This article is a guest contribution from Barry Ritholtz, or the BigPicture.
Yesterday’s WSJ had an article about Canada’s Housing market. (Housing Rebound in Canada Spurs Talk of a New Bubble). The article noted that “Average home prices in Canada have risen 23% from their trough in January 2009. Home-sales volumes are up 70% over the same period . . . Canada’s housing recovery has been so rapid that some here are worrying about a bubble.”
But to call it a rebound misses the point. As the Cleveland Fed pointed out, Canada’s housing market never went bust — there was a sales dip, but nothing like the US. And prices have continued to go higher to the point where the Journal is now discussing them in terms of bubbliciousness.
Why is that?
There are a variety of reasons why Canada’s market held up better than that in the US, but I boil it down to the big four:
1) Lending Standards: Were increasingly non-existent in the US from 2001-07. On the other hand, Canada never had the non-bank lenders that abdicated these standards en masse. There was no “Lend-to-Securitize” business model in Canada.
2) Mortgage Insurance: Mortgage with less than 20% down payment are considered a high LTV ratio (This was 25% previously). Mortgage insurance is required. Over 80% of Canada’s homes have what was commonly known as PMI in the US.
3) Full Recourse Mortgages — you can walk away from the house, but not the mortgage debt. Makes quite a difference in the way borrowers behave.
4) Single Regulator, Lack of Regulatory Capture: The hodge podge of Federal and State regulators encourages forum shopping; it also masks much of the massive lobbying effort by US banks and investment houses. Lobbying dollars don’t seem to be nearly as pernicous or corrupting Noprth of the border.
The Cleveland Fed also noted that subprime mortgages accounted for a fifth of all US mortgages originated between 2004–2006. In Canada, the subprime market share was roughly 5% percent in 2006—compared to 22% percent in the U.S. And the Canadian never expanded significantly into the wackier exotic mortgage products — IOs, Neg Ams, Piggy Backs, etc. (interest-only and negative-amortizations grew rapidly in the U.S. from 2003 to 2006).
British companies paid out £10bn less in dividends in 2009 compared with the previous year leaving pension and other investment funds dangerously dependent on carbon-heavy oil groups, BP and Shell, for a quarter of all such income, new research shows.
A total of £57bn was handed out to shareholders last year, 15% less than in the previous 12-month period, with 202 firms cutting their dividends and 74 paying nothing at all, according to Capita Registrars Research.
The data shows the financial crisis led to a £6bn fall in dividends from the banks, leaving drug, tobacco and oil companies to fill some of the gap.
“The recession has hit dividends particularly hard because companies have not only had to cope with falling profits, but also massive pressure on their ability to finance themselves. Preserving cash has been a top priority,” said Paul Taylor, head of dividends at Capita Registrars, who used data provided by the financial information specialists Exchange Data International to prepare the report.
“Much of the banking sector is either in state or foreign hands, while the ability of the remaining independents to pay dividends is severely constrained by the need to rebuild their balance sheets… Among retailers, only the supermarkets have managed to keep the dividends flowing,” he added.
Capita points out that investors are now “heavily dependent” on just five companies – BP, Shell, HSBC, Vodafone and GlaxoSmithKline – for 47% of all dividends, giving those businesses enormous clout in the investment markets and around government.
Yet Shell faces demands from its own shareholders to move away from its controversial tar sands investments in Canada, while the Co-op’s investment arm will today unveil plans to oppose BP’s involvement in this area.
“The increasing dominance of the oil companies has left investors highly dependent on a few big stocks to provide them with an income,” said Taylor. “Oil has fuelled the engine of UK dividends in the last two years. Lower oil prices, tighter refining margins, slower production growth and unfavourable currency trends have put profitability under pressure at the big oil companies and will make it tougher for them to increase their payouts to shareholders. Indeed, the latest news from the oil sector may even mean our forecast for 2010 is optimistic.”
Shell reported last week a 75% downturn in profits during 2009. It said there would be no further increase in the first quarter of 2010 as the future looked difficult. BP also gave a downbeat assessment of future trading opportunities.
Capita believes dividend payments from UK companies should recover with the economy over the next year, reaching an estimated £60bn, 5% up on 2009.
