Buffett buffet

Tuesday, March 2nd, 2010

In the video clips below, legendary investor Warren Buffett, chairman and CEO of Berkshire Hathaway, talks to CNBC about a variety of topical issues.

On the economy and politics

Source: CNBC, March 1, 2010.

On currencies and market lessons

Source: CNBC, March 1, 2010.

On deal making and financial regulation

Source: CNBC, March 1, 2010.

On Obama and politics

Source: CNBC, March 1, 2010.

Buffett on health care reform

Source: CNBC, March 1, 2010.

Buffett on succession planning and investment strategy

Source: CNBC, March 1, 2010.

Buffett on banks and earthquake insurance

Source: CNBC, March 1, 2010.

Tags: Advertisement, Banks, Berkshire Hathaway, Ceo, Cnbc, Currencies, Earthquake Insurance, Economy, Health Care Reform, Insurance, Insurance Source, Investment Strategy, Investor, March 1, Market Lessons, Obama, Politics, Succession Planning, Topical Issues, Video Clips, Warren Buffett
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Warren Buffett’s Letter to Shareholders 2009

Sunday, February 28th, 2010

Warren Buffett shares his letter to shareholders just ahead of this year’s Annual General Meeting of Berkshire Hathaway.

Berkshire Hathaway Annual Report - via BRK
Warren Buffett’s Letters to Shareholders - via BRK

Here are some of this year’s nuggets. Buffett discusses how he and Charlie Munger, apply Charlie’s thinking to investing.

• Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding.

• Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy. At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable. Even then, we will make plenty of mistakes.

• We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses.

• When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we poured $15.5 billion into a business world that could otherwise look only to the federal government for help. Of that, $9 billion went to bolster capital at three highly-regarded and previously-secure American businesses that needed - without delay - our tangible vote of confidence. The remaining $6.5 billion satisfied our commitment to help fund the purchase of Wrigley, a deal that was completed without pause while, elsewhere, panic reigned.

• We pay a steep price to maintain our premier financial strength. The $20 billion-plus of cash- equivalent assets that we customarily hold is earning a pittance at present. But we sleep well.

• We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. That means we are sometimes late in spotting management problems and that both operating and capital decisions are occasionally made with which Charlie and I would have disagreed had we been consulted. Most of our managers, however, use the independence we grant them magnificently, rewarding our confidence by maintaining an owner- oriented attitude that is invaluable and too seldom found in huge organizations. We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly - or not at all - because of a stifling bureaucracy.

• With our acquisition of BNSF, we now have about 257,000 employees and literally hundreds of different operating units. We hope to have many more of each. But we will never allow Berkshire to become some monolith that is overrun with committees, budget presentations and multiple layers of management. Instead, we plan to operate as a collection of separately-managed medium- sized and large businesses, most of whose decision-making occurs at the operating level. Charlie and I will limit ourselves to allocating capital, controlling enterprise risk, choosing managers and setting their compensation.

• We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us. Instead we want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it’s one that follows policies with which they concur. If Charlie and I were to go into a small venture with a few partners, we would seek individuals in sync with us, knowing that common goals and a shared destiny make for a happy business “marriage” between owners and managers. Scaling up to giant size doesn’t change that truth.

• To build a compatible shareholder population, we try to communicate with our owners directly and informatively. Our goal is to tell you what we would like to know if our positions were reversed. Additionally, we try to post our quarterly and annual financial information on the Internet early on weekends, thereby giving you and other investors plenty of time during a non-trading period to digest just what has happened at our multi-faceted enterprise. (Occasionally, SEC deadlines force a non-Friday disclosure.) These matters simply can’t be adequately summarized in a few paragraphs, nor do they lend themselves to the kind of catchy headline that journalists sometimes seek.

• Last year we saw, in one instance, how sound-bite reporting can go wrong. Among the 12,830 words in the annual letter was this sentence: “We are certain, for example, that the economy will be in shambles throughout 2009 - and probably well beyond - but that conclusion does not tell us whether the market will rise or fall.” Many news organizations reported - indeed, blared - the first part of the sentence while making no mention whatsoever of its ending. I regard this as terrible journalism: Misinformed readers or viewers may well have thought that Charlie and I were forecasting bad things for the stock market, though we had not only in that sentence, but also elsewhere, made it clear we weren’t predicting the market at all. Any investors who were misled by the sensationalists paid a big price: The Dow closed the day of the letter at 7,063 and finished the year at 10,428.

• Given a few experiences we’ve had like that, you can understand why I prefer that our communications with you remain as direct and unabridged as possible.

The complete letter is available here.

