Corporate Bonds or Equities? Deflation or Inflation?

Monday, March 30th, 2009

The debate rages on, and it is between whether to invest in corporate bonds or equities, or if economic conditions are deflationary or inflationary? FT Alphaville, Fortune.com and Capital Spectator have covered this quite well. Here are all the pieces:

Of Bonds and Stocks and the Weimar Republic
(FT.com/Alphaville, March 30, 2009)
by Tracy Alloway

You’d have to be living under a bailout-sized rock not to be aware of the current debate surrounding equities vs corporate bonds.

HSBC has now thrown its hat in the ring, in a 24-page research note entitled “The triumph of the pessimists”, which looks at the behaviour of corporate bonds and equities over the past 140 years or so. Here’s the summary.

Lots of studies have looked at government bond and equity valuations, few at the relationship between corporate debt and equities. We’ve filled the gap, going back to the middle of the 19th century.

The results don’t look pretty for equities, which are likely to suffer a multi-year downgrading compared with corporate debt… Historically, there have been three multi-decade periods. Relative prices in the first two were very different to those in the third. Before the beginning of the last century, yields on corporate equity were sometimes lower than those on corporate debt and sometimes higher.

Over the following 50 years — from about 1907 until 1951 — they were almost always higher, sometimes a great deal higher. But for the 50 years starting in the early 1950s, dividend yields on equities fell sharply relative to yields on corporate bonds. By 2000, the peak of the cult of the equity, the relative yield of equities compared with government and corporate bonds had reached its lowest level ever.

In fact, the only significant period in which dividend yields weren’t higher than corporate bond yields was in the early 1930s (chart, using railway bond yields as a proxy for corporates, below), when dividend yields collapsed and corporate bond yields surged because of the cascade of Depression-related defaults, according to HSBC. Investors’ enthusiasm for equities was dulled, and, in a parallel with our current financial crisis, their appetite for corporate debt sharpened. Even as the economy improved and profits rose, investors attached an increasingly low valuation to dividend payments, resulting in increased dividend yields.

Fearing another depression, then, investors demanded more of their returns upfront. That’s why dividend yields went up and corporate spreads went down. Although stocks went up and down, the shift continued until 1950, by which time the trailing PE for the S&P had fallen to 6x, its dividend yield had reached 7.5%, yields on Baa bonds had fallen to 3.2% and spreads to less than 80bps. In the early 1930s, Baa yields reached 11% and spreads touched 725bps.

That was the cheapest that equities have ever been against corporate bonds. Over the next 50 years, not all at once and with big, sometimes huge setbacks, valuations of stocks compared with corporate bonds moved from their cheapest ever to their most expensive. Which … is the situation in which we find ourselves now.

Which leads us to today, when, according to HSBC, we’re facing two scenarios for corporate bonds and equities.

Over the past 18 months, the implosion of the global financial system has led to huge risk aversion and acute deflationary concerns, both of which have driven government bond yields lower still. Now, it could be that quantitative easing by central banks will lead to a pick up in inflationary concerns and worries about how governments will repay the huge numbers of bonds that they have issued and will continue to issue. That’s certainly not an argument that one should dismiss out of hand. That wouldn’t augur well for government bonds in the long term.

Alternatively, the situation we’re in now might echo the 1930s, when risk appetite was shot to pieces and, regardless of whether inflation fell through the floor or picked up somewhat, government-bond yields fell and then fell further. For their part, having spiked up hugely, corporate spreads declined for the rest of the decade. But as we saw earlier, if investors lapped up bonds, particularly corporate bonds, they shunned equities; earnings yields and dividend yields rose dramatically. In that environment, investors, in other words, were expressing a strong preference for safety and income over risk and capital gains.

Although we strongly suspect that the present world looks more like the second of these scenarios than the first, we really don’t know for sure. Perhaps it doesn’t much matter, as long as governments don’t unleash another huge inflation. For what is certainly true is that central bankers have now told us explicitly that they will not allow government bond yields to rise for the foreseeable future. Their aim is simple: to make risk-free assets so unattractive that investors wade into riskier markets, thus restoring confidence to the financial system and the economy as a whole. For now, it’s clear, equity markets have taken the hint, but corporate credit markets haven’t. That situation will, we think, be reversed.

This is a sentiment echoed in The Aleph Blog and Crossing Wall Street. The spread between corporate bonds and equities is getting big – corporates were sitting out of the recent rally. They are, as per HSBC’s research title, the pessimists.

However, as HSBC also notes, this is essentially a deflationary vs inflationary debate. In a deflationary environment, as in the Great Depression, corporate bonds, with their stable returns, make sense. In an inflationary environment those fixed returns are eroded. Equities, with their ability to raise prices in tandem with inflation (or as close as they can get) could be more attractive.