Meanwhile, UK companies raised a record £73bn from new equity as banks and other businesses fought to rebuild their balance sheets. “There has been an unprecedented flow of capital from investors to companies,” said Taylor.
Pension funds and other institutional investors committed the most money to the UK commercial property sector on record last quarter, in spite of continued fears of a further drop in values this year.
Institutional property funds raised more than £3.2bn last quarter, dwarfing the previous peak of £1.7bn collected in the boom of the market in 2006. This is the highest since records began in 1998.
Official numbers from the Association of Real Estate Funds show that UK unlisted pooled property funds attracted £2.9bn in the fourth quarter on a net basis, much higher than the £400m raised in the third quarter.
The sudden influx of new capital from institutional investors reflects the wider shift in sentiment towards UK commercial property, which has seen a bounce in pricing since last summer after almost halving in value. Retail investment funds have also recently seen record amounts raised to invest in commercial property.
John Cartwright, AREF chief executive, said: “Last year was a volatile year, but it ended on a positive note with record new money coming in to the funds, as well as the final quarter showing extraordinary growth in returns.
“This marks the second quarter of positive net sales, signalling the resurgence in popularity for property funds. Interestingly, while retail investors remain active, we have also seen significant new money from institutional investors who tend to have longer-term investment horizons.”
However, the speed of the recovery - which has seen capital values grow by 10 per cent in six months - has led to fears that there will be a second dip in values. These fears have been exacerbated by weak fundamental reasons to invest in real estate, with rents under pressure.
Analysts said these reasons, in addition to pressure from the end of the Bank of England’s quantitative easing scheme, may have meant that the “easy money” from the bounce could have been made.
Fund managers, however, say they are investing for the longer term, typically for more than five years, meaning a further dip would not be a disaster.
AREF said the net asset value of the sector had reached £25.2bn by the end of last year, down from £26.2bn the year before.
Gross sales for 2009 were £4.5bn, up from £567.3m in 2008, while net inflows were £3.2bn, a reversal of funds, given net outflows in 2008 of £224.2m.
The UK property market stands to gain the most from all this influx of pension assets looking to scoop up commercial property at attractive prices. Will this be a great long-term investment? That depends on a lot of factors, chief among them, will the world avoid a protracted deflationary episode?
If it does, then it may make sense to pile into UK and US commercial real estate now. If it doesn’t then pensions will be waiting a long time before they see any meaningful price appreciation on these investments. The same goes for those incredibly shrinking dividends.
The choice selections from today’s Art Cashin comments, via UBS Financial Services:
Greek Rescue Rumor And Chippier Consumer Brings Stocks Back From Brink – For much of Friday’s session, fears about the European Union (particularly Greece) sent folks seeking the safety of the dollar. That, in turn, put pressure on oil; gold and stocks as carry trades were liquidated. The carnage began in earnest as the European markets closed. The dollar began to move steadily higher causing the above-noted damage.
The dollar driven selling was not as vicious as the selling on Thursday, but around 12:45 things started to turn rather ugly. They got even uglier as they headed to the day’s lows at 2:00. Rumors circulated that a trading firm in the crude pits was being forced to liquidate contracts.
But, shortly after 2:00, bids began to pop up in stocks as the dollar eased back. With some investigation, traders learned that there were rumors, or at least speculation, that the ECB and others might be cobbling together a rescue package for Greece over the weekend.
Stocks began to cut their losses as did gold. Crude remained hobbled by those liquidation rumors but cut its losses nonetheless. At 3:00, stocks picked up another tailwind. Consumer Credit fell $1.7 billion not the $10 billion some economists had projected. The hope that the American consumer might be willing to consume again helped the late rally.
That late rally was a bit of a mixed blessing. Had they closed on the lows, the probable course of the market might be a touch clearer. A close at the lows would have suggested an “oversold reflex rally” for Monday extending half-way into Tuesday’s session. The rally would then fail followed by a sharp and severe selloff. The late rally took that specificity off the table. We’ll have to review the napkins for clues to the amended course.
Greece And the Gordian Knot – As noted above, the late rally was sparked by speculation that there would be a rescue package announced over the weekend. When no announcement came forward, there was no follow-through on the rally.
