David Darst - Robert Kessler - Interview Transcript (Feb. 19)

Sunday, February 28th, 2010

Connie Mack recently interviewed David Darst, chief investment strategist for Morgan Stanley Smith Barney, and Robert Kessler, head of Kessler Investment Advisors, which runs portfolios for institutional investors and governments around the world. This is a MUST view/read interview. The complete transcript follows.

CM: David Darst is known as a master of the art of asset allocation. He is the chief investment strategist for Morgan Stanley Smith Barney. David is also a teacher and prolific author, and his latest book is The Little Book that Saves Your Assets . And it’s great to have you both here. Thanks so much for joining us on WealthTrack.
Robert Kessler, U.S. Treasuries, you make your living in investing and managing portfolios of U.S. Treasuries, and as long as I’ve known you, they have been denigrated by most of the competition except in this most recent period when everyone rushed to Treasuries, but now the naysayers are back again. So why are they wrong again about Treasuries?

ROBERT KESSLER: It’s not a question of being wrong or right. A Treasury is really a benchmark to almost every other asset class. So as a benchmark, you can’t be wrong or right about a benchmark. It’s just simply matter of spread between what other asset classes are selling at. So in the Treasury market, we’re lucky enough to be able to have a choice of overnight Treasuries, which is cash, or longer-term Treasuries. And longer term Treasuries are really based on whether you believe inflation is going to be an issue or whether disinflation will be an issue.
So right now we’re in what we call a credit crisis. We’re in a credit recession. And during credit periods of time, you don’t want to own risk assets, and if you don’t want to own risk assets, you want to go to something that has very little risk, which is a Treasury. Now the question becomes: do you own Treasuries as bills overnight or do you really believe that rates are going to come down because there’s very little inflation in the world? So since we believe rates will come down because there is very little inflation, then Treasuries become very attractive.

CONSUELO MACK: All right. So let me stop you there and we’re going to follow up on that in a couple of minutes. David Darst, as a global strategist first and as an asset allocator second, how do you view this?

DAVID DARST: It’s a great point because really, inflation is a monetary phenomenon. We have a big war going on between this monetary phenomenon called inflation potential down the road.

CONSUELO MACK: Right.

DAVID DARST: And deflation is a credit phenomenon. And right now credit is contracting. The latest month figure for December showed it contracted, consumer credit, Consuelo, by $2.5 billion. That’s 11 months in a row the government has been keeping these numbers since 1943. It’s never contracted for 11 months in a row. So right now we have this epic, titanic struggle between the deflation phenomenon, credit contracting and the inflation phenomenon, which is the government attempting to pump up the money supply, add liquidity to the system, which people, makes them worry about inflation down the road. So we feel that maybe Treasury bonds, Treasury securities, you can have them in the portfolio right now, you need to have a little offense as well as a little defense. Treasury securities are a defensive investment in our opinion. Last two years ago they were up 20%. They were up 20% in 2008 when the stock market went down 37%. Last year, ten-year Treasuries lost 9.9% on a total return basis.
I’m very receptive. For a person basically to say stay away from Treasuries means they think interest rates are going to rise. That means the consumer is going to come back. That means that credit is going to stop contracting and we’re going to worry about inflation. But over the next 12 months, I’m not so sure those things are going to be an issue, Consuelo.

CONSUELO MACK: So short term at any rate, next 12 months, Treasuries are probably a good place to be defensive.

DAVID DARST: I think you can have some in the portfolio. We are underweight. We are underweight. Normal is 16%. We’re 7%. That’s our largest single underweight. We are very underweight because we’re worried about the health of sovereign credit finance about the condition of the U.S., the U.K., the European community and so forth, the condition of these finances. So much money has been issued.

CONSUELO MACK: Okay. How do you answer that argument because, in fact, as you know, that most people who are looking at U.S. Treasuries are saying, we’ve got a record deficit; we have to finance that record deficit. If we are basically having to sell a lot of Treasury bonds, that is going to mean that the value of the dollar of our securities is going to go down. And then, in fact, that means that it’s going to be inflationary for the U.S. So how do you respond to that argument? Why aren’t you worried about the size of the deficit and what we have to finance being inflationary?

ROBERT KESSLER: Let me answer two questions. The first question is this concept of the deficit. There is this constant talk of deficits lead to inflation. We don’t really have any indication that that’s true. In the Depression in the United States, we had huge deficits, of course, and we had no inflation. We had deflation. Japan has gone through 20 years now of deficits that are far, far higher than ours, and they have deflation. So we don’t know anything about the inflation side of it. What’s really important is that if people can’t raise prices and there’s an awful lot of excess capacity in the world and wages are going down and unemployment keeps staying kind of sticky at these very, very high levels, it’s very difficult to have inflation.
And so there is no inflation. That’s not our issue. The real issue is– television was interesting today because not only are we dealing with Greece, Greece is very interesting because we’re bailing out Greece and bailing out perhaps Portugal next, but we’re probably going to bail out New Jersey after that. Because New Jersey just announced today that they’re running into a huge deficit, too.

CONSUELO MACK: As are a lot of states.

ROBERT KESSLER: As are a lot of states. So we have states having problems, lowering wages, firing people; very, very difficult to raise prices and consequently, very difficult to have inflation.

CONSUELO MACK: All right. So you think we’re deflationary. You think the credit contraction you think which is extraordinary is actually, we’re in the beginning stages of it. You’re not thinking a year down the road, you’re thinking for inflation, you’re thinking, what three, four, five…

ROBERT KESSLER: It sounds like I’m being very pessimistic.

CONSUELO MACK: You’re a bond person.

ROBERT KESSLER: No, no but I don’t want to be pessimistic. We just got back from the Middle East. I have to tell you, not only is everything for rent in the Middle East, not only are buildings completely unoccupied, but banks, since we deal with banks, banks right now are doing one trade. They’re doing what we call a carry trade, meaning they’re buying their sovereign debt, either U.S. sovereign debt or their sovereign debt short term and they’re carrying it at very low cost.

CONSUELO MACK: Because they can borrow it at very low cost.

ROBERT KESSLER: Because they can borrow at very low cost, as is JP Morgan in the United States and as is Morgan Stanley and everyone else. So the fact of the matter is when people say we’re in a bear market in Treasuries, it’s ridiculous. Last year, even though David is correct, the ten-year Treasury was down 9%. The fact of the matter is we made more money last year in two-year Treasuries than any year I can think of because everyone was carrying a two-year Treasury at zero and getting a point. Now, in bank talk…

CONSUELO MACK: So they were borrowing at lower than 2% and then they were buying the two years… So they made?

ROBERT KESSLER: They do it at a very high leverage level because they don’t need to do very much with a capital question. So the fact of the matter is you have this bull market going on and yet everyone is saying, anything but Treasuries. Tell that to JP Morgan.

CONSUELO MACK: Right. So David, not to completely focus on Treasuries, but as far as asset allocation, you said that your biggest underweight is U.S. Treasuries right now.

DAVID DARST: It’s sovereign credit, Consuelo.

CONSUELO MACK: Across the board.

DAVID DARST: It would include U.K., it would include Canada, it would include Europe.

CONSUELO MACK: And the reason for that is what?