A slightly random example here – but the German stock market of the 1920s increased by a staggering amount as inflation shot through the roof. We’re far from hyper-inflation, but throwbacks to that era, like the below 1921 clipping from the New York Times, should give us pause for thought.

Related links:
Sunday links: Stocks vs bonds – Abnormal Returns
Is it back to the Fifties? – FT
Equity lives! - FT Alphaville
The death of equity – FT Alphaville

This entry was posted by Tracy Alloway on Monday, March 30th, 2009 at 16:32.

WHAT ARE MONEY MANAGERS THINKING? (Capital Spectator)

What are professional money managers thinking these days? A new poll by Russell Investments offers an answer. Among the highlights:

- 67% of managers are now bullish on corporate bonds
– 61% are bullish on high-yield bonds

In both cases, the percentages are a bit higher compared with the previous poll from last December. “In this environment of caution and realism, managers are finding opportunity in spreads between high-quality corporate bonds and Treasuries that are at historic levels,” Erik Ristuben, Russell’s chief investment officer, says in the accompanying press release. Expectations for junk bonds are also higher from late last year.

U.S. equities, on the other hand, have fallen in the eyes of managers. Value and small-cap equities suffer the most in terms of the current outlook, according to the Russell survey. Here’s an overview of how the changes in expectations for the various asset classes stack up:

Source: Capital Spectator

High-yield bonds: Appetite for risk

If you’ve got the stomach for it, industry watchers say now is the time to hit the bargain buffet.

By Beth Kowitt, reporter

Last Updated: March 30, 2009: 12:02 PM ET

NEW YORK (Fortune) — Like most investments with higher credit risk, the high-yield bond market took a huge hit in 2008 as investors fled to quality. But with the sector recently seeing its deepest discount ever – and even rallying a bit – some say it’s time to test the waters again.

“The values are just extraordinary,” says Martin Fridson, CEO of Fridson Investment Advisors and a high-yield bond specialist. “I think it’s an opportunity you’re not going to see very often in your lifetime.”

Fridson says the spread between high-yield bonds and treasuries over the last few months has been far beyond anything seen before. The option adjusted spread, which measures the difference, is about 17.6 points, according to Merrill Lynch data. A year ago, the spread was 8.2 points.

Lower valuations mean more upside, Fridson says, but they’re also the reason for investors’ hesitations. Default rates will likely run higher than during past recessions, he notes, partly because the quality of the sector has deteriorated since the last low cycle.

Lawrence Jones, associate director of fund analysis at Morningstar, said some experts he’s spoken with expect default rates, which have run between 2% and 3% the last few years, to reach between 10% and 15%.

“I see the opportunity,” Jones says, “but almost everyone who’s being straight with you will say there’s a lot of risk.”

You may know them as “junk”

High-yield bonds, or “junk” bonds, are defined by the industry as a bond with below a Standard and Poor’s BBB- rating. They have a higher risk of default (failure to make a scheduled interest or principal payment), and are subject to greater price swings than more highly rated bonds. But on the upside they also have a higher rate of interest.

Jones suggests making high-yield bonds a small part of your portfolio through bond funds run by experienced managers and research teams investing in better-quality high-yield securities. A fund provides the advantage of a manager’s expertise and also the diversification that’s needed to limit the risk of default in any single investment. And high-yield bonds can be highly illiquid, i.e., hard to unload if they’re thinly traded, but a fund gives you the security of getting in and out when you want.

Read the entire piece here.

Source: Fortune.com

Tags: 1930s, 1950s, Alphaville, Bailout, Capital Spectator, Cascade, Corporate Bond Yields, Corporate Bonds, Corporate Debt, Corporate Equity, Corporates, Debate Rages, Deflation, Dividend Yields, Economic Conditions, ETF, Ft Alphaville, Gap, Government Bond, Government Bonds, Pessimists, Relative Prices, Valuations, Weimar Republic
Posted in Bonds, Canadian Market, Credit Markets, ETFs, Markets, Outlook, US Stocks | Comments Off

Institutional Investors Call the Shots

Monday, March 30th, 2009

This post is a guest contribution by Marty Chenard, of StockTiming.com.

Marty Chenard, of StockTiming.com has produced an interesting chart and his thoughts below about the weight that institutional investors wield in the market. He strongly cautions against buying stocks, in general, when trading by institutional investors is still in distribution, and uses a chart based on Investors Business Daily’s Accumulation/Distribution ratings. Here are his thoughts on this:

You will lose money if you go against the action of what Institutional Investors are doing.

