘underweight’ position on equities to ‘neutral’.

“But he adds: ‘We are keeping an open mind and not turning outright bullish, as there are still plenty of uncertainties related to US housing, European earnings, the European banking system, the default cycle, Chinese growth and policy action.’

“Lower bond yields, a pull back in sentiment and falling equity prices are among the factors that have led Morgan Stanley to move 5% of their weighting from government bonds to equities.

“But with stronger signals still needed to take a stance on market direction either way, Mr Draaisma argues there are ‘plenty of opportunities to make money beyond the market direction call’ by pursuing a strategy that he describes as ‘the middle ground’.

“‘Macro and the next big market move has become everyone’s favourite investment topic over the past two years. We suspect it is time to move on to the micro of sectors, stocks and styles.’

“Among a large ‘middle ground’ of investment opportunities include ‘the forgotten market’ Japan and ’sectors that are cheap and under-owned with improving fundamentals’ such as utilities, telcos and energy. Also ‘buying stocks with a management change, financial restructuring or a change of focus can be very lucrative’.”

Source: Teun Draaisma, Financial Times, July 6, 2009.

Richard Russell (Dow Theory Letters): March lows to be tested
“I’ve given this next statement a lot of thought. I don’t think most analysts understand the amazing power and tenacity of the great primary trend of the market. Most of today’s analysts have had no experience with bear markets. We’re now in a primary bear market. Most people believe that if the government or the Fed does this or that, the bear market can be halted or reversed. Nothing could be further from the truth.

“The fact is that in the market, nothing is more powerful or insistent than the great primary trend. The primary trend can best be compared with the tide of the ocean. All man’s efforts to thwart or turn the tide are like so many sand castles built on the edge of the nearest waves. The incoming tide will wash all the sand castles away, if not with the first wave then with the second or the third. Thus, the incoming tide will conquer all.

“This is why all of Obama’s and Bernanke’s and Geithner’s ’sand castles’ will be washed away by the bear market. All that will be left will be crippled corporations and monster debts.

“Obama believes that Roosevelt with his spending and alphabet agencies ended the Great Depression. Sorry, President Obama, you are wrong. The Great Bear market and Depression finally ended when the bear market died of exhaustion on July 8, 1932. That was the day when the D-J Industrial Average halted its decline at Dow 41.22. At that time, the Dow provided a dividend yield of 10.2%. That’s when the bear market actually ended. It ended the way all bear markets do - in utter exhaustion.

“On another subject, I’ve felt all along that the government and the Fed should have allowed this bear market to run its course, rather than wasting trillions of dollars in an attempt to halt the bear market. Perhaps politically, this would have been impossible, but in the end it would have been better for the nation.

“Accordingly, although I certainly do not want to see the March lows violated, my studies suggest that the odds favor an eventual breaking of the March lows and then a much lower bear market.

“Sorry, those are my deepest and most truthful thoughts.”

Richard Russell (Dow Theory Letters): Gold looks interesting
“Below we see a daily chart of gold going back six months. The 50-day MA is rising and above the rising red 200-day MA. RSI and MACD are in bullish positions, and it remains to be seen whether gold will (once again) try for the ‘over-one-thousand area’.

“Below is a weekly picture showing the huge ‘head-and-shoulders’ pattern that has formed in gold. The obvious question is whether gold can rally to break out above the resistance at roughly 1,000. This is a potentially very powerful formation, and gold is at an exciting juncture. Hard to believe that this formation won’t eventually break out to the upside, but gold is the most emotional of all tradable items. The Fed does not want to see gold spurt higher, and there’s no telling what the Fed might do to halt gold’s progress.

“The supreme irony is that the Fed and the government want a lower devalued dollar, but they don’t want the world to see what they’re doing via surging gold.”

Source: Richard Russell, Dow Theory Letters, July 6, 2009.

David Fuller (Fullermoney): Risky assets temporarily in retreat
“Recently we have seen an unwinding of speculative positions in crude oil and many other commodities.

