U.S. Stocks Trouncing Range Bound Canadian Stocks (SIA)

Thursday, May 9th, 2013

by SIACharts.com

For this weeks edition of the SIA Equity Leaders Weekly, we will update our outlook on the Canadian Equity market looking specifically at the channel the TSX Composite has been in for the last 21 months and comparing the Canadian Equity index to the U.S. Equity index to see if the relative strength relationship has changed.

S&P/TSX Composite Index (TSX.I)

Updating the S&P/TSX Composite Index since we last looked at it a quarter ago on Valentines Day shows that the TSX.I has actually pulled back to the support level we highlighted at 11733.33, most likely tied to the Commodities sell-off in early April. Below this is further support at 11056.58 should the weakness continue. To the upside, resistance can be found at 12954.55, a level it also failed to move above in April of 2012 and 2013. A break through this level could see some potential upside towards rechallenging the high from June of 2010 at 14302.87.

So while the TSX Composite has been range bound between 11000 and 13000 over the last 21 months with no growth, the U.S. Equity indexes (S&P 500 Composite, Nasdaq, Dow) have all moved on to new all-time highs. With a neutral SMAX (near-term strength) score of 5 out of 10, we continue to monitor closely these asset class comparisons (see comparison below) and if the TSX Composite can break out of the channel it is currently in.

Click on Image to Enlarge

S&P 500 Composite Index vs. S&P/TSX Composite Index (SPX.I vs. TSX.I)

This chart shows the continued outperformance we have seen from the S&P 500 Composite index over the S&P/TSX Composite index with the green arrow showing the relative outperformance since October of 2011. Since the last time we looked at the TSX.I three months ago, the SPX.I has comparatively outperformed by around 10%. If we look at the past 21 months where the TSX.I has been range bound like indicated above, the S&P 500 Index is up around 33% while the TSX Composite is down around 2%. We continue to see relative strength of U.S. Equity over Canadian Equity at this time with the ‘VS SMAX’ score (comparison score) of 7 in favor of the SPX.I over the TSX.I.

Click on Image to Enlarge

Copyright © SIACharts.com

Tags: Canadian, Canadian Market, Canadian Stocks, S&P 500, Sia, Tsx, US Stocks
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S&P 500 Index: Short-Term Buy Signal Confirmed

Thursday, December 1st, 2011

I am writing to you from my hotel room in New York, keeping the post short and to the point as a full day of appointments lies ahead.

Further to my post of two days ago, “U.S. equities – downtrend arrested?“, my short-term technical buy signal for the S&P 500 Index has been confirmed. The rationale is explained below.

The Shiller S&P 500 PE10 has broken the 40-day moving average on the upside.

The PE10 has broken both the 12- and 26-day exponential moving averages on the upside, while the 12-day moving average is about to cross the 26-day moving average on the upside.

The MACD of the PE10 is bottoming.

The VIX has broken the short-term support.

The MACD has crossed its nine-day moving average and signaled a buy for the PE10.

But it will be a rough ride. The VIX is likely to encounter support at 24.

The RSI of the VIX is entering oversold territory.

The PE10 has closed the gap with the VIX.

The RSI of the PE10 and VIX (inverse) has bounced from an oversold level.

Sources: I-Net Bridge; CBOE; Plexus Asset Management.

Tags: Amp, Appointments, Bridge, Cboe, Exponential Moving Averages, Gap, Hotel Room, Level Sources, Macd, Moving Average, Plexus Asset Management, Rationale, Rough Ride, Rsi, S&P 500, Shiller, Stocks, Vix
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Adam Hewison: Technical Update – June 15, 2011 1:00 p.m.

Thursday, June 16th, 2011

Adam Hewison, charting strategist of INO.TV, brings you another edition of his invaluable service of daily technical updates on the ups and downs of various markets. This short analysis is a great tool for keeping one’s finger on the pulse and timing the markets.

Click the image below to hear his latest views on gold , silver, the US Dollar Index, the CRB Index, crude oil and the S&P 500 Index. Also, click here to have an instant analysis of any ticker symbol in your portfolio performed by INO. We feature the daily update in the right hand column of this site; it is updated every day around 1 p.m. and it is worth watching.

Now here’s a brief summary of what’s in today’s video and what’s happening right now in the major markets:

– SP 500: -70. The market action today can only be described as negative. A score is now -70 and our downside target for this market is 1250. Major downside support is at 1250.

– Silver: -70. I would watch this market very carefully today as I feel that it is probably at the lower end of its range. We would use the Donchian Channels along with the fact that this market is oversold and expect to see a bounce from current levels. Major Support at 34.00.

– Gold: +70. Gold is currently oversold and we expect to see this market balance sometime in the near future. We would not be surprised to see further sideways action but we want to be long this market as the Donchian channel comes in at 1503. Major support at 1,500.

– Crude Oil: +55 Trading range. This market continues to pound out a base to go higher. Long term indicator remains positive. Support coming into this market at $96/barrel. This market is currently oversold and choppy.

– The Dollar Index: -55. Despite today’s strong dollar rally in the index, the longer-term and mid-term Trade Triangles remain negative. Resistance now at 76.50. The dollar index is now in overbought territory. Minor support at 73.50 and major support at 73.00.

– Reuters/Jefferies CRB Commodity Index: +55. This index is now beginning to reach an oversold condition and we may see further backing and filling-in softness. Near-term resistance at 350.00. Minor support at 340. Major support at 335.00. Trading range.

The big question is are we going to close lower seven weeks in a row in the major indexes. Many people trading the markets now have not seen the classic bear market which does not give you a chance to get out. Several of our major long-term indicators are close to turning negative and when they do we would recommend moving into an all cash position for hitting any portfolio you might have in stocks.

Tags: Crb Index, Crude Oil, Donchian Channel, Donchian Channels, Finger On The Pulse, Gold Silver, Hand Column, Instant Analysis, Invaluable Service, Negative Resistance, Reuters, S Finger, S&P 500, Sideways Action, Strong Dollar, Target, Technical Updates, Term Indicator, Ups, Ups And Downs, Us Dollar Index
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Technical Talk: End of summer rally?

Thursday, August 12th, 2010

“As seen in the chart below for the SP 500 Index futures, the Index has cut through its valid up-trend line. That said, we believe the summer rally is likely to have run its course and the bias or path of least resistance for now will likely be down. The next downside support for SP 500 is 1081, then 1050,” commented technical analyst Kevin Lane of Fusion IQ.

Source: Fusion IQ, August 11, 2010.

Conveying essentially the same message, Adam Hewison (INO.com) provided a video analysis of the S&P 500’s outlook (recorded on Tuesday before yesterday’s sharp sell-off), expecting further downside.

Tags: August 11, Bias, Downside, Fusion, Index Futures, Ino, Iq, Path Of Least Resistance, S&P 500, Summer Rally, Technical Analyst, Trend Line, Video Analysis
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Words from the (investment) wise for the week that was (February 2 – 8, 2009)

Sunday, February 8th, 2009

Global stock markets shrugged off dire news on the US employment front, arguing that the gloomy data would hasten US lawmakers’ passage of a stimulus package. After falling for four straight weeks and recording the worst performance of the major US indices for January on record, Wall Street reversed course on the back of a stimulus-induced rally.

The US government seems on track to announce two new recovery plans next week. Firstly, Senate Democrats reached an agreement with Republican moderates on Friday regarding a fiscal stimulus package. The deal, in essence, entails about $110 billion in cuts to the roughly $900 billion legislation, according to The New York Times. Secondly, a rescue plan to inject billions of dollars into banks and entice investors to purchase toxic assets will be outlined on Monday by Treasury Secretary Timothy Geithner.

As investors’ risk appetite returned, the MSCI World Index and the MSCI Emerging Markets Index chalked up decent gains of 3.8% (YTD -5.4%) and 5.3% (YTD -1.7%) respectively. Among exchange-traded fund (ETFs), sector leaders were China (see additional comments below), Brazil and South Korea – all recording double-digit gains, according to John Nyaradi (Wall Street Sector Selector).

All the major US indices revved higher, as seen from the week’s movements: Dow Jones Industrial Index + 3.5% (YTD -5.6%), S&P 500 Index + 5.2% (YTD -3.8%), Nasdaq Composite Index +7.8% (YTD +0.9%) and Russell 2000 Index +6.1% (YTD -5.8%). Interestingly, the Nasdaq has been outperforming the Dow and S&P 500 since the beginning of December. Leadership by the technology sector is often good for the market as a whole.

Recent safe-haven trades such as US Treasuries (-0.7% in the case of 30-year bonds), the US dollar (-0.6%) and gold (-1.5%) took a back seat, as investors favored equities and commodities such as copper (+4.9%) and aluminum (+7.7%).

While pundits were speculating about when the Federal Reserve would enter the market as a buyer of US government bonds, Treasuries sold off as a large issuance of sovereign debt looms. However, German bonds gained handsomely on the perception that the European Central Bank was behind the curve with interest rate cuts against the backdrop of poor economic data.

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

Giving a glimmer of hope, the Baltic Dry Index (BDI) – measuring freight rates for iron ore and other bulk goods – jumped by 40% last week due to increased Chinese demand for iron ore. The Index has gained 125% over the past two months after plunging by 94% since its May high. The chart below illustrates the close relationship between the BDI (red line) and Reuters/Jeffries CRB Index (green line). (Not shown, the trends of the BDI and US Treasury yields also follow more or less the same path.)

As reported in my “Credit Crisis Watch” review of a few days ago, the past few months saw progress on the credit front, with a number of spreads having peaked. The TED spread, LIBOR-OIS spread and GSE mortgage spreads have all narrowed markedly since the record highs. Corporate bonds have also seen a strong improvement, but high-yield spreads remain at distressed levels. The tide seems to be turning, but the thawing of the credit markets still has some way to go before liquidity starts to move freely and confidence returns to the world’s financial system again.

Speaking of confidence, Montek Ahluwalia, deputy chairman of India’s planning commission, made the following remark at the recent Davos Forum: “Confidence grows at the rate a coconut tree grows. It falls at the rate a coconut falls.”

Back to the planned US rescue packages, and specifically Bill King’s comments: “The main problem plaguing the US economy is too much debt has been accumulated on gratuitous spending and the papering over of declining US living standards. Solons espouse a monstrous surge in debt to fund even more consumer spending. The toxin is not the cure. Inducements to save and invest in production are the remedy. But the welfare state and its ruling class are trying a last grandiose socialist [Keynesian] binge in the hope of salvaging their realm.”

Next, a tag cloud of my week’s reading. This is a way of visualizing word frequencies at a glance. Key words such as “bank”, “economy” and “market” dominated the list, whereas “China” seems to be gaining more prominence.

Stock markets have been in a “holding pattern”, or trading range, since the beginning of December. Key resistance and support levels for the major US indices are shown in the table below. The immediate upside target is the 50-day moving average (the Nasdaq and Russell 2000 are already above this line), followed by the early January highs. On the downside, the December 1 and all-important November 20 lows must hold in order to prevent considerable technical damage.

Here is Richard Russell’s (Dow Theory Letters) interpretation of the situation: “Frankly, I’m very impressed by the stubborn and continuing resistance of the DJ Industrial Average. I don’t think many analysts realize the extreme importance of the Industrial’s steady refusal to violate its November 20 low. The action of the Dow contains the answer to the trillion-dollar question – ‘Is the bear market in a halting process – or will the stock market signal a continuation of the primary bear market?’

“So here we are – at a crossroads to history. The market will issue its verdict when, and only when, it is ready. But for now – if there’s anything traders love, it’s a market rising in the face of lousy news.

“An optimistic outcome would be a continued refusal by the Industrials to close below 7,552. An obviously more bullish outcome would be the DJ Industrial Average and the DJ Transportation Average continuing to rally and ultimately (both Averages) bettering their early-January peaks.

“Clearly, the most bearish outcome would be the Industrials finally breaking below the November 20 low and thereby confirming that we are still locked in a continuing primary bear market.”

From across the pond in London, David Fuller (Fullermoney) said: “… there is a scenario which few other people are taking about. As part of our often-mentioned forecast for a ranging, reversion to the mean recovery rally first hypothesized in late October, there is a possibility that stock markets will do surprisingly well in the next few weeks. Strong rallies would eventually leave markets susceptible to partial pullbacks, including some right-hand base formation extension.

“How could strong rallies possibly occur when everyone is talking about depression? The answers can be found in sentiment and liquidity. Today, most people are either incredibly bearish or despondent, but extreme forecasts are seldom accurate, as I have mentioned before. However, there is plenty of liquidity in many portfolios and governments have significantly increased money supply in recent months. A rising stock market would force a reappraisal by bears, leading to a reversal of short positions, while long-only investors put more of their cash back into the stock market.”

My view is that stock markets, in general, are still caught between the actions of central banks furiously fending off a total economic meltdown on the one hand, and a grim economic and corporate picture on the other. While we figure out whether we are in a normal bounce or witnessing the start of something bigger, I am not averse to selective stock picking – picking out the choice morsels, so to speak.

As far as specific countries are concerned, I alluded to the Year of the Ox in my “Performance Round-up” of last week and mentioned that this is regarded as a sign of prosperity that has been very rewarding in the history of China. And what a start to the year it has been with the Shanghai Composite Index gaining 9.6% during the past week.

The chart pattern (see graph below) shows arguably one of the best base formations of the major stock market indices, followed by Friday’s breakout. Although the Index is still down by 64.2% since its high of October 16, 2007, it has moved to the top slot among global stock market performances for the year to date with returns of +19.8% (local currency) and +19.4% (US dollar terms).

For more discussion about the direction of stock markets, also see my post “Video-o-rama: Stimulus ad nauseum“.

Economy
“Global businesses remain very pessimistic. Sentiment is dark across the globe. Those that work in government are most worried, followed by businesses in financial and business services,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Pricing power has sharply eroded, suggesting that deflation is increasingly likely. The only silver lining is that business confidence has not declined further since hitting bottom in mid-December.”

The latest US economic reports were less grim in some instances than in previous reports, with a few indicators showing that the pace of decline could be slowing down. This view is shared by Nouriel Roubini (RGE Monitor) who wrote in Forbes: “In the US … the second derivative of growth and of other economic indicators is approaching positive territory (i.e. growth is still negative, but GDP may be falling at a slowing rate).”

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 reports.)

Friday, February 6
- Employment Report: Severity of weakness will stimulate votes for fiscal stimulus under consideration

Thursday, February 5
- Initial Claims: Labor market situation is dismal
- Productivity: Advanced in fourth quarter
- Factory Orders: Inventories/shipments ratio keeps advancing

Tuesday, February 4
- ISM Non-Manufacturing Survey: Pace of deceleration is slowing

Monday, February 2
- Senior Loan Officer Survey: Includes positive aspects
- Consumer Spending: Significant reduction
- ISM Manufacturing Survey: Positive news, but more is necessary
- Construction Spending: Remains week

BCA Research added: “In nominal terms, consumer spending declined at an annualized pace of 11% in the three months to December – the largest contraction since the 1930s. For most consumers and companies it is the trend in nominal dollars that matters, not the statistical artifact of ‘real’ dollars, measured in the national accounts. The need for dramatic stimulus is obvious: declining nominal activity points to a deepening financial crisis.”

Elsewhere in the world, the Bank of England (BoE) slashed its key repo rate by 50 basis points to 1.0% (the lowest level since the BoE was formed in 1694), whereas the Reserve Bank of Australia (RBA) cut its cash rate by 100 basis points to 3.25% (the lowest level in two decades). As expected, the European Central Bank (ECB) maintained its key policy rate at 2%, but will in all likelihood reduce the rate further in coming months as economic indicators show the Eurozone still contracting and inflationary pressures easing.

Further afield, the International Monetary Fund halved its 2009 growth forecast for Asia from 4.9% to 2.7%. “Clearly the hopes that Asia would experience a mild downturn while the global economy retrenched have now been firmly dismissed,” said Glenn Maguire, Asia chief economist at Société Générale, in the Financial Times.

Japan, according to Roubini, is entering another severe slump, one that looks worse than that of other advanced economies, and the fall is still accelerating, resembling a severe case of stag-deflation.

More dire news came from the Russian economics ministry, forecasting the economy’s slide into recession in 2009. GDP growth is forecast to be -0.2% this year compared with 5.6% in 2008. Meanwhile, the ruble has slumped by 35% against the US dollar since August to its weakest level in 11 years. Concerns about the downgrading of the country’s credit rating and a $200 billion reduction of its currency stockpile weighed on sentiment.

On a more positive note, strong Chinese bank lending and manufacturing data provided signs that the government’s attempts to spend its way out of the economic slowdown are starting to show results. China may also consider tapping into its $1.95 trillion foreign reserves to help boost demand. With domestic government debt only 16.2% of GDP, the country is in a better position to do so than most major economies, according to US Global Investors.

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

Source: Yahoo Finance, February 6, 2009.

In addition to Fed Chairman Bernanke’s testimony on the Central Bank’s lending programs in Washington (Tuesday, February 10), the US economic highlights for the week include the following: Wholesale Inventories on Tuesday, the Trade Balance and Treasury Budget on Wednesday, Initial Jobless Claims, Retail Sales and Business Inventories on Thursday, and Michigan Sentiment on Friday.

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

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

Source: Wall Street Journal Online, February 6, 2009.

In a world faced with untold uncertainty, my concluding thought today is borrowed from Briefing.com, saying that the situation reminds them of a scene in the Oscar-winning movie Terms of Endearment where Shirley MacLaine’s character is confronted with news from a doctor that her daughter has a malignant tumor. Upon hearing this, she asks what she should do. The doctor responds that she tells family members “to hope for the best, but prepare for the worst”. To this McClain’s character responds, “And they let you get away with that?” Don’t we all feel like the doctor these days?

My bags are packed and I am ready to make my way to the airport for a ten-day visit to Europe (Dublin, London, Geneva and Ljubljana). For those not familiar with Ljubljana, it is the charming capital of Slovenia – a country situated in the heart of Central Europe (see my post “Slovenia – the best-kept secret of Central Europe“). And this country will in future be playing a very special role in my life as I have just been appointed as its Honorary Consul for South Africa. And so begins my career as a part-time diplomat …

That’s the way it looks from Cape Town.

Richard Russell (Dow Theory Letters): Survival plan for unprecedented situation
“Don’t be married to any specific scenario. Anything may happen in response to the current situation. Follow the market – the market will know what’s happening before anyone else.

“The best survival plan is to be diversified. Nobody knows who or what will be ‘the last investment standing’. Will it be Treasury paper, high-grade bonds, real estate, diamonds, T-bills, cash, top-grade corporate stocks or gold?

“T-bills are the choice of many sophisticated investors. But T-bills are denominated in dollars, and dollars are vulnerable as are bonds or any other items denominated in Federal Reserve notes (‘dollars’).

“Real estate and diamonds represent intrinsic wealth, although they are not instantly liquid, meaning that they cannot be instantly turned into cash.

“Gold has been accepted as wealth for thousands of years. When all other forms of supposed wealth crashes (deflates) or becomes suspect, the last wealth asset to stand will be gold. Gold has no counter-party nor has it any debt aligned against it. Gold needs no central bank to ensure its acceptance. Gold is accepted everywhere and in any quantity as a form of indestructible, eternal wealth.

“Today, investment money is so suspicious of the viability of any given asset that they are placing their money in an item that bears the full faith and credit of the US government – I’m referring to Treasury paper. Actually, one major worry with T-bills is a possible collapse of the dollar.

“The following are my suggestions as to where an investor might place his money.

“AIG bonds (the government has bought the preferred stock of AIG, and the bonds should rate higher). Invest with the government.

“PHK – the high-yield fund run by PIMCO – speculative, but an interesting fund that’s 60% in investment-grade bonds.

“CD’s that are backed by the FDIC up to $250,000.

“Gold (GLD or CEF) or actual gold coins if possible.”

Source: Richard Russell, Dow Theory Letters, February 3, 2009.

The New York Times: Senators reach accord on stimulus plan
“Senate Democrats reached an agreement with Republican moderates on Friday to pare a huge economic recovery measure, clearing the way for approval of a package that President Obama said was urgently needed in light of mounting job losses.

“The deal, announced on the Senate floor, was a result of two days of tense negotiations and political theater. Mr. Obama dispatched his chief of staff to Capitol Hill to help conclude the talks and reassure senators in his own party, and he called three key Republicans to applaud them for their patriotism.

“The fine print was not immediately available, and the numbers were shifting. But in essence, the Democratic leadership and two centrist Republicans announced they had struck a deal on about $110 billion in cuts to the roughly $900 billion legislation – a deal expected to provide at least the 60 votes needed to send the bill out of the Senate and into negotiations with the House, which has passed its own version.

“The pact, which is expected to be approved in the next few days, was concluded just hours after the Labor Department announced that 598,000 jobs were lost in January.