Many of you subscribe to Investors Business Daily and pay particular attention to the “Accumulation/Distribution ratings” they show on listed stocks.

Their readers have learned that a stock in “Distribution” is being sold off or dumped, and that it is not a safe buy until “Accumulation” starts.

It is all the more important to apply this concept to the stock market as a whole, because if the stock market is in Distribution, then the majority of individual stocks will also be in Distribution and moving lower.

That is why we report on the stock market Accumulation/Distribution every day.

We do this by following the action of what Institutional Investors are doing. Since Institutional Investors are responsible for OVER half of the daily trading volume, they turn out to be the deciding force and direction of the overall market.

So, this morning, we will share our Institutional Accumulation/Distribution chart. To get that net result, we take all the Institutional buying on a given day, and subtract the Institutional selling. That gives us the net difference which is by definition, accumulation or distribution.

Below is the Net Accumulation/Distribution chart going back to October of 2007. It is easy to read … if the green bars are above zero, then Institutions were in Accumulation. If the green bars are below zero, then Institutional Investors were in Distribution.

With that understanding, take a minute to look at the Accumulation/Distribution chart, and compare it to the movement on the NYA (New York Stock Exchange Index) chart below it. After observing the chart, it should be pretty clear that the market does NOT go in a different direction of the Institutional Accumulation or Distribution.

So, the message is clear … invest in the SAME direction as the Institutions, and never go against them.

If you are buying when they are selling, you will lose because they are the top dog and top force in the stock market.

Source: Marty Chenard, StockTiming.com

Tags: Accumulation Distribution, Array, Buying Stocks, Index Chart, Institutional Buying, Institutional Investors, Institutions, Invest, Investors Business Daily, Investors Daily, Marty Chenard, Money, Moving, New York Stock, New York Stock Exchange, Nya, Same Direction, Stock Chart, Stock Exchange Index, Stock Index, Stock Market, Stocks, Stocktiming, York Stock Exchange
Posted in Markets | Comments Off

Why Bother with Bonds?

Monday, March 30th, 2009

*The following article is a guest post from John Mauldin.

Investors, we are told, demand a risk premium for investing in stocks rather than bonds. Without that extra return, why invest in risky stocks if you can get guaranteed returns in bonds? This week we look at a brilliantly done paper examining whether or not investors have gotten better returns from stocks over the really long run and not just the last ten years, when stocks have wandered in the wilderness. This will not sit well with the buy and hope crowd, but the data is what the data is. Then we look at how bulls are spinning bad news into good and, if we have time, look at how you should analyze GDP numbers. Are we really down 6%? (Short answer: no.) It should make for a very interesting letter.

And for the last time, let me remind you of the Richard Russell Tribute Dinner this Saturday, April 4 in San Diego. We have had over 400 of Richard’s fans (I guess you could say we are all groupies) sign up. A significant number of my fellow writers and publishers have committed to attend. It is going to be an investment-writer, Richard-reader, star-studded event. You are going to be able to rub shoulders with some very famous analysts and writers. If you are a fellow writer, you should make plans to attend or send me a note that I can put in the tribute book we are preparing for Richard. And feel free to mention this event in your letter as well. We want to make this night a special event for Richard and his family of readers and friends. So, if you haven’t, go ahead and log on to https://www.johnmauldin.com/russell-tribute.html and sign up today. The room will be full, so don’t procrastinate. I wouldn’t want any of you to miss out on this tribute. I look forward to sharing the evening with all of you. I am really looking forward to that evening.

Why Bother With Bonds?

If stocks outperform bonds by as much as 5% over the long run then, for our truly long-term money, why should we bother with bonds? Why not just ignore the volatility and collect the increased risk premium from stocks? That is the message of those who believe in “Stocks for the Long Run” and also from those who want you to invest in their long-only mutual fund or managed account program. Indeed, it is always a good day to buy their fund.

One of my favorite analysts is my really good friend Rob Arnott. Rob is Chairman of Research Affiliates, out of Newport Beach, California, a research house which is responsible for the Fundamental Indexes which are breaking out everywhere (and which I have written about in past letters), as well as the only outside manager that PIMCO uses, for his asset allocation abilities. He has won so many industry awards and honors that I won’t take the time to mention them. In short, Rob is brilliant.

He recently sent me a research paper that will be published next month in the Journal of Indexes, entitled “Bonds: Why Bother?” The publisher of the journal, Jim Wiandt, has graciously allowed me to review it for you prior to it actually being sent out. The entire article will be available when the Journal of Indexes goes to print in late April, at www.journalofindexes.com. Qualified financial professionals can also get a free subscription there to pick up the print copy. There is some very interesting research at the website. But let’s look at a small portion of the essay. I am reducing 17 pages down to a few, so there is a lot more meat than I can cover here, but I will try and hit a few things that really struck me.