“Inevitably, this will influence monetary policy decisions, including quantitative easing, taken by many governments. Commodity price inflation is temporarily in retreat once again. The stock market correction will subdue talk of economic ‘green shoots’. Consequently government long-dated bond yields are retreating once again in what I believe will be a base formation extension phase. For instance, the US 10-year bond yield nearly doubled in rising from a low just above 2% in December 2008 to a high fractionally over 4% last month. A mean reversion towards 3% should not surprise us.

“While these recent trend reversals continue, many governments are likely to increase their efforts to cushion economic recession and stem the advance in unemployment figures. This will not be easy, as we have already seen. Nevertheless, having embarked on the road of quantitative easing, they are unlikely to change course until commodity prices, stock market indices and particularly long-dated government bond yields are strengthening once again.”

Source: David Fuller, Fullermoney, July 8, 2009.

Jeffrey Saut (Raymond James): Cautious, but not bearish
“The call for this week: We think the world is changing; and, changing VERY rapidly. Ergo, we suggest thinking more strategically, which would be in accord with the aforementioned points. That said, we also believe there will be tactical opportunities for the well prepared investor in the months ahead. Tactically, we are currently cautious, but not bearish, as we await opportunistic points to enhance our capital. Overall, we are optimistic, believing the worst is in the rear-view mirror as we anticipate a better future. Indeed, the future is coming, but only you can decide where it is going …

Source: Jeffrey Saut, Raymond James, July 6, 2009.

Bespoke: 62% is the magic number
“If the market is going to be able to trade higher this earnings season, the percentage of companies beating earnings estimates needs to be equal to or higher than the 62% reading we saw last quarter. The market did well during the last earnings season because the earnings beat rate finally saw a quarter over quarter increase. Prior to the 62% reading, the number had gone down every quarter since the second quarter of 2007 when the bear market started. It’s going to be hard to top 62% because analysts have been raising earnings estimates instead of cutting them this quarter.”

Source: Bespoke, July 9, 2009.

MoneyNews: Zoellick - dollar reserve currency not at risk
“The US dollar’s role as a global reserve currency is not currently at risk but Washington should heed concerns about its large and growing budget deficit, World Bank President Robert Zoellick said on Tuesday.

“‘The US should take all these (remarks by) commentators as serious statements about the need to preserve the unique status of the dollar as a reserve currency,’ Zoellick said in an interview with Reuters by telephone ahead of a G8 leaders’ summit in Italy.

“‘That means making sure, that after the stimulus plans, to restore fiscal discipline and have a sound monetary policy,’ he added.

“China, Russia and Brazil have said they will use this week’s summit to push their view that the world needs to start seeking a new global reserve currency as an alternative to the dollar.

“However, G8 sources told Reuters they do not expect a serious discussion on the issue.”

Source: MoneyNews, July 7, 2009.

Fin24: Zimbabwe puts rand on table again
“The Zimbabwean government put the adoption of the rand back on to the table with the country’s industry and commerce minister saying the option would be debated.

“Welshman Ncube, industry and commerce minister, was quoted by Reuters to have said on Tuesday that the country could not ‘… re-enter the Zimbabwe dollar without the economy to support that’.

“‘We need another solution. We cannot continue forever with multiple currencies,’ Ncube said. He was addressing an Africa forum in Zimbabwe.

“‘If we can at least join rand monetary union, we will have money allocated to Zimbabwe through that system,’ he said.

“The Zimbabwean dollar was abandoned at the beginning of the year, when runaway inflation and a thriving black market rendered the dollar virtually useless. The issue of Zimbabwe using the rand as its bespoke currency hit the news at the turn of the year but after several weeks of speculation the matter was ditched.

“Dawie Roodt, an analyst at Efficient Group said Zimbabwe does not have the means to peg its currency to the rand. ‘Whether they do it with or without the South African government’s permission, they need large currency reserves to enact such a plan, which don’t exist,’ he said.

“According to Roodt, Zimbabwe needs to focus on rebuilding its institutions to ensure a proper democracy, before any real improvement in the economy will be seen.”

Source: Leani Wessels,