DAVID DARST: Well, the sovereign… we believe there’s so much issuance of sovereign debt; we do believe that the balance sheet of the Fed has ballooned from $900 billion to $2.2 trillion. We do see the deficits as being quite large on out into the future. And we do believe that these trillion dollar and trillion and a half dollar deficits are going to have to be bought and to entice people, which will cause higher interest rates. So that’s why Morgan Stanley’s economists have a big out-of-consensus call, which Robert is very familiar with. And by the way, the word Robert means bright fame. His name means bright fame. Now Robert is familiar with this- Morgan Stanley is expecting 5.5%. And every conversation I get into, I have to argue we think that inflation fears will be higher towards the end of 2011. We see all this slack. But there’s concern. Supply, which you mentioned, that is the excess issuance by the Treasury, and also the Fed, and I know there’s a lot of disagreement over this, we expect them to begin their exit strategy later this year, second half of this year.

CONSUELO MACK: And exit strategy could mean raising the federal funds rate?

DAVID DARST: Higher short-term interest rates, and that means we think higher long-term interest rates. We take a little bit of respectful issue with Robert Kessler’s brilliance over here. But we believe the essence of our underweight versus sovereign debt is because of enormous supply and people’s concern. Inflation is the biggest… The biggest inflations of all times have all come from fighting deflation. In the 1946 to 1949 period in Germany, in communist China, in the 1920s and 1923 period of Weimar Germany, the biggest inflations have all come from fighting deflation.

CONSUELO MACK: So what’s interesting is the common ground is here. Right now we are fighting deflation, which is actually positive at least for the next 12 months, possibly for…

DAVID DARST: Steroids, financial steroids. Mark McGuire has admitted to it and the Fed is taking financial steroids.

ROBERT KESSLER: Let me be a little contrary for a second.

CONSUELO MACK: For a second?

ROBERT KESSLER: All right, for 30 seconds. The fact of the matter is we talk about this exit strategy all the time about the Fed. I’m into the entrance strategy. I am trying to figure out how we’re going to help out 8.5 million people who don’t have jobs. It’s probably closer to 17 million because that’s really a more correct figure.

CONSUELO MACK: The ones who have been discouraged and not looking for jobs anymore.

ROBERT KESSLER: Why we’re talking about exit strategies is very, very disconcerting to me.

CONSUELO MACK: Because the Fed is actually. Bernanke is talking about it, right.

ROBERT KESSLER: What we’re talking about again is Wall Street and the banking industry. When you get to, excuse me, the middle of the United States, at least where I live.

DAVID DARST: Right, you live in Denver.

ROBERT KESSLER: In Denver. People don’t have a clue to what JP Morgan is doing or Morgan Stanley is doing. What they’re looking for is their job, and when someone says, excuse me, I think it will be a good idea to raise interest rates, they can’t even borrow money; not only can’t they borrow money, no one will lend them any money. So they’re really…

CONSUELO MACK: Like the credit contraction you were talking about.

ROBERT KESSLER: So the issue is why are we talking about exiting the strategy?

DAVID DARST: The reason we’re talking about exit strategy is psychological. It’s the use of Shakespearean language and words to try to divert people from worrying about the debasement of the currency, internally and externally. And that’s why he’s saying it. And I agree with you. I don’t see rates jacking way up very quickly. This is going to be gradual, but we went from $900 billion Fed balance sheet to $2.2 trillion. And it is very, very important.
Sarkozy, during the last four weeks– opening speech at the World Economic Forum said that in 2011 France is going to be head of the G7 and the G20 and he says his number-one agenda item is to create a new world monetary system, a new system without the United States dollar as the primary reserve currency. The reason they talk about exit strategy, Robert, is to keep people from going to this new currency.

CONSUELO MACK: So how concerned are you about the fact that the dollar could be replaced as the reserve currency?

ROBERT KESSLER: First of all, for a second I’m going to represent Main Street as opposed to Wall Street, and Main Street doesn’t have a clue to what we’re talking about.

CONSUELO MACK: Right.

ROBERT KESSLER: Believe me. This all gets very, very complicated to talk about.

CONSUELO MACK: And our viewers are investors.

ROBERT KESSLER: They’re investors, so my answer to all of this is the United States will continue to be the reserve currency. There’s nothing wrong with the dollar. Everyone will put money into the dollar, as we’re doing today. Today is a very, very good example. We had a 30-year auction today. What was exciting about it, even though it didn’t go over very big as an auction, didn’t go well, but what was exciting about it is 23% of the auction was bought by Americans. What we call direct investors.

CONSUELO MACK: We’ve seen a trend here where the direct investors, Americans are buying more and more of their Treasury securities.

ROBERT KESSLER: And so when you look at the American dollar, as you can look at the Japanese yen- the reason the yen has stayed strong for so long is because the Japanese support their own country.

DAVID DARST: Internal savings, financing.

ROBERT KESSLER: And in the United States, we are beginning to do the same thing. And so even though we have a deficit, if we’re willing to pay for it, then frankly there’s nothing so terrible about the deficit.

DAVID DARST: Your legion of viewers in the aggregate have 25% stocks, 25% their home and 7% bonds. That’s why, as you’ve pointed out on the show, Consuelo, over the nine months from March through December, they, we all put $315 billion net into bond funds and ETFs, $35 billion into non-U.S. stocks and minus $24 billion into U.S. stocks. So there has been this trend. 1982, the average baby boomer, the median age was 25 years old. Today it’s the reverse of the digits- 52 years old. People have been killed by the dot com meltdown, the housing price meltdown and the financial stock meltdown and that want to set aside some money. So your point is an excellent point, Robert. They want to put this money and maybe some of the buyers will be U.S. households.

ROBERT KESSLER: Let me add one more statistic.

CONSUELO MACK: Very quickly because we have to get to the One Investment.

ROBERT KESSLER: The statistic being, that if Americans begin to invest in Treasuries the way they have in the past, then there would be no deficit. There would be simply no deficit.

DAVID DARST: We’re sitting on $8 trillion of cash right now. And they need only $1.5 trillion, but we need higher rates, Robert, to entice us to take it out of the cookie jar and the mattress and put it in Treasuries.

CONSUELO MACK: So one quick question for you, David Darst, and this is put your asset allocation hat on again. What are you overweighting, in a minute or less?

DAVID DARST: We’re overweighting corporate credit to summarize quickly. That would be high yield bonds, and high grade bonds.

CONSUELO MACK: Because of the yield.

DAVID DARST: The yield is more attractive. We are overweight in real estate investment trust, which have a nice yield to them.

CONSUELO MACK: Right.

DAVID DARST: We’re overweight in emerging market stocks and Canadian stocks, Australian stocks, and in small cap stocks. They have basically taken a little gas in the first part of this year. We think that’s a pause, a healthy, needed correction that we will believe as the economies grow around the world- we just jacked up our China forecast to above 10% for this year- and we think probably world growth will surprise to the up side. Maybe that’s why yields will surprise to the up side, too. Interest rates.

CONSUELO MACK: Very interesting. And so let’s go to the One Investment for our investor viewers out there, and Robert Kessler, guess what you’re recommending.

ROBERT KESSLER: A quick comment.

CONSUELO MACK: Yes.

ROBERT KESSLER: A quick comment. I am so weary of people who wear white suits and recommend emerging markets. Now, David’s not.

DAVID DARST: White suits?

ROBERT KESSLER: White suits.

DAVID DARST: Tom Wolf.

ROBERT KESSLER: Right.

CONSUELO MACK: I don’t understand that.

ROBERT KESSLER: Consequently, what I’m saying is I think you want to be in everything that is risk-averse. And therefore I would suggest that a Treasury, whether it’s overnight money or it’s ten or a 30-year Treasury, I think the ten year will probably outperform everything this year, and that’s a way-out kind of a call, but I do think that rates are going to substantially come down, and they do usually the second or third year after a recession, and since we’re only a year into this, we have a long ways to go, and I think you’ll see the ten-year Treasury probably back at 2% range or lower. And that’s a big move.

CONSUELO MACK: Wow. And David Darst, you’re thinking defensive action, too.

DAVID DARST: I am, Consuelo. Procter & Gamble (PG), which I’ve recommended on the show before- they have 23 products with over $1 billion in annual sales, and they have 20 products in addition with over $500 million in annual sales. They just changed leaders. Robert McDonald takes over from A.G. Lafley. McDonald has been with them for 29 years. He sold Folgers Coffee. He’s selling off the pharma area to focus on personal care, on household products and human well-being, okay. We see three billion people every day out of six billion in the world that are touched by a Procter & Gamble product.

CONSUELO MACK: Wow.

DAVID DARST: He wants it to go up to four billion. Only 30% of their revenues are outside the U.S. and Europe. Stock sales are 14 times last year’s earnings. It yields 2.9%. They’ve not been buying stocks in a year and a half. They’ve just begun to buy stocks, and the last thing is it was only up 1% last year with its lag to market. It went down less than the market. It went down 14 in ‘08 when it went 37 down, up 1% last year. We think this is a company that’s been a defensive stock about to go on the offense.

CONSUELO MACK: So we have a diversified portfolio right here between the two of you. Robert Kessler from Kessler Investment Advisors, thank you so much for coming in from Denver and from New York, it’s great to have you regardless, David Darst from Morgan Stanley Smith Barney, thanks so much for joining us.
At the conclusion of every WealthTrack, we tried to leave you with one action to take to build and protect your wealth over the long-term, as well. This week we’re revisiting a retirement income theme that we and many of our guests have emphasized over the years. This week’s Action Point is: lock in some retirement income for life.
How do you do that? The Obama administration recently came out in support of annuities as a tool to deliver a form of “guaranteed lifetime income.” Specifically, President Obama has called for a change in federal rules to allow adding annuities to 401(k) retirement plans.
Until that becomes a reality, one way to assure a stable flow of income that you can count on for life is to buy the simplest, plain vanilla version, an immediate fixed annuity, also known as a single premium immediate annuity. You turn over a one-time payment to an insurance company, and it in turn will provide you with a predictable and guaranteed monthly income as long as you live. To make sure it’s there, that it is as long as you live, only work with life insurance companies that have the highest credit ratings, and don’t put all your eggs in one basket.
The financial advisors we have talked to recommend investing only a portion, no more than one-third of your retirement assets, in annuity products, and also recommend consider staggering the amount you put in over a number of years, so you can adjust your income stream as you need it. To get an idea of what kind of monthly income a given amount will return, go to immediateannuities.com for a quote.
Now what troubles many people about these immediate fixed annuities is that you might die before you have recovered your investment, your heirs don’t get any benefit, and inflation can eat away at the value of the income stream. So the insurance industry, in its infinite wisdom, has responded with variations on immediate annuities that address these concerns. The tradeoff is the adjustments reduce the monthly income. Annuities are not right for everyone, but as a vehicle to create your own guaranteed pension plan for life, an immediate fixed annuity is definitely worth considering.
That concludes this edition of WealthTrack. Join us for one of our Great Investors series next week. I’ll sit down with Steven Romick, portfolio manager of the FPA Crescent Fund, a finalist for Morningstar’s Domestic Equity Fund Manager of the Decade award. In the meantime, to watch this program again, please go to our website, wealthtrack.com. Starting Monday, you can see it as streaming video or a podcast. Thank you for visiting with us. And make the week ahead a profitable and a productive one.

Source: Consuelo Mack, WealthTrack, February 19, 2010
http://www.wealthtrack.com/transcript_02-19-2010.php

Tags: Asset Allocation, asset class, Asset Classes, Bonds, Chief Investment Strategist, Connie Mack, Credit Crisis, David Darst, Disinflation, Institutional Investors, Interview Transcript, Kessler Investment Advisors, Morgan Stanley, Naysayers, Prolific Author, Recession, Robert Kessler, Smith Barney, Stanley Smith, Treasuries, Treasury Market
Posted in Markets | No Comments »

Wealthtrack: The Outlook for U.S. Treasuries

Monday, February 22nd, 2010

Investment guru Marc Faber calls Treasuries junk bonds. Best-selling Black Swan author Nassim Taleb says, “It’s a no brainer, every single human should short US Treasury bonds.”  And there is a new expression among traders on Wall Street these days, “anything but Treasury bonds” or ABT for short. Is the conventional wisdom right?

This week on Wealthtrack, Consuelo Mack poses the question: What place do US Treasuries, bonds in general, stocks and alternative investments have in an investment portfolio in today’s markets? The guests are Robert Kessler, head of Kessler Investment Advisers and one of Fortune Magazine’s “Top American Investors” and David Darst, Morgan Stanley’s chief investment strategist and author of The little book that saves your assets.

Note: The transcript of this interview is not available yet, but will be posted here as soon as it arrives.

Source: Wealthtrack, February 18, 2010.

Tags: Abt, Alternative Investments, American Investors, Black Swan, Chief Investment Strategist, Consuelo Mack, Conventional Wisdom, David Darst, Fortune Magazine, Investment Advisers, Investment Guru, Investment Portfolio, Junk Bonds, Marc Faber, Morgan Stanley, No Brainer, Robert Kessler, Treasuries, Treasury Bonds, Wealthtrack
Posted in Markets | No Comments »

David Rosenberg: “My Take on the Fed”

Friday, February 19th, 2010

WHILE YOU WERE SLEEPING

The U.S. consumer price data is hot off the press and while the headline came in below expected at +0.2% MoM (so much for the PPI being a leading indicator). The real key was the -0.14% print on the core index (which removes food and energy) - deflation in the core CPI is a 1-in-80 event and should be treated seriously in terms of what it means for bond yields and corporate pricing power in the broad retail sector (there were notable declines in recreation, clothing, new car prices, hotels and air fare).

The theme for 2010 is the return of volatility and the appropriate investment strategy is to minimize it through appropriate hedge funds strategies and portfolios that are negatively correlated to risk. Look at what we have on the worry list that we did not have 10 months and 70% ago on the S&P 500:

• China and India tightening credit policy
• The Fed embarking on an exit strategy
• The peak in fiscal stimulus behind us, not ahead of us
• Iran (see today’s WSJ editorial)
• Greece (Portugal? Spain?)
• Sovereign default risks
• China selling U.S. treasuries
• Stricter capital rules for banks

MY TAKE ON THE FED

The hike in the discount rate from 0.5% to 0.75% was only a surprise because of the timing, but the Fed had been warning for some time that this was going to be part of the process of taking the emergency stimulus out of the financial system. Ben Bernanke mentioned this at last week’s prepared text to Congress and

Wednesday’s FOMC meeting contained recommendations from the Fed staff to start raising the discount rate as soon as possible. (We see in today’s NYT that former Governor Larry Meyer quipped “don’t they [the markets] understand the meaning of soon?” Well, after looking up the word in the dictionary, “soon” was defined as “in the future”, not necessarily next week). A whole array of other emergency measures are slated to end in the course of the next month, so yesterday’s after-market-closing move in the discount rate is part and parcel of the Fed’s long-discussed exit strategy.

Before the crisis intensified in 2008, the normal spread between the discount rate and Fed funds was 100bps, and yesterday it went from 25bps to 50bps. The Fed also reduced the term on discount window loans back to overnight from 28 days - all in an effort to “normalize” policy (notwithstanding how fragile this recovery really is and how abnormal it is to still be over 8 million jobs shy of the former peak at this stage of the policy cycle).

The near-term reaction is predictable with equity futures selling off sharply but this is because Mr. Market has always held the discount rate in high esteem - likely more than it deserves (as we recall that old refrain “three hikes and a stumble”). Also keep in mind that the Fed first cut the discount rate before the market opened back on August 17, 2007, and the Dow rallied 233 points that day. It was hardly the right call and it is very likely the case that the market is over-reacting to yesterday’s hike in the opposite direction.

Not that I’m bullish on equities - from my lens, what was far more important in terms of describing the true economic backdrop was what Wal-Mart had to say yesterday in terms of its -1.7% YoY print on Q4 same-store sales (first decline in history and below the flat reading that was expected), not to mention reduced guidance for Q1. The CEO, Mike Duke, bluntly stated that “The economy remains challenged for many of our customers around the world…we expect first-quarter sales in the U.S. will be difficult.” Mr. Duke, you may run the largest retailer in the world, but the bubbleheads on television are telling you that you don’t know what you are talking about! What else does Wal-Mart represent except that 70% chunk of GDP otherwise known as the American consumer?

If the consumer is “challenged”, then how far is an inventory adjustment going to carry along this post-recession recovery. We know, we know - what about the leftover fiscal stimulus out of Washington? Our take: the drag out of the State and local government sector is going to provide a significant offset and the growing opposition to fiscal largesse from the Tea Party movement is going to put a cap on the White House intervention efforts going forward. The situation is so dire that over half of the States are reducing Medicaid services and payments to health care providers to save money (not that we have claimed sainthood, but for economists on CNBC to talk about the wonders of fiscal stimulus when the nation’s poorest people are facing budget cuts just doesn’t seem appropriate).

Yet Mr. Market was somehow able to ignore the message from Wal-Mart’s miss with the Dow rallying over 80 points. (Though yet again, on lower volume - down 6% on the NYSE!) That reaction basically makes as much sense as the dive that initially followed the discount rate increase - in a sign that this is a market that is manic and increasingly volatile.

Not only did the Fed telegraph the move, but the overall impact on bank funding costs is minimal with discount window borrowing at a mere $14.9 billion (a fraction of the pre-crisis levels of $110 billion) and the commercial banks sitting on a $1 trillion cash hoard as it is.

Moreover, the Fed kept on cutting and cutting and cutting rates all the way from August 2007 through to December 2008 and even at microscopic Japanese-like levels, this traditional mode of central bank stimulus still could not manage to put a floor under the economy, let along the markets. Only when the Fed began to treat this as a credit cycle as opposed to a liquidity cycle by rapidly expanding its balance sheet through quantitative easing measures did the turnaround in most economic indicators and investor confidence turn around.

So, it would stand to reason that the real test for the markets is going to come not from the discount rate, but by what happens when the Fed begins to shrink its balance sheet - particularly the ramifications for mortgage rates.

Bear in mind that the Fed in some sense had already been reducing its support by allowing several programs to run their course - the bond-buying program ended about four months ago too. These are all technical moves that symbolize the end to the emergency liquidity provisioning but the central bank is going out of its way to signal that these are not attempts to actually tighten monetary policy. Of course, Bernanke et al are going to have to walk a fine line and for Mr. Market, what defines “extended period” as far as the more important Fed funds rate is concerned is a key question if “before long” - the words Bernanke used to explain when the discount rate would be hiked - meant little more than a week.

All that said changes in the discount rate still can pack a psychological punch, at least in the near-term. Investors will now be reminded that the exit strategy, while gradual, is about to start in earnest. So don’t look for a lot of talk going forward of a liquidity-driven market. This could have a dampening impact on the market multiple, as has been the case in China where two moves this year to raise reserve requirements have knocked the Shanghai index down by roughly 8%. Those pundits laying claim that what the Fed is doing is great news for the stock market because it is somehow ratification of the view that we are into a sustainable growth phase should heed what has happened in China this year, and also understand that the reason the S&P 500 could muster a 70% rally off the lows of last March in advance of anything beyond ‘green shoots’ in the economy was in large part because of all this Fed- induced liquidity.

While the initial reaction to the Fed’s move may be overdone, we are still at the tip of the iceberg and the one thing Mr. Market does not like is the uncertainty when the game starts to change. I realize that the equity bull market continued well after the first set of policy tightenings in 2004, but credit growth was running rampant then and home prices were skyrocketing - a far cry from today’s landscape, especially the fact that bank lending is contracting at a record 15% annual rate at the current time. For all we know, Bernanke is about to pull a 1937-38 premature exit strategy that ultimately leads to a market and economic relapse. That may not be a base-case scenario but the odds of a policy mis-step are still greater than zero.

To be sure, it does look as though the U.S. economy has moved into an expansion phase, but like the markets, it is volatility around the downward trend. This time last year we are seeing -6.4% GDP growth and then by the fourth quarter of 2009 we are at +5.7%. What a swing. It does remind me of Japan, which has experienced no fewer than 12 quarters of 5%+ GDP growth since its bubble burst in 1990 and one-third of these occurred in the initial years after the crisis began. But there have been twice as many quarters with negative growth. Therefore, volatility is the only certainty in the economy following a credit collapse - and the markets as well.

We recall that that the Nikkei enjoyed 230,000 rally points since 1990 and the market is still down 70% from the peak at that time. It’s no different for the U.S.A. following the prior credit collapse in the 1930s - the decade saw 20 quarters of 5%+ sequential GDP growth! That’s a depression? Of course it was because there were 13 quarters of contractions mingled into those intermittent positive spasms. Real GDP did a bungee jump of 11% in 1934 and yet if memory serves me correctly, the level of economic activity was basically no higher in 1939 than it was in 1929; and because it was deflation and not inflation that predominated in that period (even with the New Deal!) nominal GDP finished the decade with a 13% loss.

It was not until the first quarter of 1941 - with the help of the war effort - that the prior 1929 Q3 peak in nominal economic activity was taken out (despite seven years of massive FDR stimulus and the odd extremely whippy positive GDP quarter). Moreover, the next secular bull market in equities did not begin until 1954 - 25 years after the prior peak. So the message here is to focus on the forest, not the trees … and to look at an inventory-led 5.7% growth rate in Q4 in the context of wiggles around what is still a fundamental downtrend.

So what does the current backdrop resemble in a modern-day sense? The summer and fall of 2007. Think about it. The S&P 500 has been jerking around on either side of 1,100 for five months now. The 10-year note yield has jumped 20 basis points from the nearby low with hardly any reason outside of negative technicals.

Go back to that period between May and October of 2007, and the S&P was just above or just below the 1,500 mark for over five months. Many didn’t know it then, and we should all be taking it into consideration now, but we were in a classic topping formation. Back then, as is the case today, the bond market was getting hit hard with the 10-year note yield surging 50bps, to 5.2%, and the universe of economists and strategists completely bearish on the Treasury market at just the wrong time. What goes around comes around.

Read the summary of today’s report here.

Read the complete report here.

Tags: 28 Days, Bond Yields, Core Cpi, Core Index, David Rosenberg, Declines, Deflation, Emergency Measures, Exit Strategy, Fed Funds, Fed Staff, Fiscal Stimulus, Fomc Meeting, Hedge Funds, Hot Off The Press, Investment Strategy, Larry Meyer, Leading Indicator, New Car Prices, Nyt, Portugal Spain, Ppi, Retail Sector, Stimulus, Treasuries, Wsj Editorial
Posted in Markets | No Comments »

China Cuts Its Holdings in Treasuries?

Tuesday, February 16th, 2010

It appears that China is doing its best to keep the dollar from strengthening, employing a strategy of “covert easing.” Is this Act One of the US-China divorce Harvard’s Niall Ferguson predicted last year, or is this an intervention on China’s part to moderate the short covering rally in the dollar, as a way to hedge its exports recovery? Only time will tell; either way, it looks as though China is selling U.S. treasuries.

AP/MSNBC reports China cuts holdings of U.S. Treasuries:

The government said Tuesday that foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.

The reductions in holdings, if they continue, could force the government to make higher interest payments at a time that it is running record federal deficits.

The Treasury Department reported that foreign holdings of U.S. Treasury securities fell by $53 billion in December, surpassing the previous record of a $44.5 billion drop in April 2009.

On the surface, this is a story that is likely to get politicized, used in Washington, as bait for continuance of QE. Scratching below, there is far more to this than meets the eye, in what amounts to a very sophisticated monetary shell game of keeping the dollar moderately cheap that is being played out between the U.S and China. Keep your eyes on the ball. The agenda belongs to China, the recovery in its export sector, and currency balance in the yuan/dollar pair.

Is China tightening? Not Really.

Source: MSNBC, February 16, 2010.

Tags: Act One, April, China, Continuance, Control, Currency, Divorce, Dollar, Emerging Markets, Export Sector, Federal Deficits, Federal Treasury, Harvard, Interest Payments, Intervention, Msnbc, Msnbc Reports, Niall Ferguson, Qe, Rally, Shell Game, Short Covering, Treasuries, Treasury Department, Treasury Securities, U S Treasury, Yuan
Posted in Markets | No Comments »

Hugh Hendry Recreates ABX, Discloses Mystery Trade With 1.5% Downside, 75% Upside

Monday, February 8th, 2010

This article is a guest post from Tyler Durden, ZeroHedge.com.

Hugh Hendry, always beautifully opinionated, nails it at the Russia 2010 forum with the following oneliner: “Who cares about anyone’s opinion. You pay money for what they do with that opinion.” We are in complete agreement as this conforms precisely with what one of our former legendary, multi-billionaire, corpulent superiors once said “nobody gives a f*&k about your opinion.” On the other hand presenting amusing observations coupled with engrossing narrative, that nobody seems to have an issue with.

The following clip from the Russia Forum pits one against another Marc Faber, Hugh Hendry, Nassim Taleb, PIMCO’s Michael Gomez, Investec’s Michael Power, resulting in a memorable debate. A few blogs caught this clip and posted it yet few actually watched it, as the biggest news from the panel was not Taleb’s admonition that “every single human being should be short treasuries”, an opinion which Hugh Hendry squashes through the groupthink meatgrinder, but Hugh Hendry’s cryptic disclosure that he has uncovered the ABX trade for the next decade, which has “1.5% downside and 75% upside.” Hendry teases, but until the end refuses to disclose what the specific trade is. And while we realize the futility of recreating others’ opinions, here is the money quote from the Scottish contrarian:

“The problem with the bailout of 2008 and the first quarter of 2009, is that it did nothing to eliminate the debt. The debt is just unprecedented in the western world… We’ve had a tripling in leverage for the last 30 years. That tripling in leverage has produced unprecedented gains. The British stock market up 43 times in nominal terms, the S&P up 25 times. This has left many people still hungry for risk. I have a portfolio today… In the UK we have interest rates which are at a 300 year low, since the bank of England was conceived in 1692. I get paid money every day underwriting the risk that the BOE will cut rates further. I use that to cheapen an option which say “I don’t think the Bank of England, and ECB, is going to raise rates in the next 4 months.” And if nothing happens i make 5 times my money. If they raise rates, I lose my premium. My premium is not a lot. I’ll survive that. On the other side of my book, I have discovered something which is close to the Paulson trade in CDOs in US mortgages in 2005 and 2006. Can you believe that a trade with that kind of dynamic exists today. Can you believe if nothing happens and I am just wrong than again I will lose 1.5% but if I am right I will make 75%. That trade exists today and maybe later on I will tell you about it.”

And continuing with opinions, here is the former GSAM and Odey executive on Treasuries:

“I am hugely intellectually bullish on Treasuries. I am long. I fear the end of QE, the money funds are making on the [curve], I am aware of the issuance, I am aware that the States is going to have to sell $2.5 trillion of this stuff. But that’s the marketplace - the marketplace disseminates the bad stuff. I think there is a lesson in Japan. You think they are going to succeed - Mark [Faber] thinks they are going to create inflation. The precedent of Japan suggest that if you allow leverage in your society to breach a certain level, let’s call it 200 or 230% of GDP, then what happens is monetary policy doesn’t work, fiscal policy doesn’t work. They’ve had helicopters, they have distributed free money to their citizens, they have built bridges to nowhere and prices are falling and look set to fall further. My fear just now is that the community of risk is very short treasuries, and is very long risk: risk assets are the hedge against inflation. Now if something untoward happens, the gamma on that trade bankrupts you.”

Elsewhere, you will hear Taleb’s proposed portfolio composition (if you have read Fooled by Randomness or The Black Swan you won’t be surprised), as well as his escalating and very much justified disdain for economists: “if the number of economists from US universities in a country is high, the country risk is high, if the number is low, the risk is low.”

And a whole lot of debate over China, with Hugh Hendry dismantling Jim O’Neill and the other China bulls. “I love Jim O’Neill. I love that Goldman Sachs guy. He says you either get it, or you don’t. I don’t get it. In the future there will be a Confucius saying: the wise man not invest in overcapacity. The flaw of the business model, at the center of it is a craving for power as opposed to profit.” (Kinda funny, coming from a former Goldmanite.) Please watch Hendry’s view on China beginning 55 minutes into the clip.

For those P&L detectives here is Hugh’s most recent missive. Good luck with extracting what the next ABX trade is.

The full hour + debate can be found here. We think far too highly of our readers’ intellectual ability than to point out that the English audio stream would require hitting the Eng button. (Its at the bottom, on the right hand side, and shaded, just to the left of the “Pyc” switch.)

Click on the icon for a link to source.

Tags: Admonition, Amusing Observations, Bailout, Bank Of England, Billionaire, British Stock, China, Emerging Markets, Engrossing Narrative, Gold, Groupthink, Hugh Hendry, Investec, Marc Faber, Meatgrinder, Michael Gomez, Nassim Taleb, Oneliner, PIMCO, Russia Forum, Squashes, Treasuries, Tyler Durden
Posted in Markets | No Comments »

Chinese Stealth Treasury Purchasing Continues

Thursday, January 21st, 2010

This article is a guest post by Tyler Durden, of ZeroHedge.com.

A week ago we speculated that the mysterious “direct auction bidder” may be China, purchasing Treasuries  indirectly though offshore money centers. Yesterday’s Treasury International Capital data confirms that there is something strange happening with China treasury purchasing, and adds more fuel to the speculative fire that China is in fact acquiring Govvies through less than overt pathways.

The TIC data released yesterday showed a surge in Treasury buying, with foreigners purchasing $118.3 billion in Long-Term Securities (Bonds and Bills). As the chart below demonstrates, this was a record monthly purchase amount in the LTM period.

What was strange about this data point, is that European investors accounted for well over half of purchases, at $68.1 billion - also a record monthly amount. Of this, the UK accounted for a whopping $50.6 billion, and France also buying a sizable $11 billion. Accounting for all Bill sales in November, foreigners offloaded $18.9 billion in short-term securities yielding next to nothing, after selling $38.3 billion in October. Furthermore, as we speculated, paydowns added to run from short-dated securities: $134 billion in bills were paid down in October and $8 billion in November. While forigners no longer flock to Bills, their holdings of the low-yielding asset class is still elevated at well over pre-crisis levels:

On this backdrop, China was a purchaser of just $14.9 billion in Notes and Bonds, while at the same time it sold $24.2 billion in Bills, for a net outflow of $9.3 billion. This is confirmed by consolidated holdings data, which saw total Chinese holdings drop to $789.6 billion in November from $798.9 billion in October. China’s aversion to Bills is indicated in the chart below, yet it still has a long way to go before it reaches its 2007-2008 holdings of the short-end. In November China held $109 billion in Bills, down from $133 billion in October, and a peak of over $200 billion in May 2009. As the country’s Bill portfolio matures, we expect an accelerating reduction in China’s holding of Bills, especially if ongoing selling interest does not decline.

We will provide a more in-depth analysis of global fund flows in November later, although we are troubled by some odd revision to October data, particularly as pertains to short-term treasury holdings by the Channel Islands and the Isle of Man, which we are currently trying to reconcile.

Focusing back on China for the moment, among other things the country was a net seller of agency debt for the 17th month in a row, offloading $3.4 billion in the class. China also sold $146 million in corporate debt while buying $393 million in US corporate stocks: a token amount on both sides.

Yet what is most odd about China, as we pointed out previously when discussing Chinese FX reserves, is that while China grew its reserves by $55.7 billion in October and $60.5 billion in November, over the same period, it saw its net holdings of US debt decline by 9.3 billion: a $126 billion differential.

As has been widely speculated, China could simply be diversifying away from the dollar, although a $126 billion net purchasing of a UST alternative would likely have had much bigger repercussions on commodity prices globally in the October-November time period. Yet, as Market News points out, this fact does not explain the stability of the CNY, coupled with the ongoing positive trade surplus. Market News’ explanation:

First, it is possible that China is making purchases through other financial centers. The UK’s holdings of US Treasuries rose USD47.4bn in November, and Hong Kong’s holdings also ticked up. If a portion of those holdings can be attributed to China, that would explain part of the disparity between strong FX reserve growth and weak growth in Treasury holdings.

Second, Federal Reserve custodial data, which has a different coverage to the TIC data, shows a solid increase in US Treasuries held in custody for foreign official institutions in October and another smaller increase in November.

Zero Hedge will analyze Fed custodial account data shortly, to determine the nature of the noted discrepancies. Yet the original question does stand: if indeed China is accumulating Treasuries in a covert fashion that bypasses a “smoking gun” appearance on TIC data, why is it doing so? Who stands to benefit from this kind of indirect purchasing via “direct bidders”? The explanation that public and private bidders originating from the UK are accumulating US debt deserves much greater scrutiny: the buyer is certainly not the BOE, which has had its hands full monetizing its own gilts for the past several months (and yes, unlike the Fed, the BOE has no problems admitting it is directly monetizing). And Europe in general is now a funding basket case, exemplified by the events in Greece: the last thing European Central Banks will worry about is funding the U.S. exploding budget deficit when they have a ticking time bomb in their own back yard. So whether the U.K. is merely a hub for offshore purchases of US bonds, whether originating from China or Petrodollar countries, is unknown. If the buyer indeed is China, we raise the same question we did a week ago:

The Fed has now informally offloaded the Treasury portion of Quantitative Easing to China, which does so via the elusive Direct Bid. It also explains why the Fed has generically been much less worried about TSY purchases under Q.E. (a mere $300 billion out of a total $1.7 trillion in monetization). It does beg the question of just how much Chinese holdings of US Debt truly are, as this number is likely hundreds of billions higher than the disclosed $799 billion.

If true, this would imply that the UK “holdings” of $278 billion are highly suspect, as the country likely own a fraction of this total, with the balance held by Chinese and Petrodollar interests.

One thing is certain: if someone is trying to hide their purchases, this is never indicative of a good thing, and much more analysis must be performed to determine just why international fund flows need to be below the radar.

Tags: 1 Billion, asset class, Auction Bidder, Aversion, Backdrop, China, Commodities, Consolidated Holdings, Crisis Levels, Emerging Markets, European Investors, Flock, Foreigners, Money Centers, Offshore Money, Outflow, Pathways, Purchaser, Stealth, Tic, Treasuries, Treasury International Capital, Tyler Durden
Posted in Markets | No Comments »

Roundup: Gold Market

Sunday, January 10th, 2010

Gold Market

For the week, spot gold closed at $1,136.60 per ounce, up $39.28, or 3.58 percent. Gold equities, as measured by the XAU Gold & Silver Index rose 8.02 percent for the week. The U.S. Trade-Weighted Dollar Index fell 0.51 percent.

Strengths

• According to statistics compiled by Commodity Online Bullion Research, investor holdings in the major global gold exchange-traded funds increased as gold spiked 39 percent for the year. The value of the total daily investment flows at the end of 2009 was $61.3 billion, a gain of 84 percent for the year.
• The Bombay Bullion Association said India imported 300 to 350 metric tons of gold in 2009, higher than the previous estimate of a little over 200 metric tons. Also noteworthy is that a recently stronger rupee has ignited gold buying in India, causing several physical dealers to report declining levels of stocks.
• The Ministry of Industry and Information Technology said China’s gold output in the first 11 months of 2009 was around 282.5 metric tons, a 14.6 percent increase over the same period in 2008. However, the estimated demand for gold in China was 450 metric tons, up 13.8 percent over the prior year.

Weaknesses

• Gold fell after a week of healthy gains mainly due to profit taking after the Labor Department announced 85,000 jobs had been lost in December. The U.S. dollar also fell after being pushed up by speculators on hopes that the much anticipated jobs report would be positive.
• The world’s largest bullion-backed ETF witnessed reserves decline by 5.25 metric tons, or 0.47 percent, to 1,123.5 metric tons.
• Treasuries were the worst-performing sovereign debt market in 2009 as the U.S. sold $2.1 trillion of notes to fund stimulus packages. According to Bank of America-Merrill Lynch, investors in U.S. debt lost 3.5 percent on average through December 30, the biggest annual slide since at least 1978.

Opportunities

• According to the Sovereign Wealth Fund Institute (SWF), there are a total of 55 SWFs globally, half of them being investment funds linked to the United Arab Emirates. Western economies have expressed concern during Dubai’s debt crisis because of neighboring Abu Dhabi securing a $10 billion bailout package. The issue going forward is that sovereign wealth funds may withdraw from their overweight investment positions in the U.S. and Europe in order to raise cash for ailing businesses domestically, which may cause weakness in those currencies.
• Zimbabwe’s mining secretary expects mining production in the state to increase 30 percent this year following the reopening of various mines that were forced to shut down during the nation’s decade-long recession.
• Gold may rise as New York gold futures command a greater weight in the Dow Jones UBS Commodity Index in 2010. The new weighting is 9.1 percent, up from 7.86 percent.

Threats

• BNP Paribas analysts expressed concern that the heavy level of investment demand for gold seen in 2009 will need to be maintained for prices to keep gaining, unless other sectors such as jewelry can adjust to these high prices.
• Venezuela has begun rationing electricity use in businesses aimed to save power amid a power drought. Breitbart has reported the new regulations came into effect on January 1, which requires businesses to comply with reduced consumption limits. Authorities have warned of forced power cuts and rate hikes if measures are violated.
• The U.S. Commerce Department said the U.S. has imposed duties of 43 to 289 percent on imports of more than $300 million worth of Chinese steel. Following the news, the United Steelworkers union and several U.S. companies filed a new petition asking for duties of at least 109 to 274 percent on Chinese-made drill pipes.

Tags: 5 Metric Tons, Bank Of America, Bullion, China, Commodities, Debt Market, Dollar Index, Emerging Markets, ETF, Exchange Traded Funds, Global Gold, Gold, Gold Equities, Gold Exchange Traded Funds, Gold Market, Gold Output, India, Labor Department, Merrill Lynch, Rsquo, Silver Index, Sovereign Debt, Speculators, Spot Gold, SWFs, Treasuries, Xau
Posted in Markets | 1 Comment »

BlackRock’s Crystal Ball into 2010 and the Next Decade

Friday, January 8th, 2010

BlackRock, Inc. (BLK) Vice Chairman Bob Doll has been putting out annual predictions for 15 years.  Doll, who helps oversee about $3.2 trillion at BlackRock, the world’s biggest asset manager, just released his ten predictions for 2010 and for the next ten year.  Eleven of the twelve predictions he made for 2009 were right.  Below are Highlights of his latest market forecasts.

In general, Doll believes U.S. stocks will outperform cash, Treasuries and other developed economies with S&P 500 rallying another 12% this year reaching 1250 from their Jan. 4 open of 1116.56.

The U.S. is on its way to recovery, but the economy will grow slower than that of a typical recovery mainly due to heavy debt load.  Inflation will be a “non-issue” in the U.S., Europe and Japan this year even with rising prices of gold and oil.  Dollar will likely remain weak in broad trading range with Euro and Yen.

Doll also noted structural issues in the economy would continue to present problems. Chief among them are

“ongoing consumer deleveraging; a banking system facing deteriorating loan quality and an increasing yet uncertain regulatory environment; securitizations markets still largely shuttered, and a real estate market that may still be healing for several years.”

Emerging-market stocks and economies will outperform the developed world this year.  His ”favorite secular story in the emerging markets remains Brazil.”  (Note: Barclays Capital recently warned of a possible Bovespa (BVSP) correction in Q1 or Q2 this year based on technical chart analysis).

Furthermore, he advised investors should prepare for rising taxes following healthcare reform and protectionist government policies if the unemployment rate remains high.

Doll favors healthcare (especially managed care and healthcare services), information technology and telecommunications sectors. However, he advised underweight on financials as they are likely to continue to underperform.

Note:  Doll’s predictions differ from that of Blackstone Group LP’s Byron Wien’s. Wien’s ten predictions for the new year call for the S&P 500 to finish year 2010 flat, U.S. GDP to expand about 5% and financials to outperform the market.

Doll’s Predictions for 2010

1. U.S. economy grows above 3% outpacing the developed world
2. Unemployment to remain high, but with positive job growth
3. Earnings rise significantly - 20-30% on cost & productivity advantage particularly from a weak dollar.
4. Inflation a non-issue for the developed countries, but oil and gold will still go up
5. Interest rate rises on treasury curve - 10-year treasury targets 4.5%
6. Stock outperform cash and treasury - S&P 500 should rally another 12%
7. Emerging markets outperform
8. Health care, IT & Telecom outperform
9. More M&As
10. Dems stay in control of the Congress

Doll’s predictions for the next 10 years:

1. US equities experience high single digit percentage total returns, in the range of 6% to 8% annually, after the worst decade since the 1930s.
2. Recessions occur more frequently during this decade, rather than only once a decade as occurred in the last 20 years.
3. Healthcare, information technology, and energy alternatives are leading growth areas for the United States.
4. The US dollar continues to become less dominant as the decade progresses.
5. Interest rates move irregularly higher in the developed world.
6. Country self-interest leads to more trade and political conflicts.
7. An aging and declining population gives Europe some of Japan’s problems.
8. World growth is led by emerging market consumers.
9. Emerging markets weighting in global indices rises by 10 percentage points.
10. China’s economic and political ascent continues.

Doll’s Advise to Investors

• Look for quality in all styles and caps.
• Focus on better-positioned sectors - IT, healthcare and telecommunications are his favorite sectors.
• Think about geography - Emerging markets, Brazil, in particular.
• Gains will be harder to come by - Ongoing volatility and selectivity will be critical.

Here is the video where Doll appeared at CNBC on Jan. 6 discussing his latest predictions.  His full commentary is available at BlackRock web site here.

Video Source:  CNBC
Economic Forecasts & Opinions

Tags: Asset Manager, Banking System, Barclays, Barclays Capital, Blackrock Inc, Bob Doll, Bovespa, Chairman Bob, China, Crystal Ball, Debt Load, Emerging Market Stocks, Emerging Markets, Gold, Government Policies, Healthcare Reform, Healthcare Services, Market Forecasts, oil, Regulatory Environment, Services Information Technology, Treasuries, Typical Recovery, Unemployment Rate
Posted in Markets | No Comments »

Technical Talk: Uptrend is Still Intact

Tuesday, December 22nd, 2009

The comments below come courtesy of John Murphy, technical analyst and author of a number of best-selling books on the topic.

A Friday stock bounce kept major stock indexes stuck in a two-month trading range. Prices also remain above their 50-day averages which keeps the intermediate uptrend intact. Prices, however, remain below long-term resistance barriers near 10,500 in the Dow, 1120 in the S&P 500, and 2200 in the Nasdaq Composite. Although not shown here, today’s unusually heavy trading is due to quarterly futures and options expiration as well as some index rebalancing. It has little forecasting value.

A modest pullback in the US dollar also provided some short-term relief to stocks and commodities. Gold and oil ETFS (GLD and USO) bounced off their 50- and 200-day moving averages respectively.

Stocks may also be benefiting from a favorable seasonal pattern. Not only is December a strong month seasonally, but a late-month bounce (known as the Santa Claus rally) may still lie ahead. That may not be enough to push stocks out of their trading range, but should be enough to prevent them from dropping much. Stock traders appear to be satisfied with protecting their 60% gains in 2009, and don’t appear in the mood for taking on new risks. That also argues for a trendless market through yearend.

Treasuries bonds and notes lost ground on fears that long-term rates are headed higher in the new year.

Source: StockCharts Blogs - ChartWatchers, December 18, 2009.

Tags: Best Selling Books, Bonds, Commodities, Dow, ETF, Fears, Futures And Options, Futures Options, GLD, Gold, Major Stock Indexes, Moving Averages, Nasdaq Composite, New Year, oil, Options Expiration, Pullback, Rally, Santa Claus, Seasonal Pattern, Stock Traders, Stocks And Commodities, Technical Analyst, Treasuries, Uptrend
Posted in Markets | No Comments »

SWOT: Economy and Bond Market

Sunday, December 20th, 2009

The Economy and Bond Market

Treasuries yields were little changed this week as the Federal Reserve more or less reiterated its stance on monetary policy. Inflation data for November was released this week and, as can be seen in the chart below, it has turned the corner and is back in positive territory on a year-over- year basis. Deflation concerns are likely to subside over the next few months as all measures of inflation have turned noticeably higher.

Strengths

• Industrial production in November rose 0.8 percent, faster than expected.
• Leading economic indicators rose 0.9 percent in November and have now risen eight straight months.
• Housing starts bounced back nearly 9 percent in November, after falling 10 percent in October.

Weaknesses

• Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) were reported this week and are now solidly back in positive territory. Combined with last week’s import prices report, which also showed a sharp year-over-year increase, the case can be made that inflation has returned to a normal level and monetary policy may need to be adjusted sooner rather than later.
• Initial jobless claims have climbed higher in the past two weeks after making significant improvement in November.
• Abu Dhabi came to the rescue of debt-plagued Dubai this week, but concerns surrounding Greek and other European debt remain.

Opportunity

• Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4 to 5 percent. The global economic recovery appears to be taking hold.

Threat

• The Fed reiterated its monetary policy stance this week. On the surface nothing really changed, but it is incrementally moving to reduce the policy accommodation and often these things move quicker than many expect.

Tags: Abu Dhabi, Accommodation, Bond Market, Consumer Price Index, Deflation, Economic Recovery, Federal Reserve, Housing Starts, Import Prices, Index Cpi, Inflation Data, Initial Jobless Claims, Leading Economic Indicators, Market Economy, Measures, Monetary Policy Stance, Producer Price Index, Producer Price Index Ppi, Significant Improvement, Treasuries
Posted in Markets | No Comments »

Bernstein’s top 10 predictions for 2010

Friday, December 18th, 2009

Richard Bernstein, CEO of Richard Bernstein Capital Management and previously Chief Investment Strategist and Head of the Investment Strategy Group at Merrill Lynch, has just formulated his top 10 predictions for next year. Bernstein’s ideas come courtesy of The Business Insider - The Money Game.

1. Stock and bond market returns in the US will again be positive.

2. The US dollar is likely to meaningfully appreciate once market-driven short-term rates begin to rise.

3. US dollar “carry trades” could get killed as 2010 progresses and the US dollar appreciates. Once accounting for leverage, hedge fund performance will likely trail long-only equity performance.

4. The Fed will spend the second half of the year trying to catch up to, and flatten, the yield curve. Short-term rates could increase more than investors currently think. Long-term rates could rise quite a bit in the first part of the year as inflation finally begins to appear, but are likely to fall during the second half of the year when the markets realize the Fed is serious about fighting inflation. The curve is likely to be much flatter one year from today than it is currently.

5. Corporate profits are likely to explode to the upside during 2010. Trailing four-quarter S&P 500 reported earnings growth could exceed 100%. Investors still seem to be under-estimating the operating and financial leverage that is built into corporate profits.

6. Employment in the US will probably continue to improve. Consumer Discretionary stocks will likely be among the best performing sectors.

7. Treasuries will probably underperform stocks. That underperformance is unfortunately likely to reinforce both individual and institutional investors’ views that it is wise to be under-diversified.

8. Small cap value, I think, will be the US’s best performing size/style segment. Small banks’ outperformance might be the biggest surprise for 2010.

9. Financial regulation will progress, but the bull market will probably aid politicians’ “forgetfulness”. As a result, new regulation could be relatively meaningless. In my opinion, serious regulation won’t occur until after the next downturn, which could be worse if no meaningful new regulation is implemented in 2010.

10. I think the Democrats will do better in the 2010 mid-term elections than people currently think they will. It seems very likely to me that in December 2010, investors will look back on the year and realize that monetary and fiscal policy stimulus still works.

Source: The Business Insider - The Money Game, December 16, 2009.

Tags: Bond Market, Business Insider, Cap Value, Capital Management, Chief Investment Strategist, Consumer Discretionary Stocks, Corporate Profits, Earnings Growth, ETF, Game 1, Hedge Fund Performance, Institutional Investors, Investment Strategy, Merrill Lynch, Money Game, Operating And Financial Leverage, Richard Bernstein, Small Cap, Strategy Group, Treasuries, Yield Curve
Posted in Markets | No Comments »

David Rosenberg: Government Bonds are on Fire

Friday, November 27th, 2009

In today’s Breakfast with Dave, Gluskin Sheff’s Rosie says:

Government bonds are on fire. Yesterday we saw a 10bps slide in the German Bund and U.K. Gilt yields - they are consolidating today - and U.S. 10-year yields are now down about half that amount, to 3.22% - 2bps from taking out the October lows, so keep an eye here for a possible technical breakdown in yields. The Canadian bond market already did that yesterday with the yield on the 10-year GoC slipping below the October lows - we have news for you: this was a major technical move. We can understand that government bonds are the “enemy” to the bulls (not once were Treasuries even mentioned as an asset class during my two-hour stint on CNBC the other day). But there is no denying that somebody is buying these bonds because the 7-year Treasury note auction ahead of Thanksgiving had $88 billion of bids for the $22 billion offering. Go figure, some folks clearly still have deflation on their mind (as they should).

We went into this latest round of turbulence with tremendous complacency in the marketplace (I really sensed it during the two-hour stint on CNBC’s squawk box on Tuesday) - rallies were still light-volume in nature (only two sessions in the past three weeks with NYSE volume north of a billion shares), the VIX index had just receded to its low for the year, at 20.5 (down 60% since March!), the bull share and bear share of the sentiment surveys hit late-2007 levels, and with the trailing P/E ratio at 27x and the forward P/E on $65 of earnings of 17x. There is no margin for error in an overvalued equity market - one that is priced for nearly 5% GDP growth. Remember, it was in the fourth quarter of 1987, a quarter that saw 7% GDP growth and a 55% earnings trend, that the S&P 500 cratered 30%. So, it’s not just about the economic backdrop, it’s what is being priced in - that is the lesson. For a highly overvalued market, it does not take much - like an off-the-cuff remark from the Treasury Secretary on the Meet the Press - to entice a massive round of profit-taking.

Don’t look now but the Baltic Dry Index has just slipped for the fifth session in a row, and down 12% from the November 19 interim high. Not a constructive near-term signpost for the commodity complex. However, as we said above, we look forward to a correction that allows us another opportunity to build long-term positions in this segment of the market where there are secular positive dynamics at play. But as we highlighted last week, anything connected to the U.S. dollar-carry-trade - a very overcrowded trade - is due for a correction.

To reiterate, the Swiss, the Russians, the Brazilians and the Vietnamese have all taken actions to weaken their currencies in recent weeks (see Russia Launches Campaign to Weaken Ruble on page C2 of the WSJ).

If you would like to read more of this, subscribe to David Rosenberg’s newsletter by clicking on the link below:

Tags: asset class, Bear Share, Bond Market, Canada, Canadian Bond, Cnbc, Commodities, Complacency, David Rosenberg, Economic Backdrop, GDP Growth, German Bund, Gilt Yields, Gluskin Sheff, Government Bonds, Half That Amount, Light Volume, Lows, Nyse Volume, Squawk Box, Treasuries, Vix Index, Year Treasury Note
Posted in Markets | No Comments »