The latest speculation is about the inverted yield curve for Greek bonds. That doesn’t allow any wiggle room or time to ease into austerity. Therefore “instant austerity” runs the risk of public backlash, strikes and maybe even unrest in the streets. To buy some time, some folks speculate, that the ECB or some entity could guarantee short term Greek debt – maybe up to one year. That might buy some time. It will be interesting to see if that’s the road that is taken.
Cocktail Napkin Charting – As noted above, the late Friday reversal rally was primarily the result of rumors of a Greek rescue package. There were also technical contributors to the bounce. The S&P made its intra-day low at 1044. That’s its 200 day exponential moving average. Both Walter Murphy and Stock Market Cycles had listed 1043 as a probable target (darn good call).
Friday’s lows will be a critical testing area on any future pullbacks. If they are violated, things could turn very ugly although some see more support at 1030/1035.
For today, the napkins suggest early support in the S&P may be around 1048/1052 with the backup 1040/1043. Resistance looks like 1070/1074 and then 1080/1085. We need to be careful because the Friday bounce may have released enough of the oversold to allow the bears another shot.
Consensus – Watch the dollar and the headlines and rumors from Euroland. If the dollar rallies smartly, things could get very ugly. Stay very nimble.
Trivia Corner Answer - To heir today - The middle son brought the ailing horse an apple every other day. Today’s Question - Heads up! Each of the following 4 letter words can be made an 8 letter word by adding the same 4 letter word to each one. (Example - If we gave you step, ball, hold, work, path & fall….the answer would be “foot”). What word fits - A) Some; Pick; Bill; Book; Rail. B) Line; Style; Long; Boat; Like; Size. C) Ding; Boy; Man; Vampire. D) Kingdom; Way; Nations, State.
European and U.S. stock markets have taken a hit recently as spooked investors from Shanghai to Sao Paolo were fleeing risky assets amid concern that the financial crisis in Portugal and Greece could spread through the euro zone with vast implications for the fate of the fragile global economic recovery. (Fig. 1)
Liquidate & Buy Dollar
A steep drop in crude-oil prices triggered declines across the commodities spectrum, as investors nervous about the pace of the economic recovery gravitated back to the dollar. Crude oil tumbled to a seven-week low of $71.19 a barrel last Friday, down 14% since the 2010 high of $83.18 reached on Jan. 6.
Investors’ fled for safety drove the U.S. dollar near a nine-month high against the euro. Emerging market currencies also weakened in Asia, while U.S. stocks fell a fourth straight week, the longest streak since July.
A Shift of Sovereign Risk
According to EPFR Global, risk aversion has prompted a withdrawal of $1.6 billion from emerging market equity funds during the week ending Feb. 3, the biggest outflows in 24 weeks, and $516 million has left Asian equities outside of Japan.
The charts from CDR (Credit Derivatives Research) tell the story of this investors’ perception. According to CDR, there has been a dramatic shift of risk in developed nations relative to emerging and less-developed nations when comparing three sovereign risk indexes, SovV, EM and CEEMEA. (Fig. 2)
In SovX, the GIPSI (H/T Zero Hedge) - Greece, Italy, Portugal, Spain and Ireland, represent around 65% of the index risk. In EM, Venezuela accounts for 26%, Turkey, Brazil, and Argentina represents 12% respectively of the EM risk. In CEEMEA, Turkey and Russia represent 49% of the index risk (followed by Hungary and Ukraine each at over 8%).
In addition, CDR finds that the sovereign risks of the emerging economies appear to be closely tied to the price of oil:
“It would appear that the CEEMEA and EM sovereign risk indices are threatened more by commodity price pressures than credit risk currently - and given the ‘relatively’ high price of oil/gas, their risk remains less of a concern than developed nations where the Ponzi appears to be in question.” (Fig. 3)
Oil Price - A Key Risk Factor
Emerging market countries, such as Brazil, China or India, are evolving since the early 90s. During this period, the issuance of bonds by these countries has increased significantly reflecting their needs for substantial long term and infrastructure investment.
Among the many determinants of risk bonds, the price of oil is a key factor as it plays a significant role in economic growth, inflation, production costs, trade balances and currency. Nine of the 10 economic recessions in the United States since the end of World War II were preceded by a dramatic increase in the price of oil.
A Sensitivity Issue
Oil prices nowadays are extremely volatile, and sharp fluctuations in oil prices contribute to macroeconomic volatility all over the globe. The impact of this volatility on economy varies according to a country’s relative dependence on oil production and exports.