Tags: American Businesses, Annual General Meeting, Berkshire Hathaway, Brilliance, Brk, Business World, Cardiac Arrest, Charlie Munger, Competitive Dynamics, Competitors Battle, Dramatic Growth, Fallback Position, Gusher, Img Src, Kindness Of Strangers, Letter To Shareholders, liquidity, Nuggets, Openx, Profit Margins, Random Number, Supplicant, Television Sets, Warren Buffett
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Offshore Oil The Warren Buffett Way

Monday, February 15th, 2010

By Dian L. Chu, Economic Forecasts & Opinions

Commodities, particularly crude, were trending down last week after China’s Central Bank raised bank reserve requirements boosting the US dollar against other major currencies. That marks the second time China has raised its bank reserve requirement in a month.

Ongoing worries about the economy stemming from European debt problems, specifically the lack of a firm Greek bailout plan from European leaders also prompted investors moving out of risky assets. Crude oil fell for the first day in five to below $75 a barrel also partly due to government data showing U.S. inventories rose more than forecast.

Meanwhile U.S. natural gas registered the largest one-day gain last Friday to $5.48 per mmbtu since the beginning of the month on a drop in jobless claims, signaling industrial demand is likely improving, and cold temperatures across the US are boosting residential demand. Industrial Demand accounts for 29% of U.S. consumption.

Oil Services Sector Bottoming Out

While the markets are in a finicky mood from the China and Greek factors, the return of relative stability in oil and natural gas prices has spurred producers to increase their capital budget and restart projects they slowed down or completely deferred a year ago. (Fig. 1)

Absorbing the impact of lower rig counts, weak global demand for fossil fuel and volatile energy prices, the majority of the oil services companies are reporting sharply lower earnings in Q1. However, the rising rig count and producers’ capital budget suggest that oil service markets are probably in the process of bottoming this year, which suggests a good entry point for long-term investors. (Fig. 2)

Oil Majors Go Deepwater & Subsea

Roughly from 2004 to 2008, the onshore, North America in particular, had outshined the offshore in terms of activity growth. But the Great Recession has shifted the tide towards offshore and international. Offshore is one of the few remaining places where the state as well as western oil majors can increase production, while emerging Asian demand is expected to outpace the U.S. and the OECD in coming years.

FBR estimates an increase in deepwater spending of almost triple expected growth in onshore spending will drive offshore spending overall at a rate of around 15% for the next few years. Energy consultants Douglas-Westwood also forecast offshore spending recovering to $439 billion in 2010, up 11% from 2009 with deepwater capital expenditure reaching new highs. (Fig. 3) South America, Mexico, Iraq, Russia, Africa, and the deepwater are the key areas.

Subsea has proven to be considerably more resilient in the downturn, and the secular growth story will continue to improve as the deepwater rig count is expected to increase by 30% in 2012 from 2009 and as projects get more complex and require greater amounts of equipment.

Offshore Infrastructure – The Buffett Way

Warren Buffett made headline last year when he placed the biggest bet of his life with the $34 billion purchase of Burlington North Santa Fe, expecting the infrastructure play will grow as the economy gets back on solid ground.

So, if we apply the same investment strategy as Buffett to the oil services sector, offshore infrastructure will be the logical choice.

Americans vs. Europeans

While oil companies typically fund and own the pipeline, platform, etc, they rely on oil services companies to provide project expertise and resources.

The oil services universe is made up of mainly two camps: Americans and Europeans. American firms such as Halliburton (HAL), Baker Hughes (BHI) and Weatherford (WFT) tend to have a stronger focus on drilling and production services mainly due to the existence of a vast American market, and higher margins.

The European firms, on the other hand, have essentially positioned as specialists in offshore drilling, infrastructure engineering and construction related services.

From Europe with Backlog

Therefore, the current offshore and deepwater trend bodes well for the major European service companies such as Saipem SpA and Technip SA (TKP).  Theses two companies are leaders of the European pack dominating in high-tech segments for deepwater activities such as the installation of platforms, the laying of subsea pipelines, the development of subsea fields, etc.,

The oil infrastructure business is generally later cycle and backlog driven, and thus tends to have less volatility in earnings than other energy stocks. That means even if we go into a double dip, these stocks should still be able to generate higher earnings.

Favorable Forex Trend

Dollar appreciation is also a major catalyst. Société Générale estimated that a 10% increase in the dollar translates into an 8% to 10% increase in EBIT for the oil services sector. All oil services companies should benefit but those that combine a sizeable proportion of dollar-based assets with borrowing denominated essentially in euros, for instance, Saipem and Technip (TKP), stand to benefit most.