“As the negotiations were under way, lawmakers said it was time to stop quibbling about the exact parameters of the legislation – which mixes safety-net spending, tax cuts and a huge infusion of dollars into federal programs – and to begin work toward a final agreement that could be sent to Mr. Obama next week.”

Source: Carl Hulse and David Herszenhorn, The New York Times, February 6, 2009.

CEP News: President Obama says US must avoid a “trade war”
“US President Barack Obama signalled on Tuesday that a controversial ‘Buy American’ provision in his stimulus bill would be reviewed in order to prevent a global trade war.

“In an ABC news interview on Tuesday, Obama said that any clause in the stimulus bill being considered by US lawmakers that would violate World Trade Organization agreements and signal protectionism would be a ‘mistake right now’.

“‘That is a potential source of trade wars that we can’t afford at a time when trade is sinking all across the globe,’ he said. ‘We need to make sure that any provisions that are in there are not going to trigger a trade war.’

“Obama’s comments come following a chorus of criticism from leaders around the world who object to a proposed ‘Buy American’ clause in the stimulus bill that would require infrastructure projects to use only manufactured goods made in the United States.

“Canada’s Ambassador to the United States, Michael Wilson, warned earlier in the day that such a policy could spark a global trade retaliation.

“‘A rush of protectionist actions could create a downward spiral like the world experienced in the 1930s,’ Wilson wrote in a letter to Republican and Democratic Senate leaders.”

Source: CEP News, February 3, 2009.

Bloomberg: Faber – US stimulus may lead to “dire consequences”
“Marc Faber, publisher of the ‘Gloom, Boom & Doom Report’, talks with Bloomberg’s Carol Massar about the prospects for a US economic stimulus package. Faber, speaking from Hong Kong, also discusses gold prices, the appeal of US technology stocks and the outlook for the banking industry.”

Source: Bloomberg, February 6, 2009.

Yahoo Finance: Peter Schiff – stimulus bill will lead to “unmitigated disaster”
“The fiscal stimulus bill being debated in Congress not only won’t help the economy, it will make the recession much worse, says Peter Schiff, president of Euro Pacific Capital.

“Schiff scoffs at the notion the economic decline is starting to level off and concedes no government action means a ‘terrible’ recession. But the path of increased government intervention will lead to ‘unmitigated disaster’, says Schiff, who gained notoriety in 2007-08 for his prescient calls on the housing bubble and US stocks.

“The problem, he says, is the government is trying to perpetuate a ‘phony economy’ based on borrowing and spending. With the US consumer tapped out, the government is ‘now taking on the mantle’ of consumer of last resort, he continues, predicting the bond bubble will soon burst – if it hasn’t already – ultimately leading to a collapse of the dollar and an ‘inflationary depression worse than anything any of us have ever seen’.

“If nothing else, Schiff is a nonpartisan critic of American policymakers, comparing President Bush to Herbert Hoover and President Obama to FDR, and neither in a favorable way.”

Source: Aaron Task, Yahoo Finance, February 6, 2009.

Bloomberg: Gross says trillions needed to avoid “mini-depression”
“Bill Gross, co-chief investment officer of Pacific Investment Management Co., talks with Bloomberg’s Kathleen Hays about the need for a US stimulus package. Gross, speaking in Newport Beach, California, also discusses his bond picks.”

Source: Bloomberg, February 5, 2009.

Bloomberg: Volcker urges more transparency in hedge funds

Source: Bloomberg (via YouTube), February 5, 2009.

The New York Times: New plan to help banks sell bad assets
“After weeks of internal debate, the Obama administration has settled on a plan to inject billions of dollars in fresh capital into banks and entice investors to purchase their most troubled assets.

“The new financial industry rescue plan, to be outlined in broad terms on Monday in a speech by the Treasury secretary, Timothy F. Geithner, will not require banks to increase their lending. That is despite criticism that institutions that already received money from the Troubled Asset Relief Program, or TARP, either hoarded it or used the funds to acquire other banks.

“The incentives to investors could be in the form of commitments to absorb some of the losses from any assets they purchase, should their values continue to decline. The goal is to relieve the banks of their worst assets so that private investors might then provide more capital.

“Officials hope that part of the plan is not labeled a ‘bad bank’ administered by the government, although they expect that some might call it that.

“No matter what it is called, the government would assume some of the risk of declining assets at the heart of the economic crisis. But by relying on a combination of private investors and government guarantees, the administration hopes to reduce its exposure to losses and avoid the problem of having to place a value on assets that the institutions have been unable to sell.

“A central element of the plan would be a major expansion of a lending facility begun in November by the Federal Reserve Bank of New York when it was headed by Mr. Geithner. The program, which was initially financed by $200 billion in Fed money and $20 billion in seed capital from the $700 billion bailout fund, lent money to investors to buy securities backed by student, auto and credit card loans, as well as loans guaranteed by the Small Business Administration.”

Source: Stephen Labaton, The New York Times, February 6, 2009.

Bill Gross: Stop the decline in asset prices
“The current financial and economic crisis is difficult to appreciate, not only for the drop in elevation, but because of the swiftness of the declines. It’s been a Wile E. Coyote 12 months – straight down like a dead weight.

“A year ago, global equity prices were nearly twice today’s levels and recession was only a whisper on the lips of the gloomiest of economists. Today, descriptions drawing parallels to the Great Depression make it obvious that a major shift in economic growth and its historic financial model, as well as policy prescriptions for its revival, are underway. Most of the world’s connected economies and its citizens are in shock, conscious but not fully aware of the seismic shifts that will unfold in future years.

“PIMCO’s thesis for several years has held that the levered global economy long ago morphed from a banking-dominated regime to one that hid behind securitized lending and structures resembling a ‘shadow banking’ system. SIVs, hedge funds, CDOs and increasingly levered mortgage and investment banks fueled asset appreciation in all investment markets, which in turn propelled real economic growth and employment to unsustainable levels.

“But, with the US housing prices as its trigger, the deleveraging process did a Wile E. Coyote and headed over the cliff in mid-year 2007, dragging down almost all asset prices except government bonds. The real economy followed shortly thereafter, not just in the US, but globally, proving that linkages work on the ‘down’ as well as the upside.

“To PIMCO, the remedy for this deflationary deleveraging and mini-depression is simple and almost axiomatic: stop the decline in asset prices. If that can be done, the real economy will level out as well. When home prices stop going down, newly created households will be more willing to take a chance on ownership as opposed to renting. If stock prices consolidate, recently burned investors will be more willing to invest, as opposed to stuffing their 401(k) mattresses with Treasury bills. Business investment, jobs, and profits should follow quickly behind.”

Source: Bill Gross, Pimco – Investment Outlook, February 2009.

Edmund Conway (Telegraph): Recession – glimmers of hope?
“The pace of economic decline is slowing. Housing sales are picking up, even if prices are falling. Credit markets have begun to thaw.

“This is the time-honoured pattern you expect to see when the downward spiral burns itself out and the cycle slowly starts to turn, helped this time by an unprecedented global monetary and fiscal blitz. But it may equally be a false dawn.

“The Baltic Dry Index measuring freight rates for iron ore and other bulk goods has been creeping up for two months after crashing 94% in the worst fall in shipping history. Copper prices are also edging up after plunging by two-thirds from their June peak. So are lumber prices.

“The debt markets have opened like a flower in spring, at least in one sense. Companies issued $246 billion in bonds in January, the most since the credit crisis began. Blue-chip groups can borrow again.

“‘The mood is upbeat. There are swathes of cash pouring back into credit,’ said Suki Mann, a credit strategist at Société Générale. ‘The market closed down after the Lehmans collapse so there was a lot of pent-up demand, but they are having to pay materially higher spreads than pre-Lehmans.’

“So far this has not helped the rest of the corporate universe. Average yields on BBB-rated debt are a prohibitive 19.6%. ‘The market is absolutely closed. There is no trickle-down yet,’ he said.

“The interbank freeze has started to thaw, again in one sense. David Buik, from BGC Partners, said interest spreads on three-month dollar Libor have come down to 1% from the extremes above 2% at the height of the panic. ‘The cost of money is coming down, but the banks are still not lending to each other. It’s virtually moribund,’ he said.

“The US Federal Reserve’s loan survey this week showed that lending is again picking up, albeit tentatively. The number of banks expecting to tighten credit has fallen from 80% in the autumn to nearer 60%, the lowest in a year.”

Click here for the full article.

Source: Ambrose Evans-Pritchard, Telegraph, February 5, 2009.

Bloomberg: Roubini says ECB “wrong”, rate cuts too little, too late
“Nouriel Roubini, professor at New York University’s Stern School of Business, talks with Bloomberg’s Ellen Pinchuk about the global economy and European Central Bank monetary policy.”

Source: Bloomberg, February 4, 2009.

European Commission: Escalating public debt

Hap tip: Phil’s Stock World.

Financial Times: IMF cuts forecast for Asian growth
“The scale of the economic slowdown in Asia was starkly underlined on Tuesday when the International Monetary Fund virtually halved its 2009 growth forecast for the region.

“The IMF slashed its forecast to 2.7% from an estimate of 4.9% made only two months ago. The move came as both Australia and Japan announced new measures to sustain their flagging economies.

“In Australia, the government unveiled a A$42 billion ($26.5 billion) fiscal stimulus and the central bank cut interest rates to 3.25%, the lowest level since the 1960s. In Tokyo, the Bank of Japan unveiled a plan to spend up to Y1,000bn ($11.2 billion) to buy shares owned by banks amid growing concerns over the impact of falling stock prices on the financial system.

“‘Clearly the hopes that Asia would experience a mild downturn while the global economy retrenched have now been firmly dismissed,’ said Glenn Maguire, Asia chief economist at Société Générale.

“‘There is a clear realisation that this is going to be a major economic readjustment and economies that are most leveraged to the global trade cycle will be most affected.’”

Source: Raphael Minder and Christian Oliver, Financial Times, February 3, 2009.

CEP News: Obama unveils economic recovery advisory board
“US President Barack Obama unveiled a new advisory board consisting of former government officials, union members and executives from some of the country’s largest firms who will provide guidance on how the US should respond to the economic crisis.

“The Economic Recovery Advisory Board will be led by former Fed Chairman Paul Volcker, Obama announced.

“The members will include: former Securities and Exchange Commission Chairman William Donaldson, former Fed Vice-Chairman Roger Ferguson, UBS Americas CEO Robert Wolf, GE CEO Jeffrey Immelt, Yale University’s CIO David Swensen, Caterpillar CEO Jim Owens, and Service Employees International Union Secretary-Treasurer Anna Burger.
“If the US government does not act soon, the US economy will continue to lose jobs and the downturn will accelerate, Obama said as he unveiled the board on Friday.”

Source: CEP News, February 6, 2009.

CEP News: Citigroup unveils plans to lend $36.5 billion
“In an effort to pass the benefits of the TARP onto the real economy, Citigroup unveiled plans to spend $36.5 billion in a series of new initiatives to spur credit card, mortgage and other consumer and business lending operations.

“The aims of the initiatives are, ‘to help expand available credit for consumers and businesses; restore liquidity and stability to the capital markets; and support the recovery of the US economy’, according to a new quarterly publication from Citigroup detailing how it plans to spend part of the $45 billion it borrowed from the US Treasury’s Troubled Asset Relief Program.

“The firm plans to make $25.7 billion in direct loans available to homebuyers and support the mortgage-backed securities market, spend $2.5 billion in consumer and business loans, $1.0 billion for student loans, $5.9 billion in credit card lending and $1.5 billion in corporate lending activity.

“Citigroup also said it made $75 billion in loans in the fourth quarter and plans to continue its partnership with the government, ‘to increase available lending and liquidity in the US financial markets and to help put the US economy back on track,’ Citi Chief Executive Officer Vikram Pandit said.”

Source: Financial Times, February 3, 2009.

Bespoke: Cumulative job losses – getting worse with time
“While they say things get better with time, the jobs picture is at least one exception. Today’s release of monthly non-farm payrolls showed that employers cut 598K jobs during the month of January. As shown, the US economy has lost a total of 3.6 million jobs since the start of 2008 with the bulk of those declines (80%) coming during the last five months. While the magnitude of the decline in jobs has been large, the pace of downward revisions is making things even worse.

“In the chart below, we show the cumulative decline in monthly jobs using the reported figures on the day of the initial release as well as the most recently revised numbers. As shown, based on reported numbers, the US economy would have lost 2.48 million jobs since the start of 2008. However, once we take into account the negative revisions, the US economy has lost another 1.1 million jobs, representing a 44% increase in jobs lost.”

Source: Bespoke, February 6, 2009.

CNBC: El-Erian on the employment picture
“The big loss of jobs will push the Obama administration to do more, says Mohamed El-Erian, Pimco co-chief investment officer/co-CEO.”

Source: CNBC, February 6, 2009.

Asha Bangalore (Northern Trust): Significant reduction in consumer spending
“The reduction in consumer spending in the past few months is noteworthy not only because it has declined in six out of the last seven, but at the same time the savings rate has increased rapidly in an environment when income is not advancing rapidly.

“The significance of an appropriately targeted fiscal stimulus package is evident … In other words, external stimulation is necessary to offset the weakness in consumer spending because an endogenous increase is unlikely in the months ahead. A decline in consumer spending in the first quarter is nearly certain. Also, the decline will be hefty because the level of consumer spending in December was considerably large such that there is an arithmetical disadvantage also.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 2, 2009.

Asha Bangalore (Northern Trust): Factory sector – inventories/shipments ratio keeps advancing
“Factory orders fell 3.9% in December following a 6.5% drop in November, reflecting a reduction in orders of both durable (-3.0%) and non-durable goods (-4.8%). Inventories (-1.4%) and shipments (-2.9%) also declined in December.

“The most important aspect of the report is the inventories-shipments ratio which rose to 1.44 in December, up from 1.29 in September and 1.23 in December 2008. The upward trend of this ratio is consistent with the underlying weakness of the economy. The December reading is the highest since April 1996.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 5, 2009.

Asha Bangalore (Northern Trust): ISM Survey – positive news, but more is necessary
“The ISM manufacturing composite index rose to 35.6 in January from 32.9 in December. The level of the index remains below 50.0 signifying a contraction in factory activity. However, the gain of the index suggests that factory activity is contracting at a slower pace in January compared with December. This is positive news.

“Indexes tracking production, new orders, and new export orders moved up in January, the employment index held steady, inventories and supplier delivers moved down. The 10.1 point increase in the new orders index warrants watching because these large jumps are associated with the end of recessions. Additional improvement in the subsequent months will be necessary to confirm that a recovery is underway given that the composite index and sub-components are far below 50.0 still.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 2, 2009.

Asha Bangalore (Northern Trust): Second tier reports – ISM non-manufacturing survey, mortgage applications
“Second tier economic reports published today include mixed signals. The composite index of the ISM non-manufacturing survey results contained positive indications, while mortgage applications for purchase of homes fell.

“The ISM composite index of the non-manufacturing rose to 42.9 in January from 40.1 in the prior month. Although the level of the index continues to signal a contracting non-manufacturing sector, it is noteworthy because the increase suggests the pace of deceleration has slowed.

“Mortgage applications index for the purchase of homes dropped to 261.4 during the week ended January 30, the third weekly decline. The level of the index now matches the reading seen in the 2001 recession, excluding the November 2008 low.

“Although the Housing Affordability Index is at a record high, severely weak labor market conditions are holding back sales of homes.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 4, 2009.

Forbes: Roubini – is America going the way of Japan?
“William Pesek, a savvy Asia columnist for Bloomberg, reports, in his latest column, views about the structural crisis faced by Japan that I first outlined in a 1996 paper, ‘Japan’s Economic Crisis’. Thirteen years later, Japan is entering another severe slump, one that looks like even worse than that of other advanced economies. In the US, Europe and some other advanced economies, along with China, the second derivative of growth and of other economic indicators is approaching positive territory (i.e. growth is still negative, but GDP may be falling at a slowing rate). In Japan, it is still highly negative. There, the fall is accelerating, resembling a free fall – a severe case of stag-deflation.

“The sad case of Japan’s free fall is a cautionary tale of what happens when a high-flying economy has a real estate and equity bubble that goes bust, avoiding (for too long) doing the painful structural reforms and clean-up of the financial system that is necessary to avoid a lengthy, L-shaped near-depression. Japan had over a decade of stagnation and deflation, then a mild, sub-par growth recovery that lasted only three years, and is now spinning into another severe stag-deflation.

“Keep alive zombie banks and zombie corporations with balance sheets and debts that haven’t been restructured, as in Japan, and you end up in an L-shaped near-depression.

“Let me explain why the US and the global economy face the risk of an L-shaped near-depression if appropriate policy actions are not undertaken.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, February 5, 2009.

BCA Research: The US economy is already in deflation
“The details of the fourth quarter US GDP data were terrible. GDP is declining in nominal terms and that is a better measure of deflation than a negative CPI rate.

“In real terms, the US economy contracted at a 3.8% annualized pace in 2008 Q4, the worst decline since 1982, but slightly better than many had expected. But the underlying picture provided no grounds for optimism. For most consumers and companies, it is the trend in nominal dollars that matters, not the statistical artifact of ‘real’ dollars, measured in the national accounts. In nominal terms, consumer spending declined at an annualized pace of 11% in the three months to December – the largest contraction since the 1930s.

“Meanwhile, total final sales to domestic purchasers also fell sharply in nominal terms in the fourth quarter. Deflation is not a risk, it is a reality. Demand, profits and asset prices are all contracting in nominal terms – which is more important than what the consumer price index is doing.

“In any case, the CPI is also in deflationary territory, down at a 13% annualized pace in the final three months of 2008. The need for dramatic stimulus is obvious: declining nominal activity points to a deepening financial crisis.”

Source: BCA Research, February 4, 2009.

CEP News: US home ownership rate falls to 7-year low
“The number of Americans who own their own home fell to a seven-year low in the fourth quarter of 2008 compared to a year ago, the Census Bureau reported Wednesday.

“The rate of home ownership fell to 67.5% in the fourth quarter, down from 67.8% during the same quarter a year ago. The report also said 2.9% of homes, excluding rental properties, were vacant and on the market, up slightly from 2.8% a year ago.

“Home ownership in the US peaked at a rate of 69.2% in 2004, at the height of the real estate boom.”

Source: CEP News, February 3, 2009.

Zillow: Americans lose $1.4 trillion in home values in Q4
“Home values in the United States fell for the eighth consecutive quarter, declining 11.6% during 2008 to a Zillow Home Value Index of $192,119, according to the fourth quarter Zillow Real Estate Market Reports, which encompass 161 metropolitan areas.

“The declines mean that US homeowners lost a cumulative $3.3 trillion in home values during 2008, with much of that loss coming in the fourth quarter.

“Homeowners lost $1.4 trillion during the fourth quarter alone; more than the $1.3 trillion lost during all of 2007. Since the housing market’s peak in 2006, $6.1 trillion in home values have been lost.

“Foreclosures made up nearly one in five (19.9%) of all transactions in 2008.”

Source: Zillow, February 3, 2009.

The New York Times: Rents are falling fast
“In this painful economic climate of layoffs and shrinking investments, there is a sliver of positive news: it’s a good time to be a renter in New York City. Prices are falling, primarily in Manhattan, and concessions like a month of free rent are widespread.

“Although it is notoriously difficult to quantify the state of the rental market, rents fell in almost every sector of the Manhattan market last year, according to the Real Estate Group, a New York brokerage. The steepest drop was in one-bedrooms, down 5.7% in buildings with doormen and 6.53% in buildings without. The only category that rose: rents for two-bedroom apartments in doorman buildings, up just a bit, by 0.61%.

“But these numbers, like most available data, represent asking rents rather than the final price. Anecdotal evidence suggests that some people are negotiating rents as much as 20% lower than the original prices asked by landlords. These figures also leave out incentives, like a month of free rent or a landlord’s paying the broker fee, which can add up to real savings.

“Fritz Frigan, executive director of sales and leasing at Halstead Property estimates that when these incentives are considered, rents are actually down some 10% to 15% since the market peak in mid-2007.”

Source: Elizabeth Harris, The New York Times, January 30, 2009.

Financial Times: S&P forecasts 200 defaults
“About 200 US junk-rated companies are likely to default this year, according to Standard & Poor’s, affecting almost $350 billion worth of debt and adding impetus to alternatives to bankruptcy, such as distressed debt exchanges.

“About half of the 17 US defaults seen in December were a result of distressed exchanges, where a company offers lenders new securities of a lesser value than the debt they are owed, usually to cut interest costs or delay principal repayment.

“Debt exchanges are becoming an increasingly common way to restructure debt outside of bankruptcy in the US – they remain rare in Europe – as US companies struggle to refinance $500 billion worth of bonds and more than $1,000 billion worth of bank loans amid the credit crunch.