For oil-exporting countries like Russia and Saudi Arabia, a rise in oil prices caused a perception of risk reduction relative to its obligations. Conversely, an oil-importing country sees its risk index increase due to a barrel price shock.
Financial Crisis 2.0?
Last week’s wild commodity price swings underscore how investors aren’t totally convinced that the world economy is on an upward trajectory. Investors are worried that multi-governments’ debt problems will spread globally similar to the subprime crisis in 2008.
In addition to concerns about GIPSI sovereign debt defaults in the 16-nation euro zone, the U.S. is grappling with its own deficits and the high jobless rate, while China began restricting lending last month to prevent high inflation.
Some analysts expect global commodity prices would eventually firm up reflecting economic recovery albeit high volatility; and fundamentals should increasingly dominate expectations and drive prices.
But there are others see the current “correction” as caused by factors very similar those brought on the “financial crisis of 2007-2010” and warned this could signal “a new crisis in development.”
Seeking Negative Beta
In this environment, a defensive play would be to invest or allocate a portion in regions that are less prone to the price of oil, which is a significant sovereign risk factor. Sector wise, agriculture and alternative investment vehicles in real estate or land development should provide some good diversification to any long term portfolios.
Jeff Rubin, Chief Economist at CIBC World Markets pointed out that the United States is less sensitive to oil price volatilities because it is itself an oil producer (5 million barrels out of 19 million barrels the US consumes are produced in the US), so it receives some of the benefit of both higher and lower oil prices. An IEA analysis also indicated that the U.S. should be less affected by oil price shocks than Japan, OECD and Euro zone. (Fig. 4)
In addition to the United State, GDP growth in Brazil, China and India could get boost from the softening and stabilizing of oil prices and should increase their competitiveness. Brazil and Chindia are all oil producers with aggressive state-sponsored exploration and production efforts and strong economic growth prospect. Brazil, with a new and improved investment grade credit rating, is now largely self-sufficient and has insulated its economy from oil price shock on net basis.
The economic impact of oil prices on oil-importing, developing countries such as China and India could be more pronounced primarily because Chindia are more energy-intensive due to its strong growth rate, and less energy efficient. From that perspective, Chindia, though good prospects could be more of a roller-coaster ride for investors.
Among the emerging economies, lower crude oil prices will be a big dampener for Russian economy. Russia’s two oil wealth funds declined by a total $1.54 billion over the last month, as more funds were transferred to aid federal budget shortfalls. The Reserve Fund, one of Russia’s two oil wealth funds, is expected to run out by the end of 2010.
This article is a guest post from Tyler Durden, ZeroHedge.com.
Hugh Hendry, always beautifully opinionated, nails it at the Russia 2010 forum with the following oneliner: “Who cares about anyone’s opinion. You pay money for what they do with that opinion.” We are in complete agreement as this conforms precisely with what one of our former legendary, multi-billionaire, corpulent superiors once said “nobody gives a f*&k about your opinion.” On the other hand presenting amusing observations coupled with engrossing narrative, that nobody seems to have an issue with.
The following clip from the Russia Forum pits one against another Marc Faber, Hugh Hendry, Nassim Taleb, PIMCO’s Michael Gomez, Investec’s Michael Power, resulting in a memorable debate. A few blogs caught this clip and posted it yet few actually watched it, as the biggest news from the panel was not Taleb’s admonition that “every single human being should be short treasuries”, an opinion which Hugh Hendry squashes through the groupthink meatgrinder, but Hugh Hendry’s cryptic disclosure that he has uncovered the ABX trade for the next decade, which has “1.5% downside and 75% upside.” Hendry teases, but until the end refuses to disclose what the specific trade is. And while we realize the futility of recreating others’ opinions, here is the money quote from the Scottish contrarian:
“The problem with the bailout of 2008 and the first quarter of 2009, is that it did nothing to eliminate the debt. The debt is just unprecedented in the western world… We’ve had a tripling in leverage for the last 30 years. That tripling in leverage has produced unprecedented gains. The British stock market up 43 times in nominal terms, the S&P up 25 times. This has left many people still hungry for risk. I have a portfolio today… In the UK we have interest rates which are at a 300 year low, since the bank of England was conceived in 1692. I get paid money every day underwriting the risk that the BOE will cut rates further. I use that to cheapen an option which say “I don’t think the Bank of England, and ECB, is going to raise rates in the next 4 months.” And if nothing happens i make 5 times my money. If they raise rates, I lose my premium. My premium is not a lot. I’ll survive that. On the other side of my book, I have discovered something which is close to the Paulson trade in CDOs in US mortgages in 2005 and 2006. Can you believe that a trade with that kind of dynamic exists today. Can you believe if nothing happens and I am just wrong than again I will lose 1.5% but if I am right I will make 75%. That trade exists today and maybe later on I will tell you about it.”