Furthermore, with euro recently plunging to a near nine-month low amid Greek concerns, the downward momentum is favorable for U.S. investors wishing to add positions in some solid European companies with good long term prospects.

Americans with Niche

All is not lost with the American companies. Large manufacturers of capital equipment such as Cameron (CAM) are poised to benefit as well, since the tender activity for deepwater rigs, subsea equipment, surface, valves and compression will likely accelerate in 2010 with oil companies gaining confidence in the commodity recovery.

Drillers & Seismic – Grinding Ahead

Nevertheless, all services are not created equal. Average day rates for deepwater floating rigs have fallen from up to $550,000 to $350,000. So, the next two years are going to be a grinding period for drillers like  Transocean (RIG) and Diamond Offshore (DO) when they have to roll over old contracts at lower rates.

Meanwhile, seismic companies such as CGG Veritas (CGV) and Petroleum Geo-Services (PGS) are still struggling to find a bottom mainly due to vessel overcapacity on the marine side. The sector is also hammered by clients’ preference to use old data instead of shooting new ones in a bid to cut costs.

So, the downward earnings trajectory could signal a buying and/or shorting opportunity depending on investment time frame and strategy.

Oil or Gas, One Sector Does It All

Energy stocks, including shares of services companies, tend to be higher beta, so the sector still has to balance the downside risk of the global growth environment. But as the world journeys on a recovery path, likely with rising oil and gas demand, there is still a significant multi-year opportunity for earnings growth from the oil macro view. (Fig. 4)

In addition, oil services is one sector that stands to benefit from the expected uptrend of either crude or natural gas, or both. With crude and natural gas prices outlook remain diverged in the medium term, this unique characteristic could be a good hedge in any energy/commodities investment portfolio.

Disclosure: No Positions

Tags: Bailout Plan, Capital Budget, Cold Temperatures, Commodities, Economic Forecasts, European Leaders, Global Demand, Government Data, Jobless Claims, Mmbtu, Natural Gas Prices, Offshore Oil, oil, Oil Majors, Oil Service, Oil Services, Relative Stability, Rig Count, Risky Assets, Service Markets, Term Investors, Time China, Warren Buffett
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Charlie Rose in conversation with Warren Buffett

Tuesday, November 17th, 2009

In this post, Charlie Rose conducts an hour-long interview with Warren Buffett.

Click here or on the image below to view the video. (As there is no direct link to the clip, you need to click on “Archive” on the Charlie Rose site, and then scroll down to the Warren Buffett video of November 13.)

Source: Charlie Rose, November 13, 2009.

Tags: Advertisement, Charlie Rose, Warren Buffett
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Doug Casey on Gold Stocks

Tuesday, October 6th, 2009

Doug Casey is an American free-market market economist, financial author and entrepreneur. He has been writing a monthly investment newsletter, the International Speculator since 1979 and I always find his ideas quite refreshing. He is also somewhat of a perma gold bull as gleaned from an interview posted here a few days ago. In a follow-up discussion with Louis James, editor of the International Speculator, Casey focused on the outlook for gold stocks.

Here is the first section of Casey’s interview:

L: Doug, we were talking about gold last week, so we should follow up with a look at gold stocks. If one of the reasons to own gold is that it’s real - it’s not paper, it’s not simultaneously someone else’s liability - why own gold stocks?

Doug: Leverage. Gold stocks are problematical as investments. That’s true of all resource stocks, especially stocks in exploration companies, as opposed to producers. If you want to make a proper investment, the way to do that is to follow the dictates of Graham and Dodd, or use the method Warren Buffett has proven to be so successful over many years. Unfortunately, resource stocks in general and metals exploration stocks in particular just don’t lend themselves to such methodologies. They are another class of security entirely.

L: “Security” may not be the right word. As I was reading the latest edition of Graham & Dodd’s classic book on securities analysis, I realized that their minimum criteria for investment wouldn’t even apply to the gold majors. The business is just too volatile. You can’t apply standard metrics.

Doug: It’s just impossible. For one thing, they cannot grow consistently, because their assets are always depleting. Nor can they predict what their rate of exploration success is going to be.

L: Right. As an asset, a mine is something that gets used up, as you dig it up and sell it off.

Doug: Exactly. And the underlying commodity prices can fluctuate wildly for all sorts of reasons. Mining stocks, and resource stocks in general, have to be viewed as speculations, as opposed to investments.

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But that can be a good thing. For example, many of the best speculations have a political element to them. Governments are constantly creating distortions in the market, causing misallocations of capital. Whenever possible, the speculator tries to find out what these distortions are, because their consequences are predictable. They result in trends you can bet on. It’s like the government is guaranteeing your success, because you can almost always count on the government to do the wrong thing.