“S&P said that there was a higher proportion of rated companies in the single-B category than ever before, with 800 business that make up one-third of all corporate ratings. ‘We expect nearly 200 speculative-grade companies to encounter some form of financial distress, leading to default in 2009,’ S&P said. ‘Currently, we have more than 180 companies rated B-minus or below with negative outlooks. That is where we expect many of the defaults will occur.’

“The agency added that the 185 companies most at risk had about $341 billion of debt outstanding. Outside the US, 61 junk-rated companies with another $56 billion worth of debt are also seen as highly likely to default.”

Source: Anousha Sakoui, Financial Times, February 2, 2009.

CEP News: US bankruptcies soar 33% in 2008
“More than 1.1 million Americans filed for bankruptcy in 2008, a 32% increase from the year before and the largest annual total since 2005, according to Automated Access to Court Electronic Records (AACER).

“Filings for companies were up 50% to 64,318, while individual filings were up 1.03 million.

“On September 15, 2008, the Lehman Brothers bankruptcy was the largest Chapter 11 filing of all-time. That was followed several days later by Washington Mutual, which became the biggest bank failure in US history.

“The largest increases in bankruptcy filings were in California (85%) and Arizona (81%), as those states also had the highest foreclosure rates.”

Source: CEP News, February 2, 2009.

CEP News: US credit card delinquencies at record high, says Fitch
“US credit card delinquencies reached all-time highs in January on the back of ongoing deteriorating conditions in the US economy, according to a study released by Fitch on Thursday.

“The rate of payments missed by more than 60 days advanced 0.47 percentage points to an all-time high of 3.75% in January, according to the report.

“‘US consumers continue to struggle in the face of mounting pressures on multiple fronts, from employment to housing to net worth,’ according to Michael Dean, a managing director at Fitch.

“The news comes at a difficult time for the United States with the economy shedding more than half a million jobs per month, and no signs of a turnaround in the near term.

“In addition, the Fed has pledged $200 billion in an initiative geared at backing holders of asset-backed securities including credit card debt, education and auto loans.”

Source: CEP News, February 5, 2009.

Financial Times: CDS regulation in Europe moves closer
“The prospect of legislation which would force banks and dealers in Europe to clear their deals in the huge credit default swap market centrally moved closer on Tuesday, when a top EU regulator asked parliamentarians to support the move.

“Charlie McCreevy, EU internal market commissioner, told a parliamentary committee in Strasbourg that both the European Central Bank and European regulators considered that ‘clearing of credit default swaps on a central counterparty in the EU is essential for financial stability and oversight’.

“Talking in the context of the capital requirements directive, which is currently passing through the parliament, Mr McCreevy said: ‘I would urge the parliament to support an amendment to give effect to this’.

“The commissioner’s move comes a few weeks after talks between Brussels and the industry to devise a central clearing system for the CDS market, which generally trades on a one-to-one basis between banks and dealers, broke down.”

Source: Nikki Tait, Financial Times, February 3, 2009.

Bespoke: Worst post-election day returns since 1900
“Not many people thought that running the country was going to be an easy job for President Obama, and based on the Dow’s returns since election day, the market doesn’t think so either. Below we highlight the performance of the Dow this many days past election day for all Presidential elections since 1900. As shown, the Dow’s decline of 17.78% since Obama’s election 93 days ago is the index’s biggest drop following any election in the last 108 years.”

Source: Bespoke, February 5, 2009.

CNN Money: Buffett’s metric says it’s time to buy
“According to investing guru Warren Buffett, US stocks are a logical investment when their total market value equals 70% to 80% of Gross National Product.

“Is it time to buy US stocks?

“According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of US stocks and the output of the US economy – its GNP.

“Fortune first ran a version of this chart in late 2001. Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.

“But he visualized a moment when purchases might make sense, saying, ‘If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you.’

“Well, that’s where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham’s statement about the stock market: ‘In the short run it’s a voting machine, but in the long run it’s a weighing machine.’”

Source: Carol Loomis and Doris Burke, CNN Money, February 4, 2009.

Bespoke: Positive guidance at decade lows
“Bespoke tracks a number of indicators during earnings season, and one of them is the percentage of companies that are raising guidance. Below we highlight this guidance indicator on a quarterly basis based on the 50,000+ individual earnings reports in our Earnings Report Database. During the current earnings season, just 2.3% of companies have raised guidance, which is the lowest reading since at least Q3 ‘01. Last quarter’s reading of 3% was the lowest at the time, but unfortunately, it has gotten even worse. At least expectations are about as low as they can get, and when the time comes that companies do start besting their guidance, it should propel stocks higher.”

Source: Bespoke, February 6, 2009.

Barry Ritholtz (The Big Picture): Bad Januarys equal bad Februarys?
“Last month, the S&P 500 index dropped 8.6%, which was the worst January on record. Naturally, that has some people wondering if this month will be any better. Unfortunately, history suggests otherwise.

“Since 1928, the market has declined in the first month of the year on 29 out of 81 occasions, or 35.8% of the time. The median loss during those losing Januarys has been 3.8% versus an overall average gain of 1.6%.

“On balance, performance in the month after a weak January has also been a downer. Over the past eight decades, the follow-on February has seen the S&P 500 decline on 18 separate occasions, or 62.1% of the time, with a median loss of 1.8%. That compares to an average rise of 0.1% for all Februarys from 1928 – 2008.

“So, while I have been among those who have been anticipating a first-half recovery (before a resumption of the bear market later in the year), the historical record suggests I just might have to wait until this month blows over first.”

Source: Barry Ritholtz, The Big Picture, February 4, 2009.

Bespoke: Nasdaq outperforms
“The Nasdaq has outperformed the S&P 500 and Dow Jones Industrial Average year to date, and it is actually up on the year while the other two are down between 3.5% and 6%.

“So how does this recent Nasdaq performance affect the index’s ratio with the Dow? Below is a chart of the DJIA/Nasdaq ratio since the start of 2002. When the line is rising, the Dow is outperforming the Nasdaq, and vice versa for a falling line. After getting slaughtered versus the Dow from August 2008 to November 2008, the Nasdaq has been outperforming. And judging by the range of the ratio over the past few years, this trend could continue for some time.”

Source: Bespoke, February 6, 2009.

Bespoke: US and BRIC world market share
“Earlier today we released a report showing just how off the ‘decoupling’ theory has been during the current global bear market. During the global bull market from ‘03 to ‘07, many pundits believed that developed and emerging markets outside of the US were strong enough to not catch a cold when the US sneezed. The BRIC countries of Brazil, Russia, India, and China were probably the most talked about countries when ‘decoupling’ came up, but as we’ve all seen, these countries have in fact gotten hit much harder than the US during the downturn.

“This couldn’t be highlighted better than in the chart below that shows both the US and the BRIC countries as a percentage of world market cap since mid 2003. As global equity markets rallied across the board from ‘03 to ‘07, the US lost a huge amount of world market share, falling from about 45% to a low of 24%. At the same time, BRIC countries went from about 4% of world market cap to nearly 16%.

“Once the credit crisis hit, however, US markets fell, but the rest of the world fell even harder. And as the chart shows, the US has been steadily gaining back market share over the last year or so, while the BRIC countries have fallen. Bear market: 1, Decoupling: 0.”

Source: Bespoke, February 2, 2009.

Bespoke: Performance of country ETFs
“Below we highlight ETFs that track equity markets for various countries. For each ETF, we provide its 5-day change, how far it is trading from its 50-day moving average, and how overbought or oversold it currently is. For overbought/oversold levels, we calculate how far the ETF is trading above or below the top or bottom of its trading range (using one standard deviation above and below the 50-day moving average as the trading range).

“As shown, four countries (Brazil, South Korea, Belgium, Canada) are trading above their 50-day moving averages, and just one (Brazil) is trading in overbought territory. The Russia ETF (RSX) is trading the furthest below its 50-day moving average, followed by Italy (EWI), Spain (EWP), Mexico (EWW), and Australia (EWA). Switzerland, Australia, Mexico, Spain, Italy, and Russia are all trading in oversold territory.”

Source: Bespoke, February 4, 2009.

CNBC: Dr. Doom – Asian markets pay you to wait
“Marc Faber, Editor of The Gloom, Boom & Doom Report, feels that the US market at current levels isn’t cheap. Asian markets, on the other hand, are much more value for money – there are stocks that pay you to wait out the recession. He shares his thoughts with CNBC’s Martin Soong.”

Source: CNBC, February 6, 2009.

Eoin Treacy (Fullermoney): Chinese stock market looks promising
“I find it interesting that the more sentiment deteriorates with regard to the future prospects for growth in the USA and Europe and as stock markets continue to disappoint; the same dire conclusions are rolled out to Asia and especially to China. There is no denying that the slowing global economy is having a knock-on effect in almost every country and China is no exception.

“Major job losses in Guangdong, slowing economic output, massive declines in the stock market and a peak in the housing market are seen as justifications to support this view. In addition, a communist system is by definition corrupt because it is unaccountable and concentrates power in the hands of too few people, media is heavily censored and citizens are indoctrinated to accept the status quo from an early age. However, with China, everything is seldom as it seems.

“The decline in the wealth effect in the West has been led by the fall in house prices. It is exaggerated by the home equity withdrawals which allowed home owners to leverage up their debt on the back of house price appreciation. To the best of my knowledge this option is simply not available to Chinese residents. 100% mortgages do not exist and the norm is for large down payments. The automotive loan industry is still in its infancy and credit / debit cards are used to far less an extent than in the West. It is still not surprising for large transactions to take place in cash rather than any other means. China does not have a futures market, although one is promised, and financial leverage available to retail investors is limited.

“Following a massive decline and 4-months of ranging, there has been little to encourage new money into the market. Ranging suggests supply and demand have come back into balance, but the Shanghai A-Share market needs to sustain a move above 2200 and ideally 2500 to indicate the bulls are back in control. In the short-term, the progression of higher or equal lows from the October nadir indicates that demand is returning at incrementally higher levels.

“The argument about the pace, course and impact of China’s re-emergence has being going on for a number of years and will continue to spark powerful emotions on both sides. At Fullermoney, we will continue to give the greatest weight to the charts, and right now, China shows the best base formation development characteristics of any globally significant market.”

Source: Eoin Treacy, Fullermoney, February 3, 2009.

Bloomberg: Roubini – Russia, east Europe stocks face “massive” drop
“Russian and eastern European equities may fall further because earnings and other fundamental measures mean little in the current economic turmoil, said Nouriel Roubini, the New York University professor who forecast a US recession two years ago.

“‘In market dynamics, prices can move far below what fundamentals justify,’ Roubini said in an interview in Moscow. ‘There is still a massive downside for equities in the region.’

“‘They may stagnate there for a while, and there’s not going to be any recovery,’ Roubini said. ‘For the time being, it’s going to get ugly.’

“The Russian Trading System Index is trading at 0.5 times book value, or the net asset value of its 50 companies, lower than the 1.4 times book value for the MSCI Emerging Markets Index according to weekly data compiled by Bloomberg.”

Source: William Mauldin, Bloomberg, February 4, 2009.

John Authers (Financial Times): Are Tips pointing to a return of inflation?
“The deflation scare that hit the world last year seems almost to be over. But markets disagree over whether this is the prelude to another inflation scare.

“Last year, the ‘breakeven’ rate at which US 10-year inflation-linked bonds (or Tips) would offer the same return as fixed-income Treasuries dipped below 0.1%. This implied there would be virtually no inflation at all, on average, over the next decade. Breakeven rates also implied there would be outright deflation over the next five years. Nothing like this had happened since the Depression of the early 1930s.

“If there was any inflation at all, this meant that Tips would outperform. Many seem to have bought them on this basis, as Tips now imply an inflation rate of 1.1% for the next 10 years. This is very low, but is its highest in four months.

“Meanwhile the real yield on conventional US Treasury bonds (obtained by subtracting current inflation from the nominal yield) is 2.8%, the highest in two years. That is in part due to low headline inflation. However, this figure makes it harder to believe US bonds are in a bubble.

“The inflation rate is fundamental to the valuation of many asset classes. Higher inflation expectations should hurt bonds and boost commodities and stocks. As it implies returning consumer activity, it should help consumer discretionary stocks most.

“Looking around the markets, there are many contradictions. Gold is gaining, but other commodities are not significantly above their lows. Stocks are not doing so well.

“An explanation might be as follows. Markets recognise that last year’s deflation panic was extreme, but are still not certain that the money-printing measures will push up inflation. The Tips market is relatively inefficient, and investors took the opportunity to make money out of it – but markets could move much further if inflation returns as governments hope.”

Source: John Authers, Financial Times, February 3, 2009.

Guardian: Soros – euro may not last without global plan
“The euro may not survive unless the European Union pushes for an international agreement on toxic assets, billionaire investor George Soros told Austria’s Der Standard newspaper.

“‘One would need a type of agreement on lost capital, so that the burden is shared, and in which every country is part of, otherwise more countries will suffer,’ said Soros in an interview with the paper, which was published on its Website.

“‘The EU should do this. If they don’t do this then the euro may not survive the crisis.’

“A warning from European Central Bank President Jean-Claude Trichet that the ECB could push interest rates below 2% and use other measures to boost growth also hit the euro, as did data showing the biggest monthly jump in German unemployment in four years.”

Source: Guardian, January 29, 2009.

Bloomberg: Ruble falls to 11-year low
“The ruble slumped to its weakest level against the dollar in 11 years as investors speculated Russia will be forced to give up its currency defense after draining reserves.

“‘The pace of the move to the target is definitely going to be a source of concern to the central bank,’ said Martin Blum, head of emerging-market economics and currency strategy at UniCredit SpA in Vienna. ‘Global risk appetite is continuing to deteriorate so the pressures on the ruble will continue.’

“The ruble slumped 35% against the dollar since August as a 63% drop in Urals crude oil prices and the worst global economic crisis since the Great Depression spurred investors and Russian citizens to withdraw about $290 billion from the country, according to BNP Paribas SA.

“Bank Rossii expanded its trading range for the ruble 20 times since mid-November before switching policy to let ‘market’ forces help determine the exchange rate within a widened limit.”

Source: Emma O’Brien, Bloomberg, February 2, 2009.

Ambrose Evans-Pritchard (Telegraph): Putin calls for end of dollar stranglehold
“Russian prime minister Vladimir Putin has called for concerted action to break the stranglehold of the US dollar and create a new global structure of regional powers.

“‘The one reserve currency has become a danger to the world economy: that is now obvious to everybody,’ he said in a speech at the World Economic Forum.

“It is the first time that a Russian leader has set foot in the sanctum sanctorum of global capitalism at Davos.

“Mr Putin said the leading powers should ensure an ‘irreversible’ move towards a system of multiple reserve currencies, questioning the ‘reliability’ of the US dollar as a safe store of value. ‘The pride of Wall Street investment banks don’t exist any more,’ he said.

“Mr Putin said: ‘We are witnessing a truly global crisis. The speed of developments beats every record, and the strategic difference from the Great Depression is that under globalisation this touches everyone. This has multiplied the destructive force. It looks exactly like the perfect storm.’

“However, Mr Putin’s own government in Russia is facing mass protest as unemployment surges and austerity measures start to bite.”

Source: Ambrose Evans-Pritchard, Telegraph, January 29, 2009.

Bloomberg: Rogers says Russia may break up
“Jim Rogers, chairman of Rogers Holdings, talks with Bloomberg’s Ellen Pinchuk about the outlook for the Russian economy, the ruble and his investment strategy. Rogers, speaking in Moscow, also discusses the outlook for oil prices and emerging markets.”

Source: Bloomberg, February 5, 2009.

Richard Russell (Dow Theory Letters): Gold trade getting crowded
“An interesting article appeared in yesterday’s Financial Times. The title of the piece was ‘I Don’t Like the Big Shiny Crowds Around Gold’ by John Dizard.

“Russell comment: This sudden wide spread interest in gold has bothered me too. Ads for gold are appearing in the newspapers, articles about gold are now commonplace. Writes Dizard, ‘I don’t like crowds, and the one around gold is just too big at the present. Let’s say that Western civilization is coming to a bloody end. That won’t happen for a few months at least. So why not wait until you don’t have to pay an unjustifiable premium for something as common as a Krugerrand.’

“‘Having said all this, I agree with the gold buyers that we are in a multi-year gold bull market that will eventually take the price to an integer multiple of where it is now, not a big integer multiple. But enough to approximate now much inflation must shrink the real burdens of debt to what the developed country taxpayer and consumer can afford.’

“‘Gold is one of, if not the most, treacherous trading markets there is. Ian Shapolsky, a New York investor, who trades for his own account, and whose tactical gold trading strategy I described in his space a couple of years ago, has abandoned the metal after a reasonably successful run.’

“As he says, ‘The gold market is thinner than it was, and it seems that the larger players can push it around more than they could in the past. The larger traders are aware of the chart points (price targets) followed by the investing public; and there seems to be a lot of effort to push prices above breakout points or moving averages.’

“So stay out of the deep end, average in. Don’t buy in a panic.”

Source: Richard Russell, Dow Theory Letters, February 4, 2009.

Commodity Online: Gold accumulation plan from India Post
“Buoyed by the runaway success of its gold coins sale scheme across the post offices in the country, India Post, the postal services department of the government of India, has announced a Gold Accumulation Plan.

“India Post, in association with the World Gold Council and Reliance Money, a financial services company of the Reliance Group, on Wednesday said that the Gold Accumulation Plan (GAP) will be carried out through its wide postal networks across the country.

“As per GAP, customers can purchase gold coins from any India Post offices across nine states in the country. ‘The GAP project ensures that people have the options like the Systematic Investment Plans of investing in gold by accumulating small quantities of the yellow metal,’ Sunita Trivedi, Chief General Manager, India Post told Commodity Online.

“‘This is to promote gold investment in India. Going forward, we not only plan to further expand this service to another 100 India Post outlets but also launch our Gold Accumulation Plan to help customers make systematic investments in gold,’ she said.”

Source: Commodity Online, February 5, 2009.

Telegraph: China falls into budget deficit as spending balloons
“China’s attempts to spend its way out of economic depression led to a fiscal deficit of 111 billion yuan (£12 billion) last year.

“Despite a near 20% rise in tax revenues and a record surplus of 1.19 trillion yuan (£128 billion) in the first six months of the year, the dramatic scale of government spending in November and December was enough to plunge the entire year into deficit.

“The figures are the first indication of how quickly and forcefully China reacted to the economic crisis after it announced a fiscal stimulus package of 4 trillion yuan in November to build new roads, railways, schools and hospitals.

“Government spending in December surged to 1.66 trillion yuan, more than triple the previous month’s total and 31% higher compared to the same month last year.

“The news came as Wen Jiabao, the Chinese prime minister, said that he was mulling over another fiscal stimulus package. ‘We may take further new, timely and decisive measures. All these measures have to be taken pre-emptively, before an economic retreat,’ he told the Financial Times.

“Although Mr Wen did not mention any concrete details, it is widely believed that the Chinese government wants to put together a social benefits package, in order to encourage people to up their spending and reduce their saving.”

Source: Malcolm Moore, Telegraph, February 2, 2009.

Financial Times: MDC agrees to join Mugabe government
“Zimbabwe’s opposition has bowed to pressure and agreed to join a national unity government with President Robert Mugabe in a last-ditch effort to halt a humanitarian catastrophe.

“In spite of deep misgivings on the part of some party leaders and trade unionists, the Movement for Democratic Change (MDC) decided that it had no choice but to accept the terms of a deal negotiated by southern African leaders this week, even though its key demand – control of policing through the home affairs ministry – was not met.

“Morgan Tsvangirai, the MDC leader and winner of a first round of presidential elections last year, emerged from a party vote on the issue on Friday sounding sanguine. He will be sworn in as prime minister on February 11. MDC politicians will occupy 11 of the 31 cabinet posts, including finance, education and health.

“The scale of the humanitarian crisis that the new administration will face was underlined when the World Health Organisation warned that ‘the deadliest cholera outbreak in Africa for 15 years is gaining momentum, with 1,493 new cases including 69 deaths reported in the last 24 hours alone’. About 60,000 Zimbabweans have caught the illness and more than 3,000 have died.”

“‘We are not saying that this is a solution to the Zimbabwe crisis,’ said Mr Tsvangirai. ‘Instead our participation signifies that we have chosen to continue the struggle for a democratic Zimbabwe in a new arena.’”

Source: Tony Hawkins and Richard Lapper, Financial Times, January 30, 2009.