It is written into our investment truisms that investors expect their stock investments to outpace their bond investments over really long periods of time. Rob notes, and I confirm, that there are many places where investors are told that stocks have about a 5% risk premium over bonds.

By “risk premium,” we mean the forward-looking expected returns of stocks over bonds. As noted above, if you do not think stocks will outperform bonds by some reasonable margin, then you should invest in bonds. That “reasonable margin” is called the risk premium, about which there is some considerable and heated debate.

Most people would consider 40 years to be the “long run.” So, it is rather disconcerting, or shocking as Rob puts it, to find that not only have stocks not outperformed bonds for the last 40 plus years, but there has actually been a small negative risk premium.

In a footnote, Rob gets off a great shot, pointing out that the 5% risk premium seen in a lot of sales pitches is at best unreliable and is probably little more than an urban legend of the finance community.

How bad is it? Starting at any time from 1980 up to 2008, an investor in 20-year treasuries, rolling them over every year, beats the S&P 500 through January 2009! Even worse, going back 40 years to 1969, the 20-year bond investors still win, although by a marginal amount. And that is with a very bad bond market in the ’70s.

Let’s go back to the really long run. Starting in 1802, we find that stocks have beat bonds by about 2.5%, which, compounding over two centuries, is a huge differential. But there were some periods just like the recent past where stocks did in fact not beat bonds.

Look at the following chart. It shows the cumulative relative performance of stocks over bonds for the last 207 years. What it shows is that early in the 19^th century there was a period of 68 years where bonds outperformed stocks, another similar 20-year period corresponding with the Great Depression, and then the recent episode of 1968-2009.

In fact, note that stocks only marginally beat bonds for over 90 years in the 19^th century. (Remember, this is not a graph of stock returns, but of how well stocks did or did not do against bonds. A chart of actual stock returns looks much, much better.

Bill Bernstein notes that in the last century, from 1901-2000, stocks rose 9.89% before inflation and 6.45% after. Bonds paid an average of 4.85% but only 1.57% after inflation, giving a real yield difference of almost 5%. In the 19^th century the real (inflation-adjusted) difference between stocks and bonds was only about 1.5%.

In the late ’90s, stock bulls would point out that there was no 30-year period where stocks did not beat bonds in the 20^th century. The 19^th century for them was meaningless, as the stock market then was small, and we were now in a modern world.

But what we had was a stock market bubble, just like in 1929, which convinced people of the superiority of stocks. And then we had the crash. Also, from 1932 to 2000 stocks beat bonds rather handily, again convincing investors that stocks were almost riskless compared to bonds. But in the aftermath of the bubble, yields on stocks dropped to 1%, compared to 6% in bonds. If you assumed that investors wanted a 5% risk premium, then that means they were expecting to get a compound 10% going forward from stocks. Instead, they have seen their long-term stock portfolios collapse anywhere from 40-70%, depending on which index you use.

So what is the actual risk premium? Rob Arnott and Peter Bernstein wrote a paper in 2002 about that very point. Their conclusion was that the risk premium seems to be 2.5%. Arnott writes:

“My point in exploring this extended stock market history is to demonstrate that the widely accepted notion of a reliable 5% equity risk premium is a myth. Over this full

207-year span, the average stock market yield and the average bond yield have been nearly identical. The 2.5 percentage point difference in returns had two sources: inflation averaging 1.5 percent trimmed the real returns available on bonds, while real earnings and dividend growth averaging 1.0 percent boosted the real returns on stocks. Today, the yields are again nearly identical. Does that mean that we should expect history’s 2.5 percentage point excess return or the five percent premium that most investors expect?

“As Peter Bernstein and I suggested in 2002, it’s hard to construct a scenario which delivers a five percent risk premium for stocks, relative to Treasury bonds, except from the troughs of a deep depression, unless we make some rather aggressive assumptions. This remains true to this day.”

One other quick point from this paper. Just as capitalization-weighted indexes will tend to emphasize the larger stocks, many bond indexes have the same problem, in that they will overweight large bond issuers. At one point in 2001, Argentina was 20% of the Emerging Market Bond Index, simply because they issued too many bonds. If you bought the index, you had large losses. The same with the recent high-yield index which had 12% devoted to GM and Ford. In general, I do not like bond index funds, and this is just one more reason to eschew them.