The classic example, not just coincidentally, concerns gold. The U.S. government suppressed its price for decades while creating huge numbers of dollars before it exploded upward in 1971. Speculators that understood some basic economics positioned themselves accordingly. As applied to metals stocks, governments are constantly distorting the monetary situation, and gold in particular, being the market’s alternative to government money, is always affected by that. So gold stocks are really a way to short government - or go long on government stupidity, as it were.

The bad news is that governments act chaotically, spastically. The beast jerks to the tugs on its strings held by its various puppeteers. So it’s hard to predict price movements in the short term. You can only bet on the end results of chronic government monetary stupidity.

The good news is that, for that very same reason, these stocks are extremely volatile. That makes it possible, from time to time, to get not just doubles or triples but ten-baggers, twenty-baggers, and even a hundred-to-one shots in these mining stocks.

That kind of upside makes up for the fact that these stocks are lousy investments and that you will lose money on some of them.

L: One of our mantras: volatility can be your best friend.

Doug: Yes, volatility can be your best friend, as long as your timing is reasonable. I don’t mean timing tops and bottoms - no one can do that. I mean spotting the trend and betting on it when others are not, so you can buy low to later sell high. If you chase momentum and excitement, if you run with the crowd, buying when others are buying, you’re guaranteed to lose. You have to be a contrarian. In this business, you’re either a contrarian or road kill. When everyone is talking about these stocks on TV, you know the masses are interested, and that means they’ve gone to a level at which you should be a seller and not a buyer.

That makes it more a game of playing the psychology of the market, rather than doing securities analysis.

I’m not sure how many thousands of gold mining stocks there are in the world today - I’ll guess about 3,000 - but most of them are junk. If they have any gold, it’s mainly in the words written on the stock certificates. So, in addition to knowing when to buy and when to sell, your choice of individual stocks has to be intelligent too. Remember, most mining companies are burning matches.

L: All they do is spend money.

Doug: Exactly. That’s because most mining companies are really exploration companies. They are looking for viable deposits, which is quite literally like looking for a needle in a haystack. Finding gold is one thing. Finding an economical deposit of gold is something else entirely. And even if you do find an economical deposit of gold, it’s exceptionally difficult to make money mining it. Most of your capital costs are up front. The regulatory environment today is onerous in the extreme. Labor costs are far above what they used to be. It’s a really tough business.

Click here for the full interview.

Source: Conversations with Casey, September 30, 2009.

Tags: Commodities, Commodity Prices, Dictates, Dodd, Doug Casey, Entrepreneur, Exploration Companies, Exploration Stocks, Exploration Success, Financial Author, Gold, gold stocks, International Speculator, Investment Newsletter, Leverage, Majors, Market Economist, Methodologies, Metrics, Minimum Criteria, Resource Stocks, Warren Buffett
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Words from the (Investment) Wise - September 20, 2009

Sunday, September 20th, 2009

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

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

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

Source: Tom Toles, Slate.com

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

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

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

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

Source: StockCharts.com

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

Source: StockCharts.com

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

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

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

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

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

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

Of the 98 stock markets I keep on my radar screen, 81% recorded gains, 13% showed losses and 4% remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included Market Vectors Solar (KWT) (+10.5%), United States Natural Gas (UNG) (+9.9%), iShares Cohen & Steers Realty Majors (ICF) (+9.6%) and Claymore/MAC Global Solar Energy (TAN) (+9.0%).

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

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

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

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

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

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

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

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “bank”, “market”, “economy”, “government”, “China” and “gold” featured prominently. “Recession” has become a footnote.

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

The August highs and September lows are also given in the table as these levels define a support area for a number of the indices. On the other hand, the next potential upside target for the S&P 500 is about 1,120.

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

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

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

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

Source: Bespoke, September 16, 2009.

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

Source: StockCharts.com

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

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

Source: Fullermoney.com

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

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

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

Source: Moody’s Economy.com

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

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

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

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

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

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

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

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

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

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

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

Source: Yahoo Finance, September 18, 2009.

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

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

Monday, September 21
• Leading economic indicators

Tuesday, September 22
• FHFA US Housing Price Index

Wednesday, September 23
• FOMC rate decision

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

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

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

Source: Wall Street Journal Online, September 18, 2009.

“Success is not final, failure is not fatal: it is the courage to continue that counts,” said Winston Churchill (hat tip: Charles Kirk - do make a point of visiting his excellent site). And isn’t this so true of the investment world where mistakes are the order of the day. Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist readers of Investment Postcards to overcome the inevitable losing trades and focus on the next money-making opportunity.