Tags: 30 Year Bonds, Abc News, Africa, Ambrose Evans-Pritchard, America, Asha Bangalore, Asia, Australia, Austria, bad bank, Baltic Dry, bank, Bank Failure, bank lending, Bank Loans, Bank Of England, Bank Of Japan, banking, Barack Obama, Barry Ritholtz, Belgium, Ben Graham, Bernanke, Bill Gross, Bill King, Bloomberg, Brazil, BRIC, BRICs, broker, Brussels, Bush, California, Canadian Market, Cape Town, Carol Massar, Caterpillar, Ceo, chairman, Chief Economist, Chief Executive Officer, China, Chinese Government, Cio, Citi, Citigroup, Cnn, CNY, Columnist, Commissioner, Congress, Crb, credit strategist, Crude Oil Prices, David Fuller (Fullermoney), David Swensen, Davos, Department Of Labor, DJ Transportation, Doom, Doris Burke, Dow 30, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Dublin, Economic Recovery Advisory Board, editor, Edmund Conway, Ellen Pinchuk, Emerging Markets, Eoin Treacy (Fullermoney), ETF, Euro Pacific Capital, Europe, European Central Bank, European Commission, European Union, Exchange Traded Fund, Executive Director, Fdic, Federal Government, Federal Reserve Bank Of New York, Finance, Fiscal Stimulus, Gbp, GE, George Soros, Glenn Maguire, Global Stock Markets, Herbert Hoover, Housing Affordability, India, International Monetary Fund, Internet Bubble, Italy, Japan, Jean Claude Trichet, Jeffrey Immelt, Jim Rogers, John Authers, John Dizard, Kathleen Hays, Labor Department, Lehman Brothers, London, major US indices, Managing Director, Marc Faber, Martin Soong, metal, Mexico, Mohamed El Erian, Mortgage Applications, Moscow, Msci Emerging Markets, Msci Emerging Markets Index, Msci World, Msci World Index, Nasdaq 100, Nasdaq Composite, Nasdaq Composite Index, New York, New York City, New York University, New York University’s Stern School of Business, Newport Beach, Nikki Tait, non-manufacturing, non-manufacturing sector, Northern Trust, Nouriel Roubini, Obama administration, oil, Oil Prices, Oil Sands, Pacific Investment Management Co, Paul Volcker, Peter Schiff, president, Prime Minister, professor, Republican Moderates, Reserve Bank Of Australia, Richard Russell, Risk Appetite, Rogers Holdings, Russell 2000, Russell 2000 Index, Russia, Russian Trading System, S&P 500, Secretary, Sector Leaders, Securities And Exchange Commission, Senate, Senate Democrats, Senior Loan Officer, shadow banking, Shanghai, Small Business Administration, Societe Generale, South Africa, South Korea, Spain, SSE 50, Standard & Poor, Stimulus Package, Straight Weeks, Survey, Switzerland, Technology Sector, Technology Stocks, the Financial Times, The Gloom, the New York Times, Timothy Geithner, Tokyo, Treasury Secretary, United States, Us Federal Reserve, Us Government, Us Treasury, usd, Vice Chairman, Vienna, Vikram Pandit, Vladimir Putin, Wachovia, Wall Street Journal, Warren Buffett, Washington, Washington Mutual, Wen Jiabao, William Pesek, World Economic Forum, World Gold Council, World Trade Organization, Yahoo, Yale University, yellow metal, Youtube, Zimbabwe
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Jeff Saut: Making a Case for the Bulls

Thursday, February 5th, 2009

This post is a guest contribution by Jeffrey Saut, Chief Investment Strategist and Managing Director of Equity Research at Raymond James & Associates.

I believe “income” will be a profitable investment theme for the foreseeable future. Indeed, the baby boomers are retiring; and, the yields afforded them via Treasury securities, money-market funds, and certificates of deposit (CDs) won’t supplement their retirement account incomes enough to support them in the style to which they have become accustomed. Enter stocks, which since 1926 have averaged a total annualized return of 10.4%.

Interestingly, roughly 5% of that return has come from earnings growth, 0.9% has come from price-to-earnings (P/E) multiple expansions – but 4.5% of said return was derived from dividends. More than 40% of long-term investment returns have been driven by dividends. Furthermore, if investors buy non-dividend-paying stocks, and the overall stock market declines, they tend to be at the “directionality” of the stock market.

However, the shares that investors purchase of dividend-paying stocks, whose share price subsequently declines, actually own an asset that is becoming more valuable as its dividend yield rises, provided the dividend is maintained.

While some contend that aggregate corporate dividends have been reduced, and/or eliminated, due to the maelstrom in the financial complex, I have recommended avoiding financials for the last 5 years, and therefore have been relatively unaffected by those dividend reductions.

Excluding the battered financials, however, most corporate balance sheets appear in relatively good shape. Yet companies remain hesitant to commit more money to capital expenditures in this weakened economic environment. Therefore, I think it reasonable to expect corporations will use dividends as an increasingly valuable strategy for distributing excess cash.

To be sure, non-financial balance sheets are in better shape than the financial complexes’, suggesting that dividends, and dividend increases, should be a favored corporate strategy going forward — rather than share repurchases — since for the last 18 months most share prices have traveled lower, making share repurchases a value-destroying strategy.

To this point, most companies have two avenues for cash: They can either plow back/re-invest in capital expenditures, M&A activities, and/or working capital initiatives, or they can pay/increase dividends, repurchase shares, and/or reduce debt. My analysis suggests that managers will probably pursue shareholder-friendly initiatives after meeting internal/external objectives. This implies they will likely pay, and/or increase, dividend streams.

This is a not unimportant observation, since the retiring “boomers” seem to be moving toward the mantra scribed in the first paragraph, of the first chapter, of Ben Graham’s book The Intelligent Investor: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

Note that Dr. Graham uses the word adequate, not spectacular, when speaking of investment returns. Plainly, secure dividends tend to cushion a portfolio and enhance total returns. Dividends also provide, at least to some degree, the “margin of safety” Ben Graham speaks of in the last chapter of his book: To wit, if you own a stock with a 7% yield, those shares can decline by 7% over the next 12 months, and you won’t have lost any money. Consistent with these thoughts, I have employed Graham’s investing matrices to our investing strategy for more than 40 years. That’s why I constantly reiterate the theme of “dividend yields.” I continue to invest this way, and would note that, in Bespoke’s dividend-yielding stock list, there are 5 companies from the Raymond James research universe of stocks. Those issues are: 8.8%-yielding Realty Income (O); 7.3%-yielding Polaris Industries (PII); 5.5%-yielding NYSE Euronext (NYX); 4.8%-yielding Hudson City Bank (HCBK); and 4.8%-yielding Aflac (AFL).

And while they are not on Bespoke’s list, additional yielding names from Raymond James’ “Analyst Current Favorites” report include: Republic Services (RSG); Johnson & Johnson (JNJ); Allstate (ALL); Inergy (NRGY); Home Depot (HD); Essex Property Trust (ESS); and New York Bancorp (NYB).

Speaking to the equity markets, I was pretty bullish between the psychological/capitulation stock market “low” of 10/10/08 (where 93% of the stock traded on the NYSE made new yearly lows), as well as the subsequent “price low” of November 20, 2008, often commenting that the stock market was in a bottoming process on a short/intermediate-term basis. Furthermore, I was adamant that participants should favor the upside into mid-January 2009 where a correction would be due. I also opined that the stock market’s internal metrics (advance/decline, upside versus downside volume, new highs versus new lows, etc.) in that decline would tell us a lot about the future direction for stocks.

Accordingly, I became increasingly defensive as the “ides of January” approached. Since then, I’ve been monitoring the market’s internals, but so far they are telling us nothing. The picture should become clearer if the DJIA (8000.86) can either confirm the breakdown by the D-J Transports (TRAN) of their November 20, 2008 “low” with a like breakdown below the Dow’s November 20, 2008 closing-low of 7552.29 (so far, what we have is a downside non-confirmation, which is bullish); or, if the DJIA and the TRAN can better their January 6, 2009 reaction highs of 9015.10 and 3717.26, respectively, which would be a Dow Theory “buy signal.”

Until then, I continue to take the market’s temperature. Indeed, sometimes me sits and thinks; sometimes me just sits. That said, I continue to think it’s a mistake to get too bearish, because of the bullish case that can be made.

1. If forward earnings estimates are anywhere close to the mark, stocks in the aggregate are cheap;

2. Nominal interest rates are zero and real interest rates a negative;

3. Money is the “oil” that makes the economic engine run, and money is being printed like wallpaper;

4. Oil prices have collapsed, which is tantamount to a huge tax cut;

5. The authorities are pulling-out ALL the stops;

6. The official recession is now 13 months old, with the typical one lasting 18 months;

7. If past is prologue, the fourth quarter of 2009 will end the recession;

8. The stock market tends to stop going down 6 months prior to recessions’ end;

9. So far the TRAN has broken below its November 2008 low without the DJIA doing the same (read: downside non-confirmation; and

10. If the DJIA and the TRAN rally above their respective January 6, 2009 closing highs, it would be a Dow Theory buy signal.

As well, I have seen this play before. As Dennis Gartman wrote last week:

“There is no question that this is the worst economic time since the Great Depression”… Sluggish economic growth this year will cap the worst 3-year period centered on a recession since the Great Depression… Forecasts for a weak recovery in 1992 suggest the period since 1990 will be the worst for the economy since the Great Depression… The banking industry has plunged to its lowest point since the Great Depression… “This is the worst retail sale period on record since the Great Depression… This recession is hitting white-collar workers more heavily than any since the great Depression of the 1930s.”

Those media quips were taken from various newspapers during the recession of 1990-1991.

The call for this week: At down 8.5%, the S&P 500 just had its worst January in history. That swoon flashed cautionary signals from not only the January Barometer (so goes January, so goes the year), but the December Low Indicator as well. Moreover, in the past 3 weeks, there have been 3 90% Downside Days (points lost versus points gained AND downside volume versus upside volume were skewed more than 90% to the downside), suggesting that the sellers have not yet been exhausted. The result left most of the market averages I follow below their respective 10-, 30-, and 50-day moving averages, indicating a full downside retest of the November lows is likely in the works.

Whether that retest will be successful remains to be seen, but I’m hopeful, because my proprietary oversold indicator is just about as oversold as it can get. In the interim we are cautiously sitting and waiting until the stock market speaks.

Source: Jeff Saut, Minyanville, February 2, 2009.

Tags: Aflac, Allstate, analyst, Annualized Return, Baby Boomers, Ben Graham, Capital Expenditures, Certificates Of Deposit, Chief Investment Strategist, Chief Investment Strategist and Managing Director, Corporate Balance Sheets, Dennis Gartman, Dividend Paying Stocks, Dividend Yield, Earnings Growth, Essex Property Trust, Excess Cash, Financial Balance, Home Depot, Hudson City Bank, Investment Returns, Jeff Saut, jeffrey saut, Johnson & Johnson, Long Term Investment, Managing Director of Equity Research, media quips, Minyanville, Money Market Funds, New York Bancorp, NYSE Euronext, oil, Oil Prices, Polaris Industries, Profitable Investment, Raymond James Associates, Republic Services, Retirement Account, S&P 500, Stock Market Declines, The Intelligent Investor, Treasury Securities, worst retail sale period
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Stock market performance round-up: At mercy of grim data

Monday, February 2nd, 2009

An avalanche of worse-than-expected economic and earnings data again put pressure on Wall Street during the past month, resulting in four straight down-weeks and the worst performance of the major US indices for January on record.

“As January goes, so goes the year” is one of the most frequently quoted sayings about seasonal trends in the stock market. With the Dow Jones Industrial Index down by 8.8% and the S&P 500 Index 8.6% lower, the year is not off to a promising start.

Despite frantic actions by the Fed and other central banks to unclog credit markets and restore confidence in the world’s financial system, the MSCI World Index and MSCI Emerging Markets Index fell by 8.8% and 6.6% respectively during January.

The performances in the table below are given in local currency terms for different measurement periods ended January 31.

Click on the image for a larger table.

From the highs of late October 2007 until the November 20 lows, mature markets have outperformed developing markets, as shown by the declines of 54.1% for the MSCI World Index and 65.3% for the MSCI Emerging Markets Index. The relative-strength graph below clearly shows this outperformance (i.e. declining trend), but the period since the November lows has witnessed emerging markets reclaiming lost ground (i.e. rising trend).

In local currency terms, the best-performing bourses since the November 20 lows have been Russia (+23.8%), Oslo (+18.8%) and Brazil (+17.7%). However, the two markets still in the red – Helsinki (-2.2%) and France (-0.2%) – have had much less to cheer about.

Considering the month of January, the top three performers were all BRIC countries, namely China (+9.3%), Brazil (+4.7%) and Russia (+2.5%). Although India closed the month on a strong note (up 8.6% during the fourth week), the Bombay Sensex 30 Index still lagged its BRIC counterparts for the month. The year-to-date performances of these countries, together with the MSCI Emerging Markets Index, are shown in the graph below.

Source: StockCharts.com

It should be noted that the Chinese stock market has been closed over the past few days in celebration of the Lunar New Year. It will be interesting to see how this market starts the Year of the Ox on Monday as the chart pattern shows arguably the best base formation of the major market indices. The Shanghai Composite Index (1,991) is also challenging its three-month highs and is within close reach of the roundophobia level of 2,000 for the Shanghai Composite Index.

The gains/declines mentioned above are all in local currency terms. However, converting the movements to US dollar shows a somewhat different picture for the non-dollar countries (see table below). Over the one-month period (US Dollar Index up by 5.8%), the European and emerging-market indices fared considerably worse in dollar terms than in local terms.

Click on the image for a larger table.

With the Russian ruble falling out of bed, the Russian Trading System Index declined by 15.3% in dollar terms over one month, whereas it recorded a gain of 2.5% in local currency terms. (Since the November 20 low, Russia has swung from the first position (+23.8%) in local currency terms to the last place (-4.7%) in dollar terms.

Back to the US stock market, the bar chart below (courtesy of Bespoke) shows the performance of the ten S&P 500 sectors in January. Financials were a large part of the overall declines, as the sector had fallen by 26.5%. On the other hand, Utilities and Health Care were the best-performing sectors, declining by only 0.8% and 1.3% respectively.

Source: Bespoke, January 30, 2009.

Notwithstanding the improvement since the November lows, it remains too early to tell whether a secular low has been recorded. The chart below shows the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (or momentum) indicator (blue line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and again since December 2007. Having said that, the level of the indicator is grossly oversold.

Stock markets are still caught between the actions of central banks furiously fending off a total economic meltdown on the one hand, and a worsening economic and corporate picture on the other. Failing stronger market breadth and further evidence of the thawing of the credit markets and the world’s financial systems starting to function normally again, investor confidence will probably remain depressed. While I remain distrustful, I am not averse to selective stock picking – picking out the choice morsels, so to speak.

Tags: Bombay Sensex, Bourses, Brazil, BRIC, Bric Countries, BRICs, BSE 30, Central Banks, China, Credit Markets, Currency Terms, Dow 30, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Earnings Data, Emerging Markets, financial systems, France, Helsinki, India, Lows, major US indices, Mature Markets, Month Of January, Msci Emerging Markets, Msci Emerging Markets Index, Msci World, Msci World Index, New Year's Day, Oslo, Relative Strength, Russia, Russian Trading System, S&P 500, Sayings, Seasonal Trends, SSE 50, Stock Market Performance, United States, Us Federal Reserve
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Words from the (investment) wise for the week that was (Jan 26 – Feb 1, 2009)

Sunday, February 1st, 2009

“Words from the Wise” this week comes to you in a shortened format as pressure from my “day job” precludes me from doing my customary commentary. However, a full dose of excerpts from interesting news items and quotes from market commentators is provided. (For more discussion about economies and financial markets, also see my post “Video-o-rama: Global economy – banked into submission“.)

Just a side note: As President Obama’s economic stimulus package makes its way to the US Senate and the government crafts plans to create a “bad bank”, the Chinese celebrated the Lunar New Year to usher in the Year of the Ox. According to Jim Trippon (China Stock Digest), the Chinese believe good and bad follow each other closely.

After a year of financial meltdowns in 2008, it is comforting to learn that the Year of the Ox is a sign of prosperity and has been very rewarding in the history of China. Are we unnecessarily concerned about the economic slowdown in China, and will the country’s vast foreign reserves come to the Western world’s rescue? If only hope were an investment strategy!

Why does the cartoon below remind me of Margaret Thatcher’s poignant observation: “The problem with socialism is that you eventually run out of other people’s money”?

Bill King (The King Report) said: “The Paradox of Thrift (or saving) is a reductio ad absurdum by John Maynard Keynes that avers that if everyone saves, aggregate demand will decline, and this will imperil the economy. We’d like to contribute the ‘Paradox of Spending’ to Econ 101. This maxim holds that if everyone spends, there are no savings; debt surges and the implosion of that debt collapses an economy.”

Next, a tag cloud of the text of all the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. As the saying goes: A picture paints a thousand words …

The US stock markets experienced their worst January in history, as seen from the movements of the major indices: Dow Jones Industrial Index -8.8%, S&P 500 Index -8.6%, Nasdaq Composite Index -6.4% and Russell 2000 Index -11.2%. This brings into question the January Barometer, stating “As January goes, so goes the year”.

Key resistance and support levels for the US indices are shown in the table below. The immediate upside target is the 50-day moving average, followed by the early-January highs. On the downside, the December 1 and all-important November 20 lows must hold in order to prevent considerable technical damage. As seen from the table, the Dow has already breached its January 2 low and closed the week only marginally above the roundophobia number of 8,000.

As far as the outlook for the stock market is concerned, I will suffice with a comment from Richard Russell (Dow Theory Letters): “The stock market often tries to confuse us by coming up with something new. Assuming that the Averages do better than their preceding January peaks, it would have occurred without the usual heavy buying on rising volume. It may be that the January peaks will have to be bettered before the ‘real’ volume comes in. … we will have to monitor the stock market action carefully, to make sure we are not being sucked in to a fake rally as was the case following the 1929 crash.”

Also make sure to read my recent posts “Albert Edwards: Back in the bear camp” and “Jeremy Grantham – The bear buys stocks“.

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

Source: Yahoo Finance, January 30, 2009.

In addition to interest rate announcements by the Bank of England and the European Central Bank (Thursday, February 5), the US economic highlights for the week include the following:

Source: Northern Trust.

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

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

Source: Wall Street Journal Online, January 30, 2009.

Caution should be exercised, since the economic and earnings background remains precarious. And do remember Charles Darwin’s words: “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.”

That’s the way it looks from Cape Town.

NBR: Warren Buffett one on one
SUSIE GHARIB, ANCHOR, NIGHTLY BUSINESS REPORT: Are we overly optimistic about what President Obama can do?

WARREN BUFFETT, CHAIRMAN, BERKSHIRE HATHAWAY: Well I think if you think that he can turn things around in a month or three months or six months and there’s going to be some magical transformation since he took office on the 20th that can’t happen and wouldn’t happen. So you don’t want to get into Superman-type expectations. On the other hand, I don’t think there’s anybody better than you could have had; have in the presidency than Barack Obama at this time. He understands economics. He’s a very smart guy. He’s a cool rational-type thinker. He will work with the right kind of people. So you’ve got the right person in the operating room, but it doesn’t mean the patient is going to leave the hospital tomorrow.

SG: Mr. Buffett, I know that you’re close to President Obama, what are you advising him?

WB: Well I’m not advising him really, but if I were I wouldn’t be able to talk about it. I am available any time. But he’s got all kinds of talent right back there with him in Washington. Plus he’s a talent himself so if I never contributed anything for him, fine.

SG: But I know that during the election that you were one of his economic advisors, what were you telling him?

WB: I was telling him business was going to be awful during the election period and that we were coming up in November to a terrible economic scene which would be even worse probably when he got inaugurated. So far I’ve been either lucky or right on that. But he’s got the right ideas. He believes in the same things I believe in. America’s best days are ahead and that we’ve got a great economic machine, its sputtering now. And he believes there could be a more equitable job done in distributing the rewards of this great machine. But he doesn’t need my advice on anything.

Click here for the full article.

Source: Susie Gharib, NBR, January 22, 2009.

CNN Money: House passes $819 billion stimulus bill
“The House on Wednesday evening passed an $819 billion economic stimulus package on a party-line vote, despite President Obama’s efforts to achieve bipartisan support for the bill.

“The final vote was 244 to 188. No Republicans voted for the bill, while 11 Democrats voted against it.

“The Senate is likely to take up the bill next week.

“‘I hope that we can continue to strengthen this plan before it gets to my desk,’ Obama said in a statement after the vote. ‘We must move swiftly and boldly to put Americans back to work, and that is exactly what this plan begins to do.’

“‘One week and one day ago, our new President delivered a great inaugural address … which I believe is a great blueprint for the future,’ said House Speaker Nancy Pelosi. ‘With swift and bold action today, we are doing just that – with this vote today, we are taking America in a new direction.’

“Next week, the full Senate will vote on its version, which differs in some significant ways from the House bill. The two chambers will then need to reconcile their differences before each vote on the final version. To pass the package in the Senate, Democrats will need 60 votes – meaning at least two Republicans.