Let me be clear here. I am not saying you should put your portfolio in 20-year bonds, or that I even expect 20-year bonds to outperform stocks over the next 20 years. Far from it! The lesson here is to be very careful of geeks bearing charts and graphs (it will be a challenge for my Chinese translator to translate that pun!). Very often, they are designed with biases within them that may not even be apparent to the person who created them.

Professor and Nobel Laureate Paul Samuelson in late 1998 was quoted as saying, a bit sadly, “I have students of mine – PhDs – going around the country telling people it’s a sure thing to be 100% invested in equities, if only you will sit out the temporary declines. It makes me cringe.”

When someone tells you that stocks always beat bonds, or that stocks go up in the long run, they have not done their homework. At best, they are parroting bad research that makes their case, or they are simply trying to sell you something.

As I point out over and over, the long-run, 20-year returns you will get on your stock portfolios are VERY highly correlated with the valuations of the stock market at the time you invest. That is one reason why I contend that you can roughly time the stock market.

Valuations matter, as I wrote for many chapters in Bull’s Eye Investing, where I suggested in 2003 that we were in a long-term secular bear market and that stocks would be a difficult place to be in the coming decade, based on valuations. I looked foolish in 2006 and most of 2007. Pundits on TV talked about a new bull market. But valuations were at nosebleed levels. And now?

I have been doing a lot of interviews with the press, with them wanting to know if I think this is the start of a new bull market. There are a lot of pundits on TV and in the press who think so. I also notice that many of them run mutual funds or long-only investment programs. What are they going to do, go on TV and say, “Sell my fund”? And get to keep their jobs?

Am I accusing them of being insincere? Maybe a few of them, but most have a built-in bias that points them to the positive news that would make their fund (finally!) perform. And believe me, I can empathize. It is part of the human condition. But you just need to keep that in mind when you are thinking about investing in a new fund, or rethinking your own portfolio.

P/E Ratios at 200? Really?

Just for fun, when I was interviewing with the New York Times today, I went to the S&P web site and looked at the earnings for the S&P 500. It’s ugly. The as-reported loss for the S&P 500 for the 4^th quarter was $23.16 a share. This is the first reported quarterly loss in history. That almost wipes out the expected earnings for the next three quarters. For the trailing 12 months the P/E ratio, as of the end of the second quarter, is 199.97. Close enough to 200 for government work.

But it gets worse. The expected P/E ratio for the end of the third quarter is (drum roll, please) 258! However, taking the loss of the fourth quarter off the trailing returns allows us to get back to an estimated P/E of 23 by the end of 2009. The problem is that you have to believe the estimates, which I have shown are repeatedly being lowered each quarter, and which I expect to be lowered by at least another 25% in the coming months.

Now, much of that loss is coming from the financials, which showed staggering write-offs of $101 billion, $28 billion coming from (no surprise) AIG alone. Sales across the board are down almost 9%, with 290 companies reporting lower sales.

This quarter the estimated consensus GDP is somewhere between down 5% to down 7%. Last quarter we were down an annualized 6.3%. That would be two ugly quarters back to back. It is hard to believe earnings for nonfinancial companies are going to be all that much better.

Side note: The economy did not contract at 6.3% in the 4^th quarter. That is an annualized number. The quarter actually contracted at about 1.6%. If we go a whole year with a 6% contraction, that would be truly horrendous. We would blow right on through 10% unemployment. While it is possible, we should start to see somewhat better numbers in the second half of the year, although I still think they will be negative.

Mark-to-Market Slip Slides Away

But it is quite possible that the financial stocks see an improvement in earnings this quarter. The US Financial Accounting Standards Board (FASB) changed the mark-to-market rules last week, which many (including your humble analyst) thought was needed. First, they suspended the mark-to-market rules for assets in distressed markets. Second, they widened the definition of “temporary” impairments of troubled assets, which will “allow banks to write up the value of some troubled assets if these have been hit by falling markets without (yet) suffering any significant credit losses.” (www.gavekal.com)

Here’s the important part. The board decided to make the new changes effective immediately, prior to full board approval on April 2.

As my friend Charles Gave noted, this will allow banks to write up their paper, and it happens before Treasury Secretary Tim Geithner starts putting taxpayer money at risk. Expect to see a pop in valuations. It will be interesting to see if Citi and B of A post profits this quarter.

(I should note that the International Accounting Standards Board sent out a scathing press release. I guess from that we should assume that European banks will not be so fortunate as their US counterparts.)

In theory, as I understand it, the information will still be there, but the way it will be recorded will not be reflected in the profit and loss statement. I understand that this is a very controversial proposal, and I expect many readers will disagree. The key is whether or not the information is available to investors and how the proposals are put into actual practice. If there is abuse, and regulators should be all over this, then the old rules must quickly go back into place