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

That’s the way it looks from Cape Town (from where I am leaving on my first trip to Dallas, Texas in just more than a week).

Hat tip: The Big Picture

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

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

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

Source: Charlie Rose, September 14, 2009.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: MoneyNews, September 16, 2009.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: MoneyNews, September 15, 2009.

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

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

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

Source: BCA Research, September 16, 2009.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, September 16, 2009.

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

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, September 15, 2009.

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

Source: Bespoke, September 14, 2009.

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

Source: Bespoke, September 17, 2009.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: CNBC, September 15, 2009.

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

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

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

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

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

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

Click here for the article.

Source: CNBC, September 14, 2009.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Reuters, September 14, 2009.

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

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

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

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

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

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

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

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

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

Source: Bespoke, September 17, 2009.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Buffett: Economy has Hit Plateau at Bottom - No double dip

Thursday, September 17th, 2009

Warren Buffett says the US economy says the economy is not getting worse, nor is it getting better, but has “hit a plateau at bottom.”

“We have not bounced but we’ve quit going down,” Buffett, the 79-year-old chief executive officer of Berkshire Hathaway Inc., said today in an interview on CNBC.

“We’re through the worst of it in residential real estate in all probability,” Buffett said today, adding that he doesn’t expect a “double-dip” recession.

…

Buffett, known as the “Oracle of Omaha,” told a conference in California that his company was buying equities because “I am getting a lot for my money.”

…

“We’re gonna have unusual losses in credit cards and in commercial real estate” in the economy, Buffett said today. “But we’re a lot better off than we were a year ago. I mean for one thing, some of the toxic assets have been flushed through. There’s been capital raised.”

…

Buffett reiterated his praise for Federal Reserve Chairman Ben S. Bernanke, Treasury Department Secretary Timothy Geithner and former Treasury Secretary Henry Paulson, calling them “heroes” for their management of the economy since last year.

“You can look back and say you could have done this a little differently or that a little differently, but at the time I called it an economic Pearl Harbor and in the end we got through Pearl Harbor,” Buffett said. “And it could have turned out a lot differently.”

Buffett on Bailouts and the Crisis

Buffett on Heroes and a Second Downturn

Buffett on Lehman and Last Year

Sources: Bloomberg | CNBC

Tags: Berkshire Hathaway, Berkshire Hathaway Inc, Bernanke, Chief Executive Officer, Cnbc, Commercial Real Estate, Credit Cards, Department Secretary, Double Dip Recession, Downturn, Federal Reserve Chairman, Harbor Buffett, Henry Paulson, Lehman, Oracle Of Omaha, Pearl Harbor, Residential Real Estate, Timothy Geithner, Treasury Department, Treasury Secretary, Warren Buffett
Posted in Markets | 1 Comment »

Buffett: Buying Less Stocks, More Corporate and Govt Debt

Wednesday, September 9th, 2009

According to the New York Times, Warren Buffett is buying fewer stocks and increasing holdings in corporate and government debt. This may indicate that he is worried about stock markets.

If Mr. Buffett picked well — and, so far, it looks as if he did — his payoff could be enormous. But now, only a year after the crisis struck, he seems to be worrying that the broader stock market might falter again. After boldly buying when so many were selling assets, his conglomerate, Berkshire Hathaway, is pulling back, buying fewer stocks while investing in corporate and government debt. And Mr. Buffett is warning that the economy, though on the mend, remains deeply troubled.

“We are not out of problems yet,” Mr. Buffett said last week in an interview, in which he reflected on the lessons of the last 12 months. “We have got to get the sputtering economy back so it is functioning as it should be.”

…

Mr. Buffett declined to predict the short-run course of the stock market. But corporate data from Berkshire shows his company was selling more stocks than it was buying by the end of the second quarter, according to Bloomberg News. Its spending on stocks fell to the lowest level in more than five years, although the company is still deftly picking up shares in some companies and buying corporate and government debt.

Read this complete article here.

Tags: 12 Months, Assets, Berkshire Hathaway, Buying Stocks, Conglomerate, Economy, Government Debt, Govt Debt, Investing, More Than Five Years, Mr Buffett, New York Times, Second Quarter, Selling Stocks, Stock Data, Stock Market, Stock Markets, Warren Buffett
Posted in Markets | No Comments »

The End of Wall Street

Thursday, July 30th, 2009

Reporters of the Wall Street Journal have produced a three-part video series on the crisis on the Street, looking at “What happened”, “Why it happened” and “What happens next”.

This is an excellent overview of the financial malaise.

Chapter one: What happened
How the housing bubble inflated and burst, and why easy money led to the collapse of Wall Street’s biggest financial institutions.