“Congress has put the legislation on a fast track, as many lawmakers on both sides of the aisle agree that swift action is needed to help pull the economy out of a deep recession. Both Democratic and Republican leaders have said they aim to get the bill to Obama’s desk for him to sign before lawmakers’ Presidents Day recess in mid-February.”

Source: David Goldman, CNN Money, January 28, 2009.

CEP News: US Government plans to set up “bad bank” to buy toxic assets
“The US government is crafting plans to create a “bad bank” to purchase toxic assets from financial institutions and strengthen the balance sheets of financial institutions, according to a report from CNBC on Tuesday evening.

“The concept of a ‘bad bank’ is one which has been floated around by many countries across the globe as a means to add further stimulus to financial institutions and speed up market recovery. Nevertheless, the details of the plan have not been released.

“At the very least, CNBC quoted an unnamed Treasury official as saying that the government was planning a ‘major’ announcement next week.

“In the aftermath of the announcement, Bloomberg News cited ‘sources familiar with the matter’ that the Federal Deposit Insurance Corporation (FDIC) would be the likely candidate to run such an institution, arguing that Chairperson Sheila Bair has proposed issuing FDIC-backed debt to finance the project.

“Also on Tuesday, US Senator Chris Dodd, an active member in the crafting of recent financial legislation in the United States, said the creation of a ‘bad bank’ sounded like a good idea and confirmed that he is aware that the Obama administration is looking into such a matter.”

Source: CEP News, January 28, 2009.

CNBC: Plan for banks’ toxic debt may be unveiled next week

Click here for the article.

Source: CNBC, January 27, 2009.

Yahoo Finance: Good bank, bad bank or banana
“While the idea of the government becoming the de facto bad bank in a system-wide good bank-bad bank solution has some merit, there’s a big problem with the ‘aggregator bank’ idea that’s gaining momentum in Washington DC, says Lawrence J. White Professor of Economics at New York University’s Stern School of Business.

“‘Whether you call it a bad bank an aggregator bank or a banana doesn’t change the basic problem: You’ve got to figure out what price is going to get paid for the assets that leave the financial system and end up in this government entity,’ White says. ‘That’s the hard part.’”

Click here for the article.

Source: Yahoo Finance, January 27, 2009.

CNBC: Barry Ritholtz – suggestions on how to restructure banks

“1. Stop interfering with the markets!: Nationalizing banks isn’t market interference, keeping these mortally wounded banks alive is! Stop pussyfooting around and admit the truth. The market knows it, investors know it.

Let the FDIC do its job. That is:

2. Temporarily nationalize the banks: We know they are insolvent, and cannot survive without taxpayer money. Spending 150% of their market cap for an 8% share is absurd.

Wipe out the debt, liquidate bad common holders, fire the board and management, appoint new competent, risk sensitive management. They have six months to spin out a 10% stake in each of their holdings, followed by the rest within 5 years (10 at most).

3. Taxpayer owned: Once nationalized, that 10% spin out of the component parts would be in the form of preferred to taxpayers! For BAC, you would spin out Bank of America, Merrill Lynch, Countrywide, plus the ‘B/A Toxic Holdings I & II’. For Citi, it would be Travelers, Citi, Smith Barney, ‘Citi Toxic Holdings I & II’, etc.

4. Now recapitalize: With the toxic waste off of the books, you can easily recapitalize the banks. Give the old creditors a ‘sweetheart’ deal – they get a 10% stake also, but only if they buy a matching amount in the new bank.

5. Align compensation with long-term profitability: Stop rewarding traders for short term gains despite long term losses. Stop paying taxpayer monies out as dividends. Bonuses must be a function of the long term health of the company – not monthly volatility.”

Sources: CNBC and The Big Picture, January 29, 2009.

David Fuller (Fullermoney): What to do with bad assets
“The question of what to do about the bad assets on bank balance sheets has been circulating for some time. No one has yet come up with a sound method of valuing these assets and until they do, the uncertainty surrounding the situation will remain acute.

“US Aggregate Reserves for Depository Institutions in Excess of Required Reserves continue to climb to levels massively in excess of what is needed. Banks are doing everything they can to shore up their balance sheets because they do not know how they will be called upon to meet their outstanding obligations. The inability to value their assets is at the root of this problem.

“The de facto guarantees that have been put behind the major players in the banking system have helped to bring the TED spread down to much more reasonable levels. However, the difference between AA Bank spreads and BBB Bank spreads imply that investors continue to bet that high numbers of lower rated banks will default at some stage. This would seem to be common sense. A less leveraged, slimmed down banking sector will have less members and those either ‘too big to fail’ or with the healthiest balance sheets are most likely to survive.

“Personally, I am in favour of a form of the ‘bad bank’ solution. However, I see recapitalisation and the valuing of suspect assets as separate issues. If a ‘bad bank’ takes possession of illiquid, hard-to-value assets, it should do so at prices well below what banks would deem as breakeven. This is the only fair way to make sure that the taxpayer is not paying up for duff assets. Recapitalisation should subsequently be considered only where any opacity in a firm’s balance sheet has been cleared out; so that taxpayers know exactly what they are putting their money into.

“We know that a large number of hard-to-value assets have deep intrinsic value, which is not readily available to assess in today’s conditions. Price discovery will only become apparent when an active secondary market for such assets is created. The ‘bad bank’ will be key to creating and managing such a pool of liquidity. If the value of the bad assets turns out to be more than a bank received in bailout funds, they would have a justifiable cause to seek redress but that would be an issue for the courts subsequent to the financial crisis and not for now.”

Source: David Fuller, Fullermoney, January 29, 2009.

The New York Times: Sweden’s fix for banks – nationalize them
“The Swedes have a simple message to the Americans: Bite the bullet and nationalize.

“With Sweden’s banks effectively bankrupt in the early 1990s, a center-right government pulled off a rapid recovery that led to taxpayers making money in the long run.

“Former government officials in Sweden, many of whom come from the market-oriented end of the political spectrum, say the only way to solve the crisis in the United States is for the government to be prepared to temporarily take full ownership of the banks.

“Sweden placed its banks with troubled assets into a so-called bad bank, where they could be held and then sold over time when market and economic conditions improved. In the meantime, it used taxpayer money to provide enough capital to allow banks to resume normal lending.

“In the process, Sweden wiped out existing shareholders.”

Source: Carter Dougherty, The New York Times, January 22, 2009.

Bloomberg: Fannie to tap US for as much as $16 billion in aid
“Fannie Mae, the largest source of home-loan money in the US, said it will need to tap as much as $16 billion in emergency funds from the US Treasury Department to stay afloat as deterioration in the housing market persists.

“Fannie’s planned request, announced today, follows Freddie Mac, which said on January 23 that it will need as much as $35 billion more in federal aid. Unprecedented mortgage losses drove the net worth of both companies below zero last quarter, they said in separate securities filings.

“This will be Washington-based Fannie’s first draw on a $200 billion emergency fund set up by Treasury in September to keep the government-sponsored enterprises solvent. Fannie said losses on mortgage loans and a decline in the market value of its assets accounted for the shortfall in the fourth quarter.

“Fannie’s Treasury request was “much worse” than expected, said Rajiv Setia, a fixed-income strategist at Barclays Capital in New York. Setia estimates taxpayers will have to shell out at least $50 billion for Fannie and $70 billion for Freddie this year. One or both, especially Freddie, may exceed the Treasury’s backstop this year, he said.”

Source: Dawn Kopecki, Bloomberg, January 26, 2009.

Daily Mail: Revealed – day the banks were just three hours from collapse
“Britain was just three hours away from going bust last year after a secret run on the banks, one of Gordon Brown’s Ministers has revealed.

“City Minister Paul Myners disclosed that on Friday, October 10, the country was ‘very close’ to a complete banking collapse after ‘major depositors’ attempted to withdraw their money en masse.

“The Mail on Sunday has been told that the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals. Only frantic behind-the-scenes efforts averted financial meltdown.”

Source: Glen Owen, Daily Mail, January 24, 2009.

CEP News: IMF slashes global growth forecasts
“On the back of a $2.2 trillion loss on toxic US assets worldwide, the global economy is expected to contract in 2009 before recovering the following year, according to a report from the International Monetary Fund (IMF) on Wednesday.

“‘Unless stronger financial stains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth,’ read the report, which urged governments to continue taking action to rescue the financial system.

“‘We now expect the global economy to come to a virtual halt,’ said IMF chief economist Olivier Blanchard at a press conference.

“As a consequence, the global economy is expected to grow 0.5% in 2009 rather than by 2.2% as previously estimated, and expand by 3.0% in 2010.

“To address the situation, the IMF report voiced support for the so-called ‘bad bank’ approach where governments could set up a financial institution to purchase toxic assets, removing them from the balance sheets of banks.

“‘We think that more decisive action is needed now by both policy-makers and market participants, and with greater emphasis on balance sheet cleansing,’ said Jaime Caruana, financial counsellor of the IMF.”

Source: CEP News, January 28, 2009.

Bloomberg: Gloom deepens among world’s chief executives
“Gloom is deepening among business leaders, casting a pall over this year’s World Economic Forum in Davos, Switzerland.

“Just one in five of 1,124 chief executives in 50 nations said they were very confident about prospects for revenue growth in 2009, down from half last year, and more than a quarter said they were pessimistic, a survey by PricewaterhouseCoopers showed. The sentiment was the worst since the accounting and consulting firm began tracking the CEO outlook in 2003.

“‘The speed and intensity of the recession has rocked the psyches of CEOs and created a global crisis of confidence,” Samuel DiPiazza, PWC’s New York-based CEO, said in a statement.

“Such concerns are virulent as executives from JPMorgan Chase’s Jamie Dimon to Stephen Green of HSBC Holdings join more than 2,500 counterparts, academics and policy makers in the ski resort for five days of soul-searching and deal-making. They meet as the world economy hurtles deeper into recession, banks add to more than a $1 trillion in writedowns and governments tighten their grip over the financial system.

“‘The outlook is pretty grim,’ said Howard Davies, director of the London School of Economics and a former Bank of England policy maker who will be in Davos. ‘Things are not good and business surveys are coming out showing they’re getting even worse.’”

Source: Matthew Benjamin and Simon Kennedy, Bloomberg, January 28, 2009.

The Wall Street Journal: YouTubing in Davos with Huffington and Forbes
“YouTube’s Chad Hurley, Arianna Huffington and Steve Forbes share their views on Davos and the global economic crisis with WSJ’s Andy Jordan.”

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

Bloomberg: Roubini – “nowhere to hide” from global slowdown
“‘There is nowhere to hide,’ Nouriel Roubini, an economics professor at NYU’s Stern School of Business who predicted the financial crisis, said from Zurich in an interview with Bloomberg Television. ‘We have for the first time in decades a global synchronized recession. Markets have become perfectly correlated and economies are also becoming perfectly correlated. This is not your kind of traditional minor recession.’”

Click here for the article.

Source: Bloomberg, January 27, 2009.

Financial Times: Nations turn to barter deals to secure food
“Countries struggling to secure credit have resorted to barter and secretive government-to-government deals to buy food, with some contracts worth hundreds of millions of dollars.

“In a striking example of how the global financial crisis and high food prices have strained the finances of poor and middle-income nations, countries including Russia, Malaysia, Vietnam and Morocco say they have signed or are discussing inter-government and barter deals to import commodities from rice to vegetable oil.

“The revival of these trade practices, used rarely in the last 20 years and usually by nations subject to international embargoes and the old communist bloc, is a result of the countries’ failure to secure trade financing as bank lending has dried up.

“The countries have not disclosed the value of any deals, and some have refused even to confirm their existence. Officials estimated that they ranged from $5 million for smaller contracts to more than $500 million for the biggest.”

Source: Javier Blas, Financial Times, January 26, 2009.

Financial Times: Capital flows to developing world at risk
“Capital flows to emerging markets are in danger of collapsing this year as the financial crisis in advanced economies risks choking off the supply of credit to the developing world, an association of large banks warned on Tuesday.

“The Institute for International Finance forecasts net private sector capital flows to emerging markets will be no more than $165 billion this year, less than half the $466 billion inflow in 2008 and only one fifth of the amount sent in the peak year of 2007.

“The figures underscore the impact the banking crisis and risk-averse investors are having on emerging market economies, one of the central issues at this year’s World Economic Forum in Davos.

“Bill Rhodes, a senior Citigroup executive who is vice-chairman of the IIF, urged leading economies to co-operate with each other and the private sector to address the problem. ‘This is a worldwide recession the like of which we have not seen since World War II,’ he said. ‘There is no one country or group of countries that can do this on its own. The only way to solve it is co-ordination across the board.’

“Mr Rhodes also called on the International Monetary Fund to intensify its efforts to supply liquidity to emerging markets by extending the duration of the current facility from three months to more than a year. ‘The IMF’s resources need to be expanded and its approaches modified to provide financing to emerging markets that have been caught in a crisis not of their making.’”

Source: Peter Thal Larsen, Financial Times, January 27, 2009.

Paul Kedrosky (Infectious Greed): Fun with Fitch – sovereign hotspots
“Some slides from a useful new Fitch presentation on one of my favorite subjects: sovereign hotspots around the world.”

Source: Paul Kedrosky, Infectious Greed, January 29, 2009.

Asha Bangalore (Northern Trust): Fed reiterates support for credit markets
“The Federal Open Market Committee (FOMC) left the target federal funds rate unchanged at 0%-0.25%. Richmond Fed President Lacker cast the only dissenting vote as he would have preferred increasing the monetary base through purchases of Treasury securities rather than through the credit programs.

“The FOMC policy statement noted that the ‘Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time’. This part of the message is identical to the December 2008 statement.

“Overall, today’s [Wednesday] statement presented a broader picture of the economic situation and included some bullish expectations about the economy. By contrast, the December 16 policy statement focused largely on features of the Fed’s new regime. In particular, six aspects of the policy statement were different from the December 2008 announcement.

“First, significantly slowing global demand was mentioned versus the December statement that did not mention the global economy.

“Second, today’s statement noted that ‘conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions.’

“Third, the FOMC predicts that ‘a gradual recovery in economic activity will begin later this year’, and the statement indicated that ‘the downside risks to that outlook are significant’.

“Fourth, in December, inflation was expected to ‘moderate in coming quarters’. There is notable departure from this view because the Fed now ‘expects that inflation pressures will remain subdued in coming quarters’.

“Fifth, the FOMC indicated that it ‘is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets’.

“Sixth, today’s statement has an explicit discussion about the Fed’s balance sheet. As expected the Fed reiterated support of credit markets.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 28, 2009.

BCA Research: US LEI – uptick unsustainable
“The Conference Board’s leading economic indicator (LEI) ticked up in December, but we do not view this as the beginning of a sustained economic recovery.

“The tick up in the LEI was mainly due to the large positive contribution from real money supply and the yield curve. Meanwhile, measures of the real economy continue to weaken: large declines occurred in building permits, employee hours worked, supplier deliveries, while initial unemployment claims are skyrocketing.

“It is still unclear that monetary and fiscal policy are effective (private sector borrowing rates have only marginally fallen) and the housing market is still very weak.

“True, existing home inventories fell in December, but seasonal factors played a large role (inventories always fall during the autumn and winter). Improved activity levels during the spring selling season, should they occur, would be a more accurate signal that the housing market is stabilizing.

“However, the unemployment rate is set to still rise sharply, which will further undermine consumer confidence and spending, particularly on big ticket items. Bottom line: Economic data will continue to be weak and the LEI will likely slide further before a sustainable bottom is made.”

Source: BCA Research, January 29, 2009.

Asha Bangalore (Northern Trust): Q4 GDP Report – gain in inventories masks true weakness
“Real gross domestic product (GDP) declined 3.8% in the fourth quarter of 2008, the minus sign for GDP growth was not a surprise but a larger decline was widely expected. The increase in inventories (+$6.2 billion versus -$29.6 billion in Q3), which was largely unexpected, offset the weakness in demand and trimmed down the headline reading.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 30, 2009.

Bespoke: GDP price index enters the deflation zone
“While the markets have been focused on the better than expected GDP report for the fourth quarter, the GDP price index was potentially even more notable. While economists were looking for a quarter/quarter annualized increase of 0.4%, the actual level was a decline of 0.1%. This negative print is only the seventh time since the end of WWII (and the first time since 1954) that prices decrease based on this measure. For now at least, the Fed’s view that ‘inflation pressures will remain subdued in coming quarters’ appears to be right on target.

Source: Bespoke, January 30, 2009.

Richard Russell (Dow Theory Letters): Is inflation creeping back?
“Below is my inflation/deflation chart. This is simply the long T-bond divided by gold. When the ratio rise in favor of bonds, it’s saying that the bonds are stronger than gold, which is deflationary. When the ratio declines in favor of gold, it tells us that gold is gaining in relative strength, and that’s inflationary. Note the head-and-shoulders pattern just before the plunge – the plunge took the ratio below the rising trendline. This is the chart Bernanke has been waiting for.”

Source: Richard Russell, Dow Theory Letters, January 27, 2009.

Standard & Poor’s: S&P/Case-Shiller – home price declines continue
“Data through November 2008, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, shows continued broad based declines in the prices of existing single family homes across the United States, with 11 of the 20 metro areas showing record rates of annual decline, and 14 reporting declines in excess of 10% versus November 2007.

“‘The freefall in residential real estate continued through November 2008,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s. ‘Since August 2006, the 10-City and 20-City Composites have declined every month – a total of 28 consecutive months.’”

Source: Standard & Poor’s, January 27, 2009.

Asha Bangalore (Northern Trust): Existing home sales – inventories remain at elevated levels
“Sales of existing homes rose 4.7% in December after two monthly declines, inventories remain at elevated levels, and the median price of an existing single-family home fell in December. The gain in home sales is noteworthy while other aspects of today’s report are much the same as we have seen for several months. The important take-away in this report is that inventories of unsold existing homes remain at elevated levels. Although mortgage rates have moved up slightly, they remain at significantly favorable levels.

“The seasonally adjusted inventory-sales ratio of existing single-family homes fell to a 9.6-month supply from an 11.4-month supply in November. This appears impressive at the outset, but digging deeper it appears that the November reading was probably an aberration because the quarterly averages for 2008 range between a 9.8-month supply and a 10.26-month mark. Inventories of unsold homes need to shrink considerably more for home prices to stabilize.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 26, 2009.

Asha Bangalore (Northern Trust): New home sales plunge
“In December, sales of new homes declined, prices fell, and inventories were the highest on record. The main message from the December report is that homebuilders will continue to reduce production of new homes.

“The inventory of unsold new homes rose to a 12.9-month supply in December, the largest on record.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 29, 2009.

The Wall Street Journal: An upside to plunging home prices
“John Lonski, CEO of Moody’s Capital Markets Research Group, discusses the latest decline in home prices. He tells WSJ’s Kelly Evans that although it highlights plunging home prices and the deterioration of mortgage-backed securities, it’s promoting the stabilization of home sales.”

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

Asha Bangalore (Northern Trust): Durable goods orders post sharp drop
“Orders and shipments of durable goods fell in 2.6% in December, after a downwardly revised 3.7% drop in November. The declines in orders of durable goods were widespread.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 29, 2009.

Asha Bangalore (Northern Trust): Consumer confidence posts new low
The Conference Board’s Consumer Confidence Index fell to 37.7 in January from 38.6 in December. This is a new record low for the series which dates back to February 1967. The grim headlines and media coverage of the financial and economic turmoil and staggering layoff announcements justify the sober consumer outlook.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 27, 2009.

The Wall Street Journal: Lending drops at big US banks
“Lending at many of the nation’s largest banks fell in recent months, even after they received $148 billion in taxpayer capital that was intended to help the economy by making loans more readily available.

“Ten of the 13 big beneficiaries of the Treasury Department’s Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008, according to a Wall Street Journal analysis of banks that recently announced their quarterly results.

“Those 13 banks have collected the lion’s share of the roughly $200 billion the government has doled out since TARP was launched last October to stabilize financial institutions. Banks reporting declines in outstanding loans range from giants Bank of America and Citigroup, each of which got $45 billion from the government; to smaller, regional institutions. Just three of the banks reported growth in their loan portfolios: US Bancorp, SunTrust Banks Inc. and BB&T Corp.

“The overall decline in loans on the 13 banks’ books – from about $3.36 trillion as of September 30 to $3.31 trillion at year’s end – raises fresh questions about TARP’s effectiveness at coaxing banks to reopen their lending spigots.

Source: The Wall Street Journal, January 26, 2009.