And continuing with opinions, here is the former GSAM and Odey executive on Treasuries:
“I am hugely intellectually bullish on Treasuries. I am long. I fear the end of QE, the money funds are making on the [curve], I am aware of the issuance, I am aware that the States is going to have to sell $2.5 trillion of this stuff. But that’s the marketplace - the marketplace disseminates the bad stuff. I think there is a lesson in Japan. You think they are going to succeed - Mark [Faber] thinks they are going to create inflation. The precedent of Japan suggest that if you allow leverage in your society to breach a certain level, let’s call it 200 or 230% of GDP, then what happens is monetary policy doesn’t work, fiscal policy doesn’t work. They’ve had helicopters, they have distributed free money to their citizens, they have built bridges to nowhere and prices are falling and look set to fall further. My fear just now is that the community of risk is very short treasuries, and is very long risk: risk assets are the hedge against inflation. Now if something untoward happens, the gamma on that trade bankrupts you.”
Elsewhere, you will hear Taleb’s proposed portfolio composition (if you have read Fooled by Randomness or The Black Swan you won’t be surprised), as well as his escalating and very much justified disdain for economists: “if the number of economists from US universities in a country is high, the country risk is high, if the number is low, the risk is low.”
And a whole lot of debate over China, with Hugh Hendry dismantling Jim O’Neill and the other China bulls. “I love Jim O’Neill. I love that Goldman Sachs guy. He says you either get it, or you don’t. I don’t get it. In the future there will be a Confucius saying: the wise man not invest in overcapacity. The flaw of the business model, at the center of it is a craving for power as opposed to profit.” (Kinda funny, coming from a former Goldmanite.) Please watch Hendry’s view on China beginning 55 minutes into the clip.
For those P&L detectives here is Hugh’s most recent missive. Good luck with extracting what the next ABX trade is.
The full hour + debate can be found here. We think far too highly of our readers’ intellectual ability than to point out that the English audio stream would require hitting the Eng button. (Its at the bottom, on the right hand side, and shaded, just to the left of the “Pyc” switch.)
Hong Kong’s retail sales rose 16 percent year-over-year in December, the fastest pace in 20 months and ahead of market expectations. The growth was thanks to improving employment and a 14 percent year-over-year increase in tourist arrivals from mainland China.
South Korea’s exports jumped 47.1 percent in January from a year earlier, the highest growth rate in more than 20 years, as the continued global recovery drove external demand for autos, appliances and electronics.
Chile’s economic activity expanded by a higher than estimated 3.9 percent year-over-year in December, the country’s highest growth in 15 months, due to a rebound in services and retail sales.
Weaknesses
China’s official Purchasing Managers’ Index moderated to 55.8 in January from 56.6 in December, partly due to seasonal factors.
Fitch described Hungary’s fiscal prospect as uncertain ten weeks ahead of the country’s general elections and remained undecided whether to increase its credit rating outlook.
Emerging market equity funds saw a $1.6 billion outflow in the week ended February 3, the biggest liquidity exodus in 24 weeks. The outflow came amid rising concerns on the sovereign debt situation in such European countries as Greece, Portugal and Spain.
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Opportunities
While China’s city population has been consistently growing in the last decade, over 40 percent of the counties in central China still have an urbanization rate of merely 20-30 percent. According to CEBM, consumer spending can be boosted by more than 45 percent when the urbanization rate rises by 10 percentage points to the 30-40 percent range. Expanded urbanization, especially in inland China, remains one of the policy solutions for stimulating domestic demand and bodes well for consumer plays in the long term.
Threats
The current rally in the U.S. dollar may continue to be a headwind for investors in Asia given the longstanding negative correlation between the U.S. dollar and Asian equities.