Chapter 2: Why it happened
What was going through the minds of CEOs, corporate boards, fund managers and mortgage lenders as they created hard-to-understand derivatives Warren Buffett once called “weapons of financial mass destruction”.

Chapter 3: What happens next
This final chapter tells the story of the $700 billion bailout and looks at what’s ahead for the global economy.

Source: The Wall Street Journal, July 22, 23 and 24, 2009 (hat tip: The Big Picture).

Tags: Bailout, Big Picture, Cape Town, Ceos, Chapter 3, Derivatives, Easy Money, Financial Institutions, Fund Managers, Global Economy, Hat Tip, Housing Bubble, Malaise, Mass Destruction, Mortgage Lenders, Target, Video Series, Wall Street, Wall Street Journal, Warren Buffett
Posted in Markets | No Comments »

Charlie Munger: Man on the Money with Buffett

Friday, July 17th, 2009

Charlie Munger has always been described simply as Warren Buffett’s business partner. Buffett however is the son of several investing fathers, mentors, according to a profile/interview with Munger in FT. This enlightening interview sheds light on perhaps the most successful business partnership in history. Here is an excerpt:

Over the years, generations of investors, chief executives and journalists have wondered why Mr Munger has stayed happily in the background for almost half a century as Mr Buffett forged a reputation as the world’s greatest stock-picker.

“Warren is peculiar, and I’m peculiar,” says Mr Munger, who is also Berkshire’s vice-chairman. “We’ve got our own peculiar operating model. Nobody else operates the same way or stays in the game in a major corporation as long as we have, so we’ve got a different model. And we like it that way.”

Working 1,500 miles apart – Mr Buffett remains in his hometown of Omaha, Nebraska – the two “intellectual pals” have built up a stellar record by sticking to the basic principles of value investing: they buy companies in industries they understand, with managers they trust, at cut-rate prices. “We think all intelligent investing is value investing,” he says. “What the hell could it be if it wasn’t value?”

While Mr Buffett’s mentor, the economist Benjamin Graham, is considered the father of value investing, it is Mr Munger who is credited with helping Mr Buffett evolve beyond buying stocks for no other reason than that they were cheap.

Read the complete article here.

Tags: Benjamin Graham, Berkshire, Business Partner, Business Partnership, Buying Stocks, Charlie Munger, Chief Executives, Economist, Excerpt, Half A Century, Man On The Money, Mentors, Mr Buffett, Omaha Nebraska, Pals, Stellar Record, Stock Picker, Successful Business, Vice Chairman, Warren Buffett
Posted in Markets | No Comments »

Charlie Munger: Interview (Spring 2009)

Tuesday, May 19th, 2009

Charlie Munger, Warren Buffett’s right hand, and Vice-Chairman of Berkshire Hathaway, was recently interviewed by Joseph Grundfest, in Stanford Lawyer magazine. It’s a substantial interview, in which Munger offers his profound and eloquent views. Here are a few excerpts:

On the accounting profession:

JG: As we look at the current situation, how much of the responsibility would you lay at the feet of the accounting profession?

CM: I would argue that a majority of the horrors we face would not have happened if the accounting profession developed and enforced better accounting. They are way too liberal in providing the kind of accounting the financial promoters want. They’ve sold out, and they do not even realize that they’ve sold out.

JG: Would you give an example of a particular accounting practice you find problematic?

CM: Take derivative trading with mark-to-market accounting, which degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large profit from the same trade.

JG: And they can’t both be right. But both of them are following the rules.

CM: Yes, and nobody is even bothered by the folly. It violates the most elemental principles of common sense. And the reasons they do it are: (1) there’s a demand for it from the financial promoters, (2) fixing the system is hard work, and (3) they are afraid that a sensible fix might create new responsibilities that cause new litigation risks for accountants.

About the chances of a Great Depression?

JG: And do you see a chance that our current economic woes could reach to a level closer to the Great Depression?

CM: Well, nobody can predict that very well because we’ve never faced conditions as extreme. Very few people realize how much we’ve screwed up. Even in leading law schools and business schools very few people realize that the mess at Enron never could have happened if accounting customs hadn’t been changed. What we have now is a bigger, more widespread Enron.

When the regulators put in the option exchanges, there was just one letter in opposition saying “you shouldn’t do this,” and Warren Buffett wrote it. When they wanted to make the securities market function better as a gambling casino with vast profits for the people who were croupiers-there was a big constituency in favor of dumb change. Buffett was like a man trying to stop an elephant with a pea shooter. We’re not controlling financial leverage if we have option exchanges. So these changes repealed longtime control of margin credit by the Federal Reserve System.