Richard Russell (Dow Theory Letters): Will new primary bull market be signalled?
“The Dow Theory to the fore. On January 20, the DJ Transportation Average broke below its November 20 bear market low of 2,988.99. The new low was not confirmed by the Industrial Average, which held above its own November 20 bear market low of 7,552.29. This non-confirmation set up the potential for a Dow Theory bull signal. If the Industrials and Transports can now muster the strength to rally above their preceding January peaks, (Industrials on January 6 at 9,015.10 and Transports at 3,717.26), a new primary bull market will be signaled.

“There are two concepts about this that bother me.

(1) If a new bull market is signaled, it would mean that the bear market of November 2007 to November 2008 ended in only one year. Since the preceding bull market (1982 to 2007) lasted 25 years, a one-year bear market (no matter how severe) seems too short in time to correct one of the greatest bull markets in history.

(2) Based on the Lowry’s figures, it appears that most of the upside progress since the November 20 bear market lows has been the result of a decline in selling pressure. Historically, the beginning of a new bull market has been characterized by not only a drastic drop in Lowry’s Selling Pressure Index, but also by heavy buying and strong upside volume (neither of which has been present).

“The stock market often tries to confuse us by coming up with something new. Assuming that the Averages do better their preceding January peaks, it would have occurred without the usual heavy buying on rising volume. It may be that the January 6 peaks will have to be bettered before the ‘real’ volume comes in. In other words, even if a new bull market is signaled in the weeks ahead, we will have to monitor the stock market action carefully, to make sure we are not being sucked in to a fake rally as was the case following the 1929 crash.”

Source: Richard Russell, Dow Theory Letters, January 29, 2009.

Bespoke: Fourth quarter earnings “beat rate” below 50%
“There’s still a long way to go before the fourth quarter earnings season comes to an end, but the first batch of reports indicate just how bad of a quarter it was. Since Alcoa kicked off earnings season earlier this month, only 45% of US companies have beaten analyst EPS estimates. As shown in the chart below, this would be the lowest reading since at least 1998. Even though analysts have been cutting estimates sharply over the past few months, companies still haven’t been able to beat at a better than 50% clip. Hopefully this ‘beat rate’ gets better as earnings season chugs along, but we wouldn’t count on it.”

Source: Bespoke, January 26, 2009.

Bloomberg: Earnings may slump 45%, Socgen says
“Analysts have cut their estimates for company earnings worldwide by $1 trillion since October, suggesting profits may tumble as much as 45% this year amid the global recession, according to Societe Generale SA.

“A profit slump of that magnitude would mean stocks are trading at 20 times future 12-month earnings, according to calculations by the quantitative analysis team at France’s third- largest bank, led by Andrew Lapthorne in London. The MSCI World Index currently trades at 10.7 times its members’ estimated earnings after plummeting 42% in 2008 and 11% so far this year, according to Bloomberg data.

“‘Global earnings forecasts are disintegrating as companies and analysts struggle to adjust to rapidly declining commodity prices, continuing financial sector losses and, of course, a crumbling global economy,’ wrote Lapthorne’s team in a report today. ‘There is little sign of this pace of downgrading abating. Equities will struggle.’”

“Analysts estimate companies on the Standard & Poor’s 500 Index will report a 28% drop in fourth-quarter profits, according to data compiled by Bloomberg. That compares with a 55% increase forecast in March 2008. Analysts currently predict earnings will decline 2.3% in 2009, the data show.

“SocGen’s strategy team estimated the 45% profit decline by extrapolating the pace of downgrades to earnings predictions since October. The team was ranked first by investors in Europe this year, according to Thomson Reuters Plc’s Extel survey.”

Source: Alexis Xydias, Bloomberg, January 23, 2009.

Bespoke: Sector relative strength – financials still lagging
“In our relative strength charts, we highlight how each sector has performed versus the S&P 500 over the last year. For each sector, rising lines indicate the sector is outperforming the S&P 500, while falling lines indicate underperformance. In each chart, we also note each Fed meeting over the last year. Red dots indicate meetings where the Fed lowered rates, while black dots indicate meetings where the Fed left rates unchanged.

“While the Financial sector has led the recent rally, a look at the sector’s long-term relative strength shows that they are nowhere near breaking the downtrend they have been in for at least a year now.

“While everyone is focused on the Financials, the Energy sector has been enjoying its position out of the spotlight. While the sector was killed in the summer and fall when the decline in oil kicked into high gear, since then, energy stocks have been steadily outperforming even as oil remains near its lows. Just imagine what could happen if oil actually started to rally.”

Source: Bespoke, January 29, 2009.

Bespoke: 10-year Treasury yield reaches key juncture
“Even with the Fed’s reiteration that they were considering outright purchases of US Treasuries, the yield on the 10-year has been climbing steadily higher from its lows in December. At 2.77%, the 10-Year is approaching yields that it traded at before the bottom dropped out in early December. How we trade in the next few days will go a long way in determining whether the current sell-off is simply profit-taking after a massive rally, or the beginning of the end of the latest bubble in asset classes (stocks, real estate, commodities, etc.).”

Source: Bespoke, January 29, 2008.

David Fuller (Fullermoney): Treasuries – a dangerous game
“The promise (threat?) by the Fed to purchase US long-dated securities has deterred me from shorting them to date, despite some very good sell signals …

“However I have also described the Fed’s frequent hints of its apparent willingness to buy US debt as akin to a con artist’s shell game. However in the Fed’s version, instead of trying to guess under which of three rapidly moving cups the pea lurks, we are guessing how and when we might see their bond purchases.

“I do not question the Fed’s word that it would be prepared to buy Treasuries to keep long-term rates low, if necessary. Instead, my point is that they may hope to avoid purchases if they persuade the market to do their work for them. In other words, I wonder how many people, from hedge fund managers to foreign governments, have bought or at least retained their Treasuries, despite historically low yields and rapidly increasing supply.

“This is a dangerous game. Financial history is full of instances where investors have been persuaded to pay record high valuations for assets, usually because: ‘It is different this time.’ Perhaps … for a while, but the bubble always bursts in a mean reversion process which usually ends in an overshoot of its own.

“The only way I can envisage significantly lower long-term yields for US Treasury bonds, would be if the economy slid into a lengthy deflation, as we saw with Japan in the late 1990s and earlier this decade, causing real interest rates to rise. This is a risk, but one that the Bernanke Fed has vowed to avoid. It has the means to do so.

“At Fullermoney, we think gold is replacing US Treasuries as the safe haven investment.”

Source: David Fuller, Fullermoney, January 30, 2009.

Bespoke: Credit default risk down but still high
“Below we highlight a chart of an index that measures the default risk of investment grade credit in the US. Throughout the credit crisis, default risk has risen sharply, although it has ticked lower since peaking in December. Any decline in default risk is a good sign, but it needs to fall much more before anyone can make the claim that things are ‘settling down’. As shown, the index has still not broken below the bottom of its uptrend line that formed back in April 2008.”

Source: Bespoke, January 27, 2009.

Bloomberg: Soros stopped betting against pound
“Billionaire investor George Soros, who made $1 billion selling the pound in 1992, said he is no longer betting against the UK currency after it reached $1.40.

“‘I did actually foresee the fall in sterling and that was one of the positions we carried,’ he told reporters at the World Economic Forum in Davos, Switzerland. Below $1.40 ‘it seemed to me the risk-reward was no longer clear’.

“Soros said today that he has made money from the financial crisis. The British government’s efforts to protect the banking system from the turmoil last week led to a drop in the pound to the lowest level against the dollar since 1985.

“‘We did have a short position in sterling, but it doesn’t mean I’m bearish on sterling today or bullish,’ Soros said. ‘It will continue to fluctuate.’

“Soros’s comments contrast with those of Jim Rogers, who co-founded the Quantum Fund with him and is now chairman of Singapore-based Rogers Holdings. Rogers said on January 20 that the pound was ‘finished’ because of turmoil in the banking system and a decline in North Sea oil output.”

Source: Simon Kennedy, Bloomberg, January 28, 2009.

Bespoke: Russian troubles
“Russia’s currency made news today for having its biggest two-day decline versus the dollar in a decade. For those interested, below we provide a long-term chart of the Russian ruble versus the US dollar. As shown, the amount of rubles that one dollar will get you has spiked significantly in recent months, going from about 23 rubles per dollar last May to its current level of 34.84 rubles per dollar.”

Source: Bespoke, January 29, 2009.

BBC News: Zimbabwe abandons its currency
“Zimbabweans will be allowed to conduct business in other currencies, alongside the Zimbabwe dollar, in an effort to stem the country’s runaway inflation.”

Source: BBC News, January 29, 2009.

Financial Times: Gold pushes above $900 in buying spree
“Strong investor buying on Monday pushed the price of gold above $900 a troy ounce, hitting a 3½-month high in dollar terms and posting all-time highs in euro and sterling, in a stark sign of money seeking refuge from equities and bond markets.

“Traders said that investors, particularly in continental Europe and the UK, were pouring money into gold exchange-traded funds – a popular way to gain access to the metal – and also noted strong buying of physical gold, from coins to bars.

“Edel Tully at Mitsui & Co Precious Metals in London said gold was the ‘obvious shelter’ for safe-haven investors.

“The total amount of gold held by the world’s gold ETFs last week rose for the first time above the 40 million ounce level. Together, such investment vehicles are now the largest holders of physical gold after the official reserves of the US, Germany, the International Monetary Fund, France and Italy.

“In the short term, traders said gold was likely to consolidate above $900 an ounce this week and could test the $930 an ounce level previously touched in October.”

Source: Javier Blas, Financial Times, January 26, 2009.

Bespoke: Will gold break its downtrend?
“After briefly piercing the $1,000 level in March of last year, the price of gold went into a long-term downtrend with a series of lower highs and lower lows. However, since bottoming out at $681 in October, gold has rallied to over $900 per ounce. This has brought the commodity right to the top of its downtrend line from the March 2008 high. While the current rally in gold has been attributed to fears over competitive currency devaluations across the globe, how the commodity acts in the coming days will go a long way in determining how valid those fears are.”

Source: Bespoke, January 26, 2009.

Richard Russell (Dow Theory Letters): Gold benefits from devaluations
“The world battle for exports, with the help of cheap currencies is on. They call it competitive devaluations, and the whole picture is not lost on gold. The move is starting – to move to hard assets. The hardest of all assets is gold. Gold, in case you forget, is pure wealth, it’s the only money with no debt against it or without a counter-partner. Gold needs no nation or central bank to attest, by fiat – that it’s money.”

Source: Richard Russell, Dow Theory Letters, January 26, 2009.

Bloomberg: StockCharts’s Murphy sees gold at $1,000 by year end
“John Murphy, chief technical analyst at StockCharts.com, talks with Bloomberg’s Brennan Lothery about the outlook for the gold price in 2009. Murphy also discusses commodity prices, the US equity market and investment strategy.”

Source: Bloomberg, January 27, 2009.

Bespoke: Baltic Dry Index up seven days in a row
“The Baltic Dry Index gained another 1% today, which makes seven up days in a row. Since bottoming in December, the Index has formed a nice uptrend, gaining over 50%. Longer term, however, the Index’s highs from last Spring are still a long way off. While the Index bottomed on December 5 with a 94.4% decline from its all-time high of 11,793, at its current level of 1,014, it is still down 91.4% from its May 20 high. In order to get back to those highs, the index would have to rally an additional 1,063%. Hey, you have to start somewhere.”

Source: Bespoke, January 28, 2009.

CNBC: Oil move to $20?
“Crude oil may fall to $20 this year, says Joe Petrowksi, Gulf Oil and Cumberland Farms CEO.”

Source: CNBC, January 27, 2009.

Victoria Marklew (Northern Trust): Eurozone – is that light at the end of the tunnel?
“Today’s [Tuesday] Ifo and last week’s Belgian leading indicator offer the tantalizing hope that the economic downturn across the Eurozone is starting to bottom out – but one month is not enough to call a trend, and the ‘zone’ in general, and Germany in particular, are still likely in for a rough first quarter of 2009.

“First, the Ifo index in Germany. The headline business climate index edged upward from 82.7 in December to 83.0 in January, the first improvement in eight months. Nevertheless, the difference between the current conditions and expectations indices remains wide, suggesting that the economy will contract again in Q1 2009 and that the government’s latest forecast of -2.25% real GDP growth this year is about right.

“Which takes us to our favorite Eurozone leading indicator, the Belgian National Bank’s (BNB) business confidence indicator. As we’ve noted before, thanks to Belgium’s strong trade ties with its neighbors (about 80% of Belgium’s manufacturing output is sold abroad, mostly to fellow EU members), the BNB’s business confidence index is a reliable leading indicator – about six months out – for GDP growth in the Eurozone as a whole.

“The Belgian and German data imply that the Eurozone as a whole will see a marked contraction in Q4 2008 and Q1 2009, flat-to-negative growth in the middle of the year, and a sustained improvement finally underway by Q4.”

Source: Victoria Marklew, Northern Trust – Daily Global Commentary, January 27, 2009.

CEP News: Spain is officially in a recession, says Central Bank
“With GDP contracting for two quarters in a row, the Spanish economy has officially entered into a technical recession, the Bank of Spain said in its quarterly GDP report released on Wednesday.

“According to the central bank, the Spanish economy contracted by 1.1% to Q4 from Q3, when output had fallen 0.2%. On an annualized basis, the economy declined 0.8% in Q4, down from Q3’s 0.9% increase. The Bank of Spain also reported that for 2008 as a whole, the economy grew at 1.1%, down from 2007’s 3.7% print.

“With the economy expected to decline 1.6% in 2009, the government is looking to spend upwards of €90 billion in stimulus measures. As a result of the pressures on public finances, Standard & Poor’s had reduced Spain’s sovereign credit rating from AAA to AA+ earlier in the month.”

Source: CEP News, January 28, 2009.

BCA Research: UK economy – in a deep recession
“The UK economy is the epicenter of the global housing/credit crisis and will need substantially more support from policymakers.

“Last week’s release highlighted that the UK economy contracted again in Q4 by more than expected to -1.8% YoY. More importantly, the outlook is grim given that the collapse in both commercial and residential real estate prices is still gaining momentum, banks have shut off the credit taps, and business sentiment surveys indicate that activity has ground to a halt.

“UK households face dramatic headwinds from plunging home prices and rapidly rising unemployment. Correspondingly, our models warn that retail sales growth will contract later this year, causing deflationary pressure to build further.

“Bottom line: In order to prevent debt-deflation from gaining further momentum, UK policymakers will need to continue stimulating aggressively (using both conventional and unconventional measures). While the collapse in the pound is helping ease overall monetary conditions, the lack of global trade limits the positive impact for the economy.”

Source: BCA Research, January 26, 2009.

US Global Investors: China – threat of capital flight
“While China’s capital outflow during the fourth quarter is only 2% of the country’s formidable foreign exchange reserve, the specter of liquidity fleeing China may continue to haunt investors as the worst-case scenario if the government’s policy efforts fail to revive the economy.”

Source: US Global Investors – Weekly Investor Alert, January 30, 2009.

Financial Times: Japan’s production falls record 9.6%

“Japanese industrial production fell a record 9.6% in December, while core annual inflation almost evaporated, reinforcing expectations of a record economic contraction as the global financial crisis worsens.

“Unemployment hit a three-year high, household spending dipped, and manufacturers saw no quick turnaround in the outlook for industry – the main driver of the world’s second-biggest economy – as inventories hit record highs despite factory closures and lay-offs.

“Subsiding inflation and worsening economic conditions are also stoking deflation worries, as in other major economies, which may prompt more central bank steps to support the staggering economy and free up frozen credit markets that are starving key companies of cash.

“Economists said fourth-quarter GDP figures, due out in February, would show Japan’s economy shrinking at a double-digit annual rate, and Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities, said early 2009 also looked bleak.”

Source: Reuters, Financial Times, January 30, 2009.

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Words from the (investment) wise for the week that was (January 19 – 25, 2009)

Sunday, January 25th, 2009

Fears about the intensity of the global recession and renewed skepticism regarding the beleaguered financial sector fueled a flight to safety during the past holiday-shortened trading week. President Obama’s inauguration offered only a brief respite from the dreadful economic and earnings data and pounding of the stock markets.

Commentators were in agreement that Mr O commenced his tenure against the worst economic background in living memory and had his work cut out to resurrect America from its economic morass. I wish him well with this daunting task.

As investors piled into the perceived safety of gold (+6.9%), the US dollar (+1.8% in the case of the US Dollar Index) and the Japanese yen (+2.1% against the US dollar), global stock markets recorded a third straight week of losses. West Texas Intermediate Crude (+9.2%) also ended higher, joining a broader rally in commodities (+2.1% in the case of the Reuters/Jeffries CRB Index).

The MSCI World Index and the MSCI Emerging Markets Index declined by 4.7% (YTD -10.3%) and 5.7% (YTD -10.5%) respectively. Bucking the downtrend, the Shanghai Composite Index rose by 1.9% over the week and, with a gain of 9.3%, is also the best-performing global stock market since the start of 2009.

Elsewhere, the yields of long-dated government bonds in the US, UK and Eurozone rose sharply as large issuances of sovereign debt looms. For example, the yield of the US ten-year Treasury Note jumped by 28 basis points to 2.62% and that of the 30-year Treasury Bond by 40 basis points to 3.32% – the highest weekly points rise since April 1987. On the other hand, short-dated yields in a number of European countries declined as a result of expectations of further rate cuts.

The UK was a case in point with the two-year Gilt declining by 12 basis points to 1.0% on doubts about the government’s new rescue plan for the banking system and a deterioration in the country’s public finances. The pound crumbled to a 23-year low against the greenback and an all-time low against the yen.

The financial turmoil and the various actions by central banks reminded me of a quote from 1867 by Karl Marx: “Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.”

“TARP has been an abject failure,” said Thomas Barrack Jr, billionaire and founder of Colony Capital, in BusinessWeek. “I compare the situation to a fire on a Savannah plain: Let it rip and burn, and the market will rejuvenate so much faster – try to control or impede it, and there will be more and longer suffering before renewal. Japan experienced two decades of economic paralysis by experimenting with fire control of a similar unproductive sort.”

And here is Peter Schiff’s (Euro Pacific Capital) prescription for how the US can dig itself out of the current mess, as reported by Fortune Magazine: “Shrink the government radically, cancel all bailouts immediately, take plenty of tough medicine, and let the free market do its job – however harsh it may be for, say, autoworkers in the meantime.”

According to Sheila Bair of the FDIC, as reported by The Wall Street Journal, there will soon be a new government banking agency, the Aggregator Bank, to buy troubled assets from financial institutions. For a bit of fun, I tried to register this domain last week. Alas, another aspirant banker pipped me to the post. His reselling price? $100,000! Needless to say, I swiftly terminated the negotiations.

Next, a tag cloud of my week’s reading. This is a way of visualizing word frequencies at a glance. Key words such as “bank”, “government”, “economy”, “market”, “financial”, debt” and “crisis” topped the list.

The graph below shows the performance of various S&P sector SPDRs for the year to date. With Financials having declined by 28.2%, the market’s weakness was quite strongly concentrated in one sector. In addition to Financials, only Industrials (-11.9%) and Consumer Discretionary (-8.8%) have underperformed the S&P 500 Index (-7.9%) since the beginning of the year.

“During prior declines during this bear, losses were broad based and once they become more concentrated (as they are now), it’s a sign that the market is beginning to separate the eventual winners from the losers,” said Bespoke.

Considering the outlook for the stock market, Richard Russell, 84-year-old author of the Dow Theory Letters, said: “Recently, the Transports broke below their November 20 bear market low. The Industrials have refused (so far) to confirm the Transports. Will the Industrials break down and confirm?

“No one can possibly know. But the longer the time elapses that the Industrials refuse to confirm, the more hopeful the situation. As a rule, the closer in time the two Averages, Transports and Industrials, break through preceding levels, the more authoritative the signal. The Transports broke to new lows on January 20. The longer Industrials hold above their November 20 low of 7,552, the better the odds that they will not confirm.”

Key resistance and support levels for the major US indices are shown in the table below. The immediate upside target is the 50-day moving average, followed by the early January highs. On the downside, the December 1 and all-important November 20 lows must hold in order to prevent considerable technical damage.

A number of global stock markets – Germany, France, Belgium, Finland, Ireland and Venezuela – have actually already broken below their November 20 lows. Although a retest of the lows is often a feature of base formation development, it can also be a harbinger of the resumption of a downtrend.

Donning his customary bearish outfit, Albert Edwards of Société Générale, a favorite market strategist among Investment Postcards’ readers, said: “After increasing our equity exposure at the end of October we believe that the market is set to quickly slide sharply towards our 500 target for the S&P 500.

“While economic data in developed economies increasingly reflect depression rather than a deep recession, the real surprise in 2009 may lie elsewhere. It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the yuan. A subsequent trade war could see a re-run of the Great Depression.”

According to Jeffrey Hirsch (Stock Trader’s Almanac), the December Low Indicator says that should the Dow Jones Industrial Index close below its December low anytime during the first quarter, it is frequently an excellent warning sign. This came to pass on Tuesday when the Dow closed below its December low of 8,149 (recorded on December 1).