Despite Concerns over the Global Economy, Leading Indicators & Global Industrial Production are Improving
Strengths
The American Iron & Steel Institute reports that for the week ending January 30, steel utilization rates increased to 66.9 percent versus the prior week of 65.6 percent and 42.4 percent last year.
Prices for Indian iron ore shipments to China jumped $1-2 per metric ton to a range of $127-130 per ton after news broke that India may increase export duties to 15 percent.
The U.S. Rig Count is up 18 from last week to 1,335 but is still down 64 year-over-year.
Weaknesses
Commodities such as crude oil and copper declined by 1.3 and 6 percent, respectively, in response to fears that some European nations could default on their debt as budget deficits widen due to the global recession.
Chinese steelmakers are “almost not profitable” in their main business because of overcapacity and high raw material costs, Nanjing Iron & Steel United Co. said.
Opportunities
According to the International Copper Study Group, global copper mine capacity will expand to 20.04 metric tons in 2010, versus 19.51 metric tons in 2009.
An article from Reuters states that Transocean is nearing a deal with Exxon to build a $1 billion arctic drillship. The article mentioned the new rig could be deployed to places such as Greenland, Iceland or offshore Alaska at a rig rate in the range of $650,000 per day.
Zimbabwe’s platinum exports are set to double after Impala Platinum Holdings Ltd. completed an expansion project in the country during the last quarter of 2009, according to Mines Minister Obert Mpofu.
Indonesia’s Department of Energy and Natural Resources expects coal exports from the country to fall 1.5 percent in 2010 despite a predicted production rise of 6.3 percent to 270 metric tons. The department expects domestic demand, led by the electricity generation sector, to rise by 34 percent.
Threats
U.S. Interior Secretary Ken Salazar said that drilling for oil and natural gas on government land will face increased environmental scrutiny and slower approvals under new requirements currently being debated in Congress.
Gold Market
For the week, spot gold closed at $1,065.85 per ounce down $15.00 or 1.39 percent. Gold equities, as measured by the XAU Gold & Silver Index gained by 4.27 percent for the week. The U.S. Trade-Weighted Dollar Index gained by 1.07 percent. Strengths
The U.K.’s Royal Mint more than doubled gold-coin production last year as investors diversified into physical assets. Output rose to 125,469 ounces from just 46,315 ounces during the previous year, according to data from Bloomberg News. Sales of American Eagle coins by the U.S. Mint increased 66 percent last year to 1.43 million ounces.
The Russian Gold Industrialists’ Union said Russia’s gold production rose 11.2 percent in 2009 on a year-over-year basis to 205.2 tonnes. Output of gold production by refining the metal from scrap rose 52.4 percent to 12.4 tonnes.
According to the Indian Bullion Market Association, 37 tonnes of gold were imported during the month compared with 27 tonnes for December and 30 tonnes in November. The increase was primarily attributed to jewelers shifting to the precious metal as record prices began to drop.
Weaknesses
During the week, gold posted its biggest one-day loss since 2008, hitting a three-month low. This came as risk aversion resurfaced throughout global markets, triggering massive selling in the metal and other commodities. Also, tightening in Chinese monetary policy may have caused the Reserve Bank of Australia to remain reluctant in raising rates once more because of speculation there will be a lack of demand for the region’s commodities, a prime contributor to its overall economic growth.
The eruption of policy and sovereign credit risk, most notably in the euro zone area, has resulted in a flight-to-quality causing the U.S. dollar to strengthen relative to a faltering euro. Greece’s fiscal imbalances combined with Spain and Portugal’s weak bond auction earlier in the week witnessed rising borrowing costs and credit default swaps for the region. Spreads were further exacerbated on fears that striking Greek workers would hinder Greece’s plan to shrink its massive deficits to acceptable European Union standards.
Bloomberg has reported that commodity investors in China are reducing their open interest in futures markets ahead of the country’s biggest national holiday. The director of research from Wanda Futures Co. said the exit of funds from commodities is accelerating and that any rally may have to wait until the country’s New Year celebration ends.
Reserves for the world’s largest bullion-backed exchange-traded fund fell 21.7 tonnes or 1.9 percent in January, against a rise of 63.36 tonnes or 8.1 percent in the same month of 2009.