On modern derivatives markets

JG: You and your partner, Warren Buffett, have for years warned about the dangers of the modern derivatives markets, particularly credit derivatives, and about interest rate swaps, currency swaps, and equity swaps.

CM: Interest rate swaps have enormous dangers given their size and the accounting that has been allowed. But credit default derivatives took that danger to new levels of excess-from something that was already gross and wrong. In the ’20s we had the “bucket shop.” The term bucket shop was a term of derision, because it described a gambling parlor. The bucket shop didn’t buy any securities. It just enabled people to make bets against the house and the house furnished little statements of how the bets came out. It was like the  off-track betting system.

JG: Until the house lost its money and suddenly disappeared. Or the house made its money and suddenly disappeared.

CM: That is right. Derivatives trading, with no central clearing, brought back the bucket shop, because you could make bets without having any interest in the basic security, and people did
make such bets in the billions and billions of dollars. Some of the most admired people in finance-including Alan Greenspan - argued that derivatives trading, substituting for the old bucket shop, was a great contribution to modern economic civilization. There’s another word for this: bonkers. It is not a credit to academic economics that Greenspan’s view was so common.

Read the complete interview here.

Tags: Accounting Practice, Accounting Profession, Berkshire Hathaway, Business Schools, Charlie Munger, Derivative Trade, Derivative Trading, Economic Woes, Folly, Great Depression, Interview Spring, Jg, Law Schools, Lawyer Magazine, Litigation Risks, Model Two, Promoters, Stanford Lawyer, Vice Chairman, Warren Buffett
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Video Digest: Stress Tests Ad Nauseum

Friday, May 8th, 2009

As to be expected, discussions about the stress tests on the health of the 19 biggest US banks dominated the video airwaves during the past few days, with arguments ranging from whether the tests were necessary to whether they were stressful enough.

For the rest, Warren Buffett held his annual Berkshire shareholders’ jamboree - this year sharing both concern and optimism about the future. And as the nascent stock market rally is looking more tired by the day, the debate intensified on whether this was a “real rally”.

In addition to Buffett and the usual suspects of Tim Geithner and Ben Bernanke, commentators featured on camera in this post include Richard Bernstein, Bill Fleckenstein, Nouriel Roubini, Neel Kashkari, Alan Blinder, Russell Napier, Robin Griffiths and Meb Faber.

The selection kicks off with an item in lighter vein - a song entitled “Zombie Bank”, and concludes with a great vintage animation, dating back to 1948, on the profit motive and the part it has played in the development of the US economy.

YouTube: Zombie Bank
“Musical op-ed piece written and performed by John Forster and Tom Chapin.”

Source: YouTube, April 15, 2009.

CNBC: Buffett speaks
“Warren Buffett, chairman and CEO of Berkshire Hathaway, tells CNBC’s Becky Quick he has both concern and optimism about the future.”

Part 1

Part 2

Source: CNBC, May 4, 2009.

Minyanville: Are stress tests necessary?
“What’s the point of a stress test if the government isn’t going to allow banks to fail? Minyanville’s executive editor, Kevin Depew, debates himself to find the answer.”

Source: Minyanville, May 4, 2009.

CNBC: Dr. Doom - stress tests aren’t stressful enough
“Nouriel Roubini, co-founder & chairman at RGE Monitor, also known as Dr. Doom, doesn’t put a lot of credibility into the US bank stress tests. He tells CNBC’s Martin Soong that the tests aren’t stressful enough. Josh Felman, assistant director from the IMF joins in the discussion.”

Source: CNBC, May 7, 2009.

CNBC: Bernanke’s bank structure
“Federal Reserve chairman Ben Bernanke speaks at the Chicago Fed’s Conference on bank structure and competition.”

Part 1

Part 2

Source: CNBC, May 7, 2009.

Charlie Rose: A conversation with Timothy Geithner, US Treasury Secretary

Source: Charlie Rose, May 6, 2009.

Charlie Rose: A conversation with Neel Kashkari, former assistant Treasury Secretary

Source: Charlie Rose, May 7, 2009.

Financial Times: Gillian Tett of Fool’s Gold
“Gillian Tett, the FT’s capital markets editor, talks to Andy Davis, editor of FT Weekend, about the background to her new book, Fool’s Gold, in which she traces the origings of the financial crisis back to innovative work by a small group of bankers in the mid-1990’s and explains how the products they pioneered ultimately enguifed most of the developed world’s biggest financial institutions.”

Source: Financial Times, May 1, 2009.

The Wall Street Journal: Goldman connection puts NY Fed official in tight spot
“When Goldman Sachs became a bank holding company late last year, New York Fed official Stephen Friedman inadvertently found himself in violation of charter rules. Kate Kelly reports on his efforts to receive a waiver and potential conflicts of interests.”

Source: The Wall Street Journal, May 4, 2009..

Yahoo Finance: The financial system - where’s the trust
“A discussion with Elizabeth Warren, Chairwoman, Congressional oversight panel.”

Part 1

Part 2

Source: Tech Ticker, Yahoo Finance, May 6, 2009.

CNBC: Ben Bernanke’s economic outlook
“Federal Reserve chairman Ben Bernanke discusses the current state of the economy and an outlook.”

Source: CNBC, May 5, 2009.

John Authers (Financial Times): Credit less crunched
“Libor’s fall and surveys of lending officers by central banks show that the credit crunch is no longer intensifying.”

Clik here for the article.

Source: John Authers, Financial Times, May 5, 2009.

Financial Times: Markets respond to stress test
“Despite the release of US bank stress test results, market sentiment was most strongly affected on Thursday by a $14 billion US Treasury bond auction, in which the government had to offer higher yields than expected. This trend is worrying Wall Street.”

Source: John Authers, Financial Times, May 7 2009.

Bloomberg: Richard Bernstein says US stocks in “real rally”
“Richard Bernstein, former chief investment strategist at Merrill Lynch, talks with Bloomberg’s Tom Keene and Ken Prewitt about the outlook for the US equity market. The S&P 500 has rebounded 34% from a 12-year low on March 9 after companies from Wells Fargo & Co. to Ford Motor Co. beat analysts’ earnings estimates by an average 11% since April 7, according to Bloomberg data.”

Source: Bloomberg, May 6, 2009.

The Wall Street Journal: Earnings season is mostly over - thankfully
First quarters earnings reports have been awful, but not as awful as expected.

Source: The Wall Street Journal, May 4, 2009.

CNBC: Charts - bears still in control
“Western stock indexes still seem to be undergoing a bear-market rally, instead of starting a bull market, Robin Griffiths from Cazenove Capital told CNBC Thursday.”

Source: CNBC, May 7, 2009.

John Authers (Financial Times): Bear market bottoms
“What can we learn from history? Russell Napier, author of ‘Anatomy of the Bear’, talks to John Authers about how his study of historical bear markets can help identify when markets have bottomed out.”

Source: John Authers, Financial Times, May 6, 2009.

Fox Business: Fleckenstein, Altucher & Lindzon - from surviving to thriving in the market

Source: Fox Business, May 4, 2009.

The Wall Street Journal: Ivy League Investing
“Money manager and author of ‘The Ivy Portfolio’ Meb Faber talks with MarketWatch’s Jonathan Burton about steps investors can take to protect themselves in volatile bear markets.”

Source: The Wall Street Journal, May 4, 2009.

Charlie Rose: Future of trade in the global economy
“A conversation about the future of trade in the global economy with Susan Schwab, United States Trade Representative, Jagdish Bhagwati, University Professor at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations, Alan Blinder, Director of Princeton’s Center for Economic Policy Studies and Sherrod Brown, United States Senator from the state of Ohio.”

Source: Charlie Rose, May 5, 2009.

CNBC: China’s next engine for growth
“China’s big move toward social infrastructure spending could turn out to be its engine for growth in next 10-15 years, says Robert Barbera, global economist at Investment Technology Group, speaking to CNBC’s Martin Soong.”

Source: CNBC, May 4, 2009.

CNBC: ECB starts quantative easing
“The European Central Bank began its own version of quantitative easing Thursday, following its interest rate cut. Ken Wattret from BNP Paribas and Stephen Gallo from Schneider Foreign Exchange discussed the move.”

Source: CNBC, May 7, 2009.

CNBC: Obama proposes new tax provisions
“President Barack Obama proposes changing provisions in the tax code that he says encourage US companies to move jobs overseas, as part of a broader package aimed at saving $210 billion over 10 years.”

Source: CNBC, May 4, 2009.

YouTube: Going Places (1948)
“Fun and Facts About America, John Sutherland Productions. Defines the profit motive and dramatizes the part it has played in the economic development of our country. Stresses the need for continued industrial profits if our economic vitality is to endure.”

Source: YouTube, June 6, 2006.

Tags: Answer Source, Ben Bernanke, Berkshire Hathaway, Bill Fleckenstein, Dr Doom, ETF, John Forster, Market Rally, Martin Soong, Minyanville, Neel Kashkari, Nouriel Roubini, Profit Motive, Richard Bernstein, Robin Griffiths, Stress Tests, Tim Geithner, Tom Chapin, Us Bank, Vintage Animation, Warren Buffett
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