Also of concern to Hirsch is the January Barometer, stating “As January goes, so goes the year”. Every down January since 1950 has been followed by a new or continuing bear market or a flat year. On Friday the S&P 500 closed at 832, 7.9% lower than the December 31 close.

From across the pond David Fuller (Fullermoney) commented that one could not rule out an overcorrection by the S&P 500 to 600 (as suggested by Jeremy Grantham in his latest quarterly newsletter), “although the downside move to date is still quite overstretched relative to the 200-day moving average. Fundamentals will not determine the actual low, in my opinion, whether already seen or pending. That will be determined by sentiment and liquidity, as always. Currently, sentiment is diabolical but liquidity is increasingly abundant.

“From an investment perspective, my preferred strategy would be to nibble on high-quality equities with decent and well-covered yields.”

On the back of the bullion price increasing by 6.9%, the Gold Bugs Index (+10.6%) was one of the top-performing industry groups for the week. The venerable Richard Russell said: “The [gold] market always does what it’s supposed to, but never when. Is it ‘when time’ for gold? It looks like the long erratic correction in gold is over.

“Gold is pushing up consistently now – the first upside target is to better the 900 level which will take gold above the two preceding peaks. If gold can move above the 900 level (we’re close), I think there is a good chance it will test the highs. Up until now, gold’s progress has been halted, every advance corrected. Gold appears to advance more easily now and the gold stocks are going along with the bullion.”

According to US Global Investors – Weekly Investor Alert, David Rosenberg of Merrill Lynch on Friday sent out a research note titled “The case for gold”, explaining that gold’s value is enhanced by declining bullion supply and increasing money supply.

James Montier of Société Générale added: “Gold kind of scares me because very often the people involved with it seem to be slightly insane. My other problem is I don’t know how to value it. That said, I can certainly see why gold could be considered somewhat of an insurance policy, if not an investment in its own right. Any kind of systemic economic turmoil is likely to drive gold prices higher.”

For more discussion about the direction of stock markets, also see my post “Video-o-rama: Wishing you well, Mr O“.

Economy
“Global businesses remain darkly pessimistic. Sentiment was at its worst in mid-December, but has improved only marginally since then,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “European and South American businesses are most worried, followed by North America; Asian companies are negative but less so. Pricing power has collapsed, suggesting that deflation is increasingly likely.”

The latest US economic reports also indicate that the intensity of the economic downturn shows no sign of letting up. Homebuilding descended to an unprecedented post-war low, the National Association of Home Builders (NAHB) housing market index again reached a new low, and the ABC/Washington Post Consumer Confidence Index remained near its all-time lows. Interestingly, no president has entered office with such a poor level of consumer confidence since the beginning of the Survey in 1985.

Regarding the meeting of the Federal Open Market Committee (FOMC) on January 27 and 28, Asha Bangalore (Northern Trust) said: “The policy statement will be the first following the zero interest rate policy adopted at the last meeting. The explicit hint about the Fed’s future course of action in the December 16, 2008 policy statement read as follows:

‘The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.’

“We will be paying close attention to whether the Fed will retain or rephrase this part of the policy statement. With regard to the Fed’s views about economic growth and inflation … we do not expect radical modifications of the entire policy statement.”

Elsewhere in the world, evidence mounted that the recession was spreading and deepening.

- The UK’s real GDP contracted by 1.5% in the fourth quarter, following a 0.6% decline in the third quarter. The data confirmed the first UK recession since 1991.

- China’s real GDP declined by 6.8% year on year in the fourth quarter. However, when recalculating China’s growth rate on a quarter-on-quarter annualized basis, like most other countries do, commentators are of the opinion that the Chinese economy might already be contracting.

- Japan recorded a fifth consecutive monthly trade deficit in December, marking the worst year for exports on record. Exports contracted by 35% year on year, compared with a 16% expansion as recently as July.

Summarizing the economic situation, Nouriel Roubini (RGE Monitor) said: “The US economy is, at best, halfway through a recession that began in December 2007 and will prove the longest and most severe of the post-war period. Credit losses of close to $3 trillion are leaving the US banking and financial system insolvent. And the credit crunch will persist as households, financial firms and corporations with high debt ratios and solvency problems undergo a sharp deleveraging process.

“Worse, all of the world’s advanced economies are in recession. Many emerging markets, including China, face the threat of a hard landing. Some fear that these conditions will produce a dangerous spike in inflation, but the greater risk is for a kind of global ‘stag-deflation’. We’re likely to see vulnerable European markets (Hungary, Romania and Bulgaria), key Latin American markets (Argentina, Venezuela, Ecuador and Mexico), Asian countries (Pakistan, Indonesia and South Korea), and countries like Russia, Ukraine and the Baltic states facing severe financial pressure.

“The world’s first global recession is just getting started.”

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

Source: Yahoo Finance, January 23, 2009.

In addition to the interest rate announcement by the FOMC (Wednesday, January 28), the US economic highlights for the week, courtesy of Northern Trust, include the following:

1. Leading Indicators (January 26): Consensus: -0.3% versus -0.4% in November.

2. Existing Sales (January 26): Consensus: 4.40 million versus 4.49 million in November.

3. New Home Sales (January 29): Consensus: 400,000 versus 407,000 in November.

4. Durable Goods Orders (January 29): Consensus: -2.0% versus -1.5% in November.

5. Real GDP (January 30): Northern Trust: -4.5% Consensus: -5.4% versus -0.5 in Q3.

6. Other reports: Consumer Confidence (January 27); Consumer Sentiment Index and Employment Cost Index (January 30).

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

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

Source: Wall Street Journal Online, January 23, 2009.

Bernard Baruch said: “If you get all the facts, your judgment can be right; if you don’t get all the facts, it can’t be right.” Hopefully the “Words from the Wise” reviews offer assistance to Investment Postcards‘ readers in compiling the facts.

That’s the way it looks from Cape Town.

Bespoke: Interesting prediction market contracts
“Prediction market website Intrade has some interesting finance-related contracts trading at the moment, and below we highlight charts of them. The first contract is whether Apple CEO Steve Jobs will depart as CEO by the end of 2009. As shown, the contract peaked when the company announced Mr. Jobs’ leave of absence earlier this month, but it has since declined a bit to its current level of 60% (traders are putting the odds at 60%).

“The second contract is whether the unemployment rate in the US will be higher than 8.5% by December 2009. The unemployment rate is currently at 7.2%, and the odds for it to be higher than 8.5% by year end are at 55%.

“Intrade also has a contract on whether the US will default on its debt on or before 12/31/09. Traders are currently putting the odds of this occurring at 3.5% on Intrade, which seems low, but is actually pretty high considering what the implications would be if this happened.

“And back in early December, Intrade traders were putting the odds of a GM bankruptcy before the end of Q1 ‘09 at greater than 60%. After government intervention for the automakers happened a few weeks later, those odds dropped sharply and now stand at just 10%.

“Liquidity in these markets is low, so making big bets is hard to do, but analyzing these contracts gives some unique insight into what some people think will or will not happen in the near future.”

Source: Bespoke, January 22, 2009.

CNBC: Barack Obama will help the economy, but don’t expect miracles

Click here for the article.

Source: CNBC, January 18, 2009.

Reuters: Soros – US stimulus not enough, TARP bailout misused
“The stimulus plan the US government is currently considering is necessary to help American citizens, but it will likely not reverse the country’s economic decline, hedge fund manager and billionaire philanthropist George Soros said on Monday.

“‘It is not enough to turn the situation around,’ Soros told the US Conference of Mayors about the $850 billion proposal to increase spending and cut taxes.

“The plan, which was introduced in the US House of Representatives last week and will likely be passed by next month, will help state and local governments balance their budgets and preserve important social services, Soros said.

“At the same time, the $700 billion financial bailout known as TARP for Troubled Assets Relief Program had been carried out in a ‘haphazard and capricious way’ and ‘without proper planning’, he said.

“‘Unfortunately it was misused and the way it was done has poisoned the well. It has created tremendous ill will toward putting up more money,’ Soros said.”

Source: Lisa Lambert, Reuters, January 19, 2009.

Casey’s Charts: What the banks did with the latest bailout
“The red line in the graph below shows that, since August, banks have built their cash position in the form of Treasuries, agencies and deposits at the Fed by $865 billion, while their loans and leases have increased by only $325 billion.

“In other words, rather than lending the billions of dollars received from the Treasury’s Troubled Asset Relief Program (TARP), as was originally intended, the recipient banks have squirreled away the bailout funds in order to shore up their balance sheets.

“Concurrently, the Federal Reserve is exchanging its excess reserves for toxic waste from the financial institutions.

“The combined affect is a ‘circular bailout’ with the Treasury borrowing … in order to lend money to banks … that then lend it back by purchasing more Treasuries. Of course, the expense of this entire bailout scheme ultimately falls onto the back of the tax-paying public.”

Source: Casey’s Charts, January 20, 2009.

Reuters: US and UK on brink of debt disaster
“The United States and the United Kingdom stand on the brink of the largest debt crisis in history. While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt.

“To understand the scale of the problem, and why it leaves so few options for policymakers, take a look at the chart below which shows the growth in the real economy (measured by nominal GDP) and the financial sector (measured by total credit market instruments outstanding) since 1952.

“The solution must be some combination of policies to reduce the level of debt or raise nominal GDP. The simplest way to reduce debt is through bankruptcy, in which some or all of debts are deemed unrecoverable and are simply extinguished, ceasing to exist.

“But widespread bankruptcies are probably socially and politically unacceptable. The alternative is some mechanism for refinancing debt on terms which are more favorable to borrowers (replacing short term debt at higher rates with longer-dated paper at lower ones).

“The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalization, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population.”

Source: John Kemp, Reuters, January 21, 2009.

Financial Times: Winter bites in EU but with some bright spots
“Wintry conditions are gripping Europe’s economies as the biting winds caused by financial market storms lead to deep and protracted recessions, but regional variations are still distinguishable.

“The latest Financial Times economic weather map for Europe shows a further substantial deterioration since it was last published in October, when the devastating impact on the global economy of the collapse of Lehman Brothers, the investment bank, was only just becoming apparent.

“European industrial production collapsed in November, data this month have shown, and business confidence surveys suggest the bottom of the recession – set to be among the worst since the second world war – has not yet been reached.”

Source: Ralph Atkins and Ben Hall, Financial Times, January 19, 2009.

CNBC: Buffett & Brokaw
“Insight on the financial and economic turmoil, with Warren Buffett, Tom Brokaw, NBC News special correspondent, and CNBC’s Erin Burnett and Mark Haines.”

Source: CNBC, January 19, 2009.

RGE Monitor: Estimated $3.6 trillion loan and securities losses in US
“Nouriel Roubini and Elisa Parisi-Capone of RGE Monitor released new estimates for expected loan losses and writedowns on US originated securitizations.

“Loan losses on a total of $12.37 trillion unsecuritized loans are expected to reach $1.6 trillion. Of these, US banks and brokers are expected to incur $1.1 trillion.

“Mark-to-market writedowns based on derivatives prices and cash bond indices on a further $10.84 trillion in securities reached about $2 trillion. About 40% of these securities (and losses) are held abroad according to flow-of-funds data. US banks and broker dealers are assumed to incur a share of 30-35%, or $600-700 billion in securities writedowns.

“Total loan losses and securities writedowns on US originated assets are expected to reach about $3.6 trillion. The US banking sector is exposed to half of this figure, or $1.8 trillion (i.e. $1.1 trillion loan losses + $700 billion writedowns.)

“FDIC-insured banks’ capitalization is $1.3 trillion as of Q3 2008; investment banks had $110 billion in equity capital as of Q3 2008. Past recapitalization via TARP 1 funds of $230 billion and private capital of $200 billion still leaves the US banking system borderline insolvent if our loss estimates materialize.

“In order to restore safe lending, additional private and/or public capital in the order of $1 – 1.4 trillion is needed. This magnitude calls for a comprehensive solution along the lines of a ‘bad bank’ as proposed by policy makers or an outright restructuring through a new RTC.

“Back in September, Nouriel Roubini proposed a solution for the banking crisis that also addresses the root causes of the financial turmoil in the housing and the household sectors. The HOME (Home Owners’ Mortgage Enterprise) program combines a RTC to deal with toxic assets, a HOLC to reduce homeowers’ debt, and a RFC to recapitalize viable banks.”

Source: RGE Monitor, January 22, 2009.

Asha Bangalore (Northern Trust): Home building activity posts new low
“Starts of new homes fell 15.5% in December to an annual rate of 550,000. The annual average of new homes started in 2008 is 902,000, the lowest on record. Starts of new single-family homes dropped 13.5% to an annual rate of 398,000, the lowest on record.

“The peak-to-trough decline in housing starts, both total and single-family, is the largest on record since record keeping began for these series in 1959 (see table 1). The duration of the weakness in home construction (peak was in January 2006) is also the longest on record.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 22, 2009.

Asha Bangalore (Northern Trust): Housing Market Index spells more gloom
“The Housing Market Index (HMI) of the National Association of Home Builders fell to 8.0 in January 2009 from 9.0 in December 2008. Before the onset of the current recession, the record low for the HMI was 20.0 during the 1990-91 recession. The question now is: What is the low for the HMI? The answer is unknown, but we can say that the severity of the housing market situation grows in leaps and bounds everyday.

“The HMI is strongly correlated with sales of new single-family homes. Based on this historical relationship, it appears that a pickup in new sales in the near term is unlikely.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 21, 2009.

Shadowstats: Decline in retail sales worst since World War II
“Annual real retail sales fell by 9.09% in December, versus a 9.11% contraction in November, the steepest annual declines since 1952. On a three-month moving-average basis the December and November declines were 8.88% and 7.87%, respectively. The December annual moving-average decline was the deepest in the history of the two most recent retail series, making the results the worst of the post-World War II era. The annualized real contraction for fourth-quarter 2008 retail sales was 17.1%.”

Source: Shadowstats, January 2009.

BCA Research: US deflation – this time it’s for real
“Annual US headline CPI dipped to zero in December. Core CPI is still positive (1.7% annual growth), albeit is falling steadily.

“The decline in headline inflation is due largely to sharply falling energy (and food) prices. Underlying inflation moves with the business cycle, though it lags economic growth by several quarters. The economy decelerated steadily last year before imploding in the autumn. Thus, core CPI is on track to fall further as economic slack builds. Already, retail prices are falling.

“The current deflationary threat is much more serious than the previous episode in 2002, given the speed and magnitude of the credit and economic crunch. Thus, policymakers will need to work hard to anchor inflation expectations in positive territory, and ensure that a deflationary mindset among consumers and businesses does not set in.”

Source: BCA Research, January 19, 2009.

Paul Kedrosky (Infectious Greed): Banks are just a circle of their former selves
“Nice graphic of how the major banks are just a fraction of their former selves, at least as measured by market value.”

Click on the image below for a larger graph.

Source: Paul Kedrosky, Infectious Greed, January 21, 2009

Bespoke: Long-term charts of the financial sector
“A look at long-term charts of the S&P 500 Financial sector is downright depressing. The first chart below dates back to 1990, and as shown, the sector closed at its lowest level since March 1995 yesterday. The sector is now down 79% from its highs in 2007. A chart of the sector all the way back to 1940 shows just how much the sector has fallen in such a short period of time.”

Source: Bespoke, January 21, 2009.

Eoin Treacy (Fullermoney): Will bank indices be leading indicators?
“The downward breaks experienced by a number of Western banking indices over the last week are significant and suggest we can expect further moves by the respective governments to shore up their financial sectors. This relative weakness poses a headwind for their wider markets.

“When bank indices began to underperform in 2007, they had an incredibly large weighting in most country indices. The performance of bank shares was important both in terms of their high relative weightings and because of their status as lead indicators. However, bank sectors are now a considerably smaller weighting in most indices. This lessens the intrinsic importance of the banks sector to the performance of the wider market, but the psychological impact is undiminished.

“The performance of bank sectors is a major drag on sentiment. Dividends are being eliminated and a process of nationalisation is underway in a number of Western countries. However, one should not forget that many other companies will not need government support, will not eliminate their dividend and as such are likely to be relative performers in this environment.

“In addition, an interesting dichotomy exists between markets where banks are underperforming and where they are outperforming. Bank indices in the USA (S&P500 Banks, Philadelphia Banks, Regional Banks), Europe (DJ Euro Stoxx Banks), the UK, France, Germany, Norway, Finland, Sweden, Italy and Ireland all made new lows in the last week. Internationally, the Chinese bank index is closest to the upper side of its range. No other bank index, I know of, is showing such relative strength. All Asian bank indices remain within their ranges. The marked underperformance of the USA and much of Europe is a clear indication that this is where the bulk of financial risk is focused.”

Source: Eoin Treacy, Fullermoney, January 20, 2009.

Brian Belski (Banc of America Securities-Merrill Lynch): Liquidity is key
“US equity investors should concentrate on companies, industries and sectors that have the means to fund themselves, says Brian Belski, strategist at Banc of America Securities-Merrill Lynch.

“He notes that areas in the market exhibiting strength recently have been dominated by low-quality companies with higher debt levels. But he says fundamental conditions do not support a move to low quality. ‘If 2008 taught us anything, attempts to get ahead of an eventual stock market and economic recovery were premature and misguided.’

“He acknowledges that credit market conditions have improved but is not convinced the worst is over. ‘Remember, even though credit spreads have narrowed, they still remain considerably above the peaks exhibited during prior credit cycles which we believe is a consequence of the loss of confidence both from investors and lenders.

“‘This is particularly troubling to us because we expect US corporate bond issuance to decline in 2009, yet a significant amount of bonds are expected to mature for S&P 500 companies. As a result, areas within the market that rely on leverage to fund operations are likely to struggle in the coming year and the trajectory of corporate bankruptcy filings over the past several years certainly appears to support this notion. Therefore, investors should continue to focus on areas demonstrating strong liquidity in the form of high cash balances and free cash flow.’”

Source: Brian Belski, Banc of America Securities-Merrill Lynch (via Financial Times), January 20, 2009.

Bespoke: Volatility Index shows more complacency
“Below we highlight a chart of the VIX volatility index along with the S&P 500. One difference between the current decline and the declines in October and November is that the VIX has not spiked nearly as much. Many think of the VIX as an indication of fear in the market, and whether it’s good or bad, there seems to be more complacency during the most recent downturn.”

Source: Bespoke, January 23, 2008.

Bloomberg: Roubini, Edwards predict slump in S&P 500 on China
“Stocks will retreat around the world because of shrinking demand from China as growth in the third- biggest economy slows, said Nouriel Roubini, the New York University professor who predicted last year’s financial crisis.

“Global equities will fall 20% this year from current levels as China, which contributed 19.5% to total growth in 2007, contends with its slowest expansion in seven years, he said. Wall Street strategists predict the Standard & Poor’s 500 Index, down 8.4% so far, will rise 17% in 2009.

“Roubini, an economics professor at NYU’s Stern School of Business, said China already is in a ‘recession’ despite government data showing a 6.8% fourth-quarter growth rate, as power output declines and manufacturing shrinks.

“‘Demand is falling in China, they’re over-invested in capacity and there’s a global supply glut,’ Roubini said in a telephone interview. ‘It has very, very important implications.’

“Roubini’s view is shared by Societe Generale global strategist Albert Edwards, who was correct in forecasting in March that a US contraction would spur a bear market in equities. Edwards says the China slowdown will reduce earnings at industrial, energy and raw-materials companies, sparking a selloff in emerging and developed-market stocks that may send the S&P 500 down 40% to 500.

“‘People should be thinking really hard about this rather than sticking their heads in the sand,’ said Edwards, a London-based strategist and member of the top-ranked global investment strategy team in Thomson Extel’s surveys the past three years. ‘We’re just pointing out when the emperor doesn’t have any clothes on.’”

Source: Michael Patterson and Adam Haigh, Bloomberg, January 23 2009.

Bloomberg: Mobius to invest more in China, emerging markets
“Mark Mobius, who oversees about $26 billion in emerging-market stocks at Templeton Asset Management, said he plans to buy more shares of consumer and commodities companies in emerging markets.

“‘Valuations are attractive,’ Mobius, Templeton’s executive chairman, said at a briefing in Kuala Lumpur today. ‘We feel that this year would be a year of recovery of the stock markets in the emerging markets.’

“Mobius said rising income in China, India and other parts of Asia will spur spending on consumer goods, while commodity prices are now ‘too low’. The two nations, Brazil, South Africa and Turkey offer best investment opportunities, he said.

“‘There is an incredible build-up of foreign reserves in the emerging markets, and the increase in money supply is quite dramatic,’ the executive chairman said. ‘We’ve seen a very big increase of money coming into markets.’