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Opportunities
Andy Smith, Senior Metals Strategist of Bache & Co., believes the latest correction in the gold price is a very opportunistic event for further sovereign and central bank gold buying. The International Monetary Fund still has 191 tonnes of gold available for purchase. Smith has also said that India, Mauritius and Sri Lanka may buy more gold at depressed prices to average down earlier purchases at much higher prices.
The World Gold Council has demanded tax benefits for gold investments in India, primarily for working women and the bottom level tax bracket. The Council has also said that gold should play a more significant role in the sustainable growth of the Indian economy.
The White House has unveiled its plans to double U.S. exports in a bid to boost the economy and reduce the deficit by pledging to pursue more trade agreements, increasing pressure on trading partners to open markets and by the creation of an export promotion cabinet.
Threats
A Bloomberg news columnist expressed that China’s large foreign exchange reserves pose a severe risk to the global economy. If the dollar were to collapse, actions taken by central banks to sell the currency could shake global markets more than the U.S. credit crisis has. Also, excess reserves can overheat an economy as it sells its currency to increase investments abroad, triggering an imbalance from an excess in the money supply which leads to higher levels of inflation.
The Reserve Bank of Zimbabwe failed to redeem scheduled bonds it issued to mining companies instead of cash payment for gold deposited with the central bank by mining companies. The central bank has already failed to pay for gold delivered to it by miners in 2007 and 2008, leading to the issuance of the negotiable bonds, and now intends to extend the term of the bonds for six months. This is a major blow to miners as they struggles to recover since they cannot have access to foreign currency to conduct their business.
The African National Congress of South Africa is pushing for the nationalization of at least 60 percent of the country’s mining sector which will involve expropriation with or without compensation. However, analysts say the proposal is unlikely to become government policy, but it has still managed to rattle investors.
The U.S. government intends to cut more than $1 trillion from the deficit over the next decade by allowing billions of dollars in tax breaks to expire by the end of the year and possibly sending personal income tax rates to higher levels. Investors may also pay more on their earnings next year as well, with the tax on dividends jumping to 39.6 percent from 15 percent and the capital gains tax increasing to 20 percent from 15 percent.
The Economy and Bond Market
Treasury yields were mixed this week as the middle part of the curve rallied while the long end rose slightly. Concerns over the potential of a debt default in Greece early in the week quickly spread to wider problems in the euro zone which include similar concerns surrounding Spain and Portugal. The U.S. dollar rallied strongly on these concerns, which helped support the Treasury market.
Two important pieces of economic data were released this week: the ISM Manufacturing Index and the amount of change in nonfarm payrolls in the unemployment report. These two series are graphed below and represent the past 20 years of data and shows how these two series tend to move in tandem. This week the ISM index hit the highest level in more than five years, which bodes well for job growth in the near future if history is any guide.
Strengths
The ISM Manufacturing Index hit 58.4, well above the economic breakeven level of 50, the highest level in over five years. The jobs index component also rose the highest levels since 2006.
Retail sales in January broadly beat expectations, reinforcing the idea that the economy is improving and consumers are becoming more confident.
The ISM Nonmanufacturing Index also rose in January, hitting 50.5 with strength seen in the amount of new orders.
Weaknesses
Concerns over the potential of a debt default in Greece early in the week quickly spread to wider problems in the euro zone which include similar concerns surrounding Spain and Portugal. These concerns caused risky assets to fall across the board and are a threat to global economic recovery.
January’s employment report was somewhat disappointing as nonfarm payrolls failed to break into positive territory as the economy lost 20,000 jobs last month.
Construction spending fell 1.2 percent in December and a record 12.4 percent for the full year.
Opportunities
The economic recovery is still intact but looks more fragile now than it did just a couple of months ago. This will likely keep the Fed on hold for some time.
Threats
If one of the euro zone countries were to seriously threaten default, the entire euro currency system could come into question, threatening global financial stability.
Stay on top of the latest headlines from the Wall Street Journal Online.
WSJ's What's News Early Edition, Feb. 9, 2010by The Wall Street Journal 9 Feb 2010 at 5:02am
Congressional investigators examining Toyota are questioning whether the company and regulators have fully grasped what caused sudden-acceleration problems ... Electronic Arts posted a smaller loss in the holiday quar...
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