“The emerging-markets gauge trades at 8.2 times its companies’ reported earnings, 36% cheaper than its average valuation last year, according to data compiled by Bloomberg. The developed measure trades for 10.8 times profit.

“The US economy and other economies will rebound in 2010, said Mobius, whose biggest holdings are in Asia.”

Source: Soraya Permatasari, Bloomberg, January 17, 2009.

Bespoke: S&P 500 Q4 ‘08 earnings now expected to fall 28.2%
“At the start of the fourth quarter, analysts were expecting S&P 500 earnings to grow by 30% versus Q4 ‘07. While this seems outlandish now, remember that growth in Q4 ‘07 was extremely poor as well, and analysts thought many companies would begin to turn the corner by Q4 ‘08. As we all know, the economy pretty much came to a halt last October. As a result, analysts quickly began to cut growth estimates for the fourth quarter after it became apparent that things weren’t going to get better anytime soon.

“Fast forward a few months, and now analysts are expecting those same Q4 ‘08 earnings to be 28% weaker than the fourth quarter of 2007. With the direction that these estimates have been heading, when all is said and done, it’s likely that this number will get even worse.”

Source: Bespoke, January 21 2009.

Bespoke: Pick your poison – stocks or bonds
“While we all know that investing in stocks has been painful, some readers may be surprised to learn that Treasuries haven’t provided a much better alternative. While the S&P 500 is down 8% so far this year, long-term Treasuries (as measured by the US Long Bond future) are down almost 6%. With the recent break below their 50-day moving average, bonds are hardly looking like a ‘safe’ alternative in the current environment.”

Source: Bespoke, January 22, 2009.

Financial Times: Barclays Capital’s Larry Kantor says keep assets liquid
“The situation in many markets and economies is so tenuous now because we don’t know what the policies are going to be. The next month or two are critical. Investors should keep an ‘arsenal of liquid assets to deploy’, at some point it is possible that there could be a very big upswing in the economy and in equities, which investors should be ready for.

“In the meantime, debt of strong companies appears to be a good investment, especially as the Federal Reserve is considering buying corporate debt, together with other assets it is already buying, such as commercial real-estate backed bonds.”

Source: Financial Times, January 18, 2009.

Bloomberg: “Time to sell” Treasuries, biggest Korean fund says
“A rally that sent US Treasuries to their best year since 1995 is coming to an end, South Korea’s National Pension Service, the country’s biggest investor, said.

“US government efforts to combat the recession will prompt the Federal Reserve to raise interest rates this year, said Kim Heeseok, who oversees $160 billion as head of global investments for the service in Seoul. The decline would snap a surge that sent the securities up 14% last year, according to Merrill Lynch & Co.’s US Treasury Master index, as investors sought the relative safety of debt.

“‘It’s time to sell US Treasuries,’ said Kim, who took over as head of investments at the start of the year. ‘The stimulus plan may cause inflation. The US will raise the benchmark interest rate.’”

Source: Wes Goodman, Bloomberg, January 19, 2009.

John Hussman (Hussman Funds): The case for TIPS
“The way to think about the relationship between TIPS yields and straight Treasury yields is that the nominal yield on a security is equal to the ‘real’ yield plus expected inflation. At present, we have extraordinarily depressed nominal yields, but relatively high real yields, which means that the inflation rate implied in TIPS is extraordinarily low. Indeed, in order for TIPS to achieve the same total return as straight Treasuries over the next decade, we would need to observe a slight but sustained deflation over that period.

“My impression is that we are not near the point where there is any real risk of inflation, and we may very well observe negative near-term inflation rates (which is why it is important to be careful with TIPS that trade at a substantial premium to par, since the apparently high ‘real’ yields on near-term TIPS can be eroded by deflation). TIPS can’t mature at less than par, but if there is a deflation, the accrued inflation adjustment on these securities can be whittled down.

“Suffice it to say that we are holding TIPS not because we anticipate a near-term resurgence of inflation, but because the real, inflation-adjusted yields available over the next decade are quite high on a historical basis, and will adequately provide for the maintenance and growth of purchasing power over time, regardless of the near-term course of consumer prices.”

Source: John Hussman, Hussman Funds, January 19, 2009.

Steve Barrow (Standard Bank): Dollar honeymoon won’t last
“The arrival of a new US president often sees an initial rise in the dollar – although the honeymoon does not always last long and it is doubtful whether this time will be different, says Steve Barrow, currency strategist at Standard Bank.

“He says it is possible that the market might buy into new hope offered by an incoming president.

“‘There’s little doubt that Barack Obama campaigned on a pledge to bring new hope to the American people. It is also possible that the Democrats’ strong position in Congress will give Mr Obama more scope to impose his will than President Bush did.’

“But Mr Barrow doubts any early dollar strength in Mr Obama’s presidency will last. He says the US budget deficit is set to balloon due to the recession and likely $775 billion stimulus plan and notes that the last president to oversee such huge deficit expansion was Ronald Reagan in 1980-1988.

“‘Dollar strength at the start of Mr Reagan’s term gave way to a downtrend that lasted until 1995. The Reagan camp initiated this weakness with dollar sales in 1985. We doubt Mr Obama will do the same, but in one respect, the new president will be seeking a weaker dollar.

“‘The Chinese renminbi remains a thorn in the side of the US trade balance. Mr Obama has vowed to continue the fight for flexibility – and hence strength – in the renminbi as initiated by President Bush. In order to see the dollar weaken against the renminbi, the dollar may have to fall elsewhere.’”

Source: Steve Barrow, Standard Bank (via Financial Times), January 19, 2009.

Jim Rogers: Sterling in peril
“The pound is a currency with no underpinning and should fall against the dollar and the euro, says Jim Rogers, chairman of Rogers Holdings and co-founder of the Quantum Fund with George Soros.

“He says his view reflects the UK’s dire economic situation: ‘It’s simple, the UK has nothing to sell.’

“Mr Rogers says the two main pillars of support for sterling have been North Sea oil and the strength of the UK financial services sector, in particular, the City of London’s role.

“But Mr Rogers says just as North Sea oil is running out, so London’s standing as a major financial centre is set to suffer.

“‘I don’t think there is a sound UK bank now, at least, if there is one I don’t know about it,’ he says.

“‘The City of London is finished, the financial centre of the world is moving east. All the money is in Asia. Why would it go back to the West? You don’t need London,’ says Mr Rogers.

“Mr Rogers thinks the pound is more vulnerable than the dollar or the euro. He says the UK housing market is arguably in a worse state than that of the US, given pockets of strength in the US and prices that are sliding across the board in the UK.

“Meanwhile, he says, the UK is in worse shape economically than the eurozone, where most countries are not big debtors and do not run huge trade deficits. ‘If the UK discovers more North Sea oil, I might change this view,’ he says. ‘But I don’t see that happening.’”

Source: Jim Rogers (via Financial Times), January 21, 2009.

Bespoke: British pound crumbles
“The US dollar is clearly back in rally mode after suffering a setback in December. As shown in the first chart below, the Dollar Index has now broken well above its 50-day moving average and appears to be heading back to its November highs. Unfortunately, rallies in the dollar have recently coincided with declines in riskier assets like equities.

“But the bigger news in currencies is the dramatic fall that the British pound has recently experienced. Today the pound is suffering another big drop, and as shown in the first chart below, the currency broke below recent support levels as well as the $1.40 mark. And the bottom chart shows just how much the pound has fallen in such a short period of time. In late 2007, the pound was trading at record highs versus the US dollar. Now it is trading very close to its lowest level since 1991. Anyone in the US that has the money to go to England can stay there on the cheapest tab in decades.”

Source: Bespoke, January 20, 2009.

Eoin Treacy (Fullermoney): Testing times for euro
“All countries in the Eurozone are now seeing their government bond spreads widen relative to German yields. This is an indication that all countries took part in the access to abundant credit made possible by the launch of the Euro and are now suffering the consequences.

“Some are being more affected than others. Spreads for Spain, Greece, Italy and Ireland have expanded most. These were some of the countries where borrowing costs had fallen most in order to join the Euro and where most use was made of the ability to access cheap credit. Without the single currency they would never have been able to borrow at such low rates, but they are now constricted by being unable to devalue their currencies in order to help them through the crisis.

“This is the first real test for the single currency. If it can survive the credit / solvency crisis without seeing some countries dropping out or its efficacy being called into question; then it stands a good chance of surviving for the longer-term as a viable entity. This may well depend on how long the crisis drags on.

“Spreads of more than 250 basis points over Bunds, for Greek government bonds are not encouraging for its long-term participation. Investors will no doubt remember there were significant questions about the Greek government’s financial probity in the figures submitted to the European Commission prior to its entry into the single currency. Time will tell, but it will be a worthwhile exercise to monitor these spreads going forward.

“It is also interesting to see that in the UK, where control of interest rates is maintained by the BOE, that the brunt of the country’s risk reassessment has been borne by the pound rather than government bonds. The spread over Bunds has been in a volatile downtrend since late 2005 and tested parity recently. The government bond spread has been contracting in line with the pound’s decline against the Euro; both appear to have turned around the same time.”

Source: Eoin Treacy, Fullermoney, January 19, 2009.

CEP News: Treasury Secretary Geithner takes hardline stance on China
“In tune with the ‘change’ mantra heard throughout the US Presidential campaign, the Obama administration signalled a new stance on China. But given the economic climate, analysts question the strategy of adopting a hardline position with the biggest purchaser of US debt.

“In comments to the Senate Finance Committee released Thursday, newly-confirmed Treasury Secretary Timothy Geithner said, ‘President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency.’ He added later that Obama will aggressively push the Asian country to change its policies on foreign exchange.

“‘The comments from the new administration suggest a more robust position on China than the former administration,’ said Shaun Osborne, chief currency strategist at TD Securities. ‘It remains to be seen what China’s response will be, but the US is in a very delicate position at the moment.’

“In September, China overtook Japan as the largest foreign holder of US debt, but that appetite may shrink as China’s growth has slowed dramatically in the global recession.”

Source: Patrick McGee, CEP News, January 22, 2009.

John Authers (Financial Times): Currency interventions looming
“Unprecendented shifts in forex markets last year is fueling rumors of currency interventions in the coming weeks.”

Click here for the article.

Source: John Authers, Financial Times, January 22, 2009.

US Global Investors: Rosenberg – the case for gold
“Gold was, of course, one of the investment world’s few bright spots in 2008, and after a slow start in 2009, it began a rally that climbed above $900 an ounce on Friday. This is gold’s highest price since early October.

“David Rosenberg at Merrill Lynch sent out a short but useful research note Friday titled ‘The Case for Gold’ that explains that gold’s value is enhanced by declining bullion supply and increasing money supply.

“‘It’s the only currency not going up in supply. Pretty simple. South African gold output declined 14% last year in the steepest decline since 1901. US production was down 2%. The leading producer in terms of growth last year was China at +3% (and global central bank selling activity dropped 42% in 2008 to 279+ tons, the lowest since 1996).

“‘Meanwhile, money supply is up more than 10% YoY in the USA (M2); +16% in Australia (M3); almost 11% in Germany (M2); 18% in the UK (M2); almost 9% in Italy (M2); 13% in Canada (M2); 14% in Korea (M2); 18% in India (M2); 12% in Singapore; and 18% in China (M2).

“‘Outside of gold, the only country where money is not being poured into the financial system as if it was water from the tap is Japan, where trends in the monetary aggregates are flat-to-negative. Be that as it may, and in view of all the problems in the US banking sector, we think the dollar is unlikely to lose its reserve currency status any time soon … Confidence in the ability of European governments to service their sovereign debt is being called into question in the debt markets (‘in the land of the blind …’ ).’”

Source: US Global Investors – Weekly Investor Alert, January 23, 2009.

Richard Russell (Dow Theory Letters): Gold – very bullish action
“During the great gold bull markets of the 1970s to 1980, gold topped out at a price of 850 per ounce. For months now, gold has been ‘testing’ the 850 level, first rallying above 850 and then sliding below 850. Currently, February gold is trading at 891. I consider this to be very bullish action. The current gold action is taking place in the second phase of the new gold bull market. The second phase has seen many hedge funds and a small segments of the public become interested in gold.
“I believe the third speculative phase of the current gold bull market lies ahead. This is the phase where the public jumps wholesale into the market. It’s the phase where I expect to see a much higher, even frenzied, gold price. This final phase of the gold bull market will be accompanied by international doubt regarding the value and viability of fiat currency.
“Fiat money is being created in great quantities by almost every central bank in the world. Imagine, the foolishness of trying to ward off insolvency by creating ever-larger quantities of paper money. The worse off the economies of the world, the more fiat currency will be created.”

Source: Richard Russell, Dow Theory Letters, January 23, 2009.

Financial Times: UK move to boost cash supply
“Britain paved the way towards unconventional monetary policy in Europe on Monday when the government gave the Bank of England authority to create money and buy a variety of private sector assets.

“Although there is no sign the Bank’s monetary policy committee wants to introduce US-style quantitative easing immediately, it now has the power to buy assets ranging from corporate bonds to asset-backed securities with newly created money.

“The policy, if introduced, seeks to ease the flow of finance to companies, driving down company borrowing costs and boosting the supply of cash in the economy. The Federal Reserve prefers the term ‘credit easing’ to describe similar moves.

“The decision comes as part of a package designed to ease pressure on lending in the UK economy and put a brake on deepening recession. On Monday, the European Commission said Britain had one of the most exposed economies in the world to the global recession, predicting its economy would contract by 2.8% this year with stagnation continuing in 2010.

“Other elements of the package were heavily trailed. An insurance scheme stands at its heart, designed to restore some certainty to banks’ finances by providing cover against catastrophic losses. This will be implemented from February on a case-by-case basis.

“From April, the government will provide guarantees to wrap around simple asset-backed securities issued by banks containing high-quality mortgage and corporate assets. Subject to state aid approval from the European Commission, it is also planning to extend its current guarantee of short-term funding for banks to the end of the year.

“For the first time since the crisis began, the Bank of England will also explicitly accept corporate credit risk when it begins a $74 billion programme of asset purchases from the private sector in return for government paper in February.”

Source: Chris Giles, Financial Times, January 19, 2009.

Financial Times: UK tries to break recessionary dynamic
“The government on Monday launched its second bank rescue package, injecting billions of pounds more of the taxpayer’s money into saving Britain’s banks. Chris Giles, FT’s economics editor, tells Daniel Garrahan that the new bank rescue package is designed to rescue the economy as well as the banks.”

Source: Financial Times, January 19, 2009.

BCA Research: Last chance for UK banks
“Measures by UK authorities to shore up the banking system brings the prospect of full scale nationalization one step closer if they fail to re-ignite lending.

“The BoE’s ability to purchase assets outright will effectively help in recapitalizing the banking system and should also provide a valuable fillip to the corporate debt market. For now, the Treasury has stopped short of setting up a ‘bad bank’ to coral all the poor quality assets, probably for fear of what this might mean for the UK’s beleaguered public finances in the event of default. Based on current government estimates the deficit will stay above 3% of GDP until the middle of the next decade.

“Bottom line: At this stage, policymakers are limiting their actions to ‘quality assets’. However, it is probable that the next step is a ‘bad bank’ and full scale nationalization, given that output is forecast to fall this year at the fastest pace since 1946 and lending is likely to stay weak for a prolonged period.”

Source: BCA Research, January 21, 2009.

James Pressler (Northern Trust): Japan – no sale!
“Two items of significance regarding the Japanese market hit the wire this morning – the end-year trade balance and the Bank of Japan (BoJ) policy meeting announcement. With the overnight call rate already down to 0.10%, another rate cut would hardly be a news-maker, but the state of Japan’s exports usually makes the front page. And unfortunately, the news was not good.

“Nobody expected the export market to make a miraculous turnaround, but some hope existed for less erosion in overseas sales or fewer imports, thereby supporting net exports. Neither occurred. December imports contracted by 21.5% on the year and were up by 7.9% for 2008 as a whole, but exports fared much worse, posting respective changes of -35.0% and -3.4%. This dragged the annual trade balance down to $20.4 billion, a level not seen since 1983 and a far cry from the 2007 tally of $92.1 billion.

“We have said it before and we will say it again – our official forecast for Q4 GDP in Japan is ‘abysmal’.”

Source: James Pressler, Northern Trust – Daily Global Commentary, January 22, 2009.

Societe Generale: Japanese exports fall 35%
“Strikingly, Japanese exports to the US were down some 37% yoy. But we cannot highlight strongly enough how truly mindboggling Japan’s collapse in exports to China are. Last July they were expanding at a 16% yoy pace. Now they are contracting at a 35% yoy rate! This is a phenomenon throughout the region. Hence despite the notoriously manipulated Chinese GDP data showing a shocking slowdown in GDP growth to 6.8% yoy. I would eat my hat if the Chinese economy was doing anything other than contracting right now.”

Source: Societe Generale, January 2009.

Nouriel Roubini (RGE Monitor): China – why 0% growth is the new size 6.8%
“The Chinese came out today with their 6.8% estimate of Q4 2008 growth. China publishes its quarterly GDP figure on a year over year basis, differently from the US and most other countries that publish their GDP growth figure on a quarter on quarter annualized seasonally adjusted (SAAR) basis.

“When growth is slowing down sharply the Chinese way to measure GDP is highly misleading as quarter on quarter growth may be negative while the year over year figure is positive and high because of the momentum of the previous quarters’ positive growth.

“Indeed if one were to convert the 6.8% y-o-y figure in the more standard quarter over quarter annualized figure Chinese growth in Q4 would be close to zero if not negative.

“Other data confirm that China was in a borderline recession in Q4 and that it may be in an outright recession in Q1: production of electricity plunged 7.9% in y-o-y basis; the Chinese PMI has been below 50 and close to 40 for five months now.

“And with manufacturing being about 40% of GDP , manufacturing is certainly in a sharp recession (negative growth) and the overall economy may be close to a recession

“So the 6.8% growth was actually a 0% growth – or possibly negative growth – in Q4; and the Q1 figures look even worse. So China is in a recession regardless of what the highly massaged official numbers claim.”

Source: Nouriel Roubini, RGE Monitor, January 22, 2009.

Bryan Crowe (Northern Trust): Brazil – 100 is the new 75
“In a surprise to the majority of forecasters, Brazil’s central bank lowered its benchmark rate by a larger-than-expected 100bps on Wednesday after an official vote of 5-3 (the three voted for a 75 bp cut), bringing the overnight Selic rate down to 12.75%. This move was justified after a subdued inflation reading for December, but the committee’s main reason for the move was a significant deterioration in domestic conditions.”

Source: Bryan Crowe, Northern Trust – Daily Global Commentary, January 22, 2009.

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Jeremy Grantham: Obama and the Teflon Men, and other Short Stories

Friday, January 23rd, 2009

In October last year perennial bear Jeremy Grantham, chairman of Boston-based GMO, said: “We are reconciled to buying too soon, but we recognize that our fair value estimate of 975 on the S&P 500 is, from historical precedent, likely to overrun on the downside by 20% to 40%, giving a range of 585 to 780 on the S&P as a probable low.

“The world faces unavoidable declines in economic activity and profit margins, so this overrun is unlikely to be much less painful than average, although you never know your luck.”

Given Grantham’s forecast, it was with keen interest that I have been awaiting his latest quarterly newsletter entitled “Obama and the Teflon Men, and Other Short Stories. Part 1“. The following paragraphs are a summary of his investment recommendations from this report:

“The current disaster would have been easy to avoid by making a move against asset bubbles early in their lifecycle. It will, in contrast, be devilishly hard to get out of. But, we are deep in the pickle jar, and it seems likely that, in terms of economic pain, 2009 will be the worst year in the lives of the majority of Americans, Brits, and others. So break a leg, everyone!

“Slowly and carefully invest your cash reserves into global equities, preferring high quality US blue chips and emerging market equities. Imputed 7-year returns are moderately above normal and much above the average of the last 15 years. But be prepared for a decline to new lows this year or next, for that would be the most likely historical pattern, as markets love to overcorrect on the downside after major bubbles. 600 or below on the S&P 500 would be a more typical low than the 750 we reached for one day.

“In fixed income, risk finally seems to be attractively priced, in that most risk spreads seem attractively wide. Long government bond rates, though, seem much too low. They reflect the short-term fears of economic weakness and the need for low short-term rates. We would be short long government bonds in appropriate accounts.

“As for commodities, who knows? There were a few months where they looked like a high-confidence short, but now they are half-price or less, and are much lower confidence bets.

“In currencies, we know even less. It is easy to find currencies to dislike, and hard to find ones to like. There are no high-confidence bets, in our opinion.

“For the long term, research should be directed into portfolios that would resist both inflationary problems and potential dollar weakness. These are the two serious problems that we may have to face as a consequence of flooding the global financial system with government bailouts and government debt.”

Click here for the full report on Grantham’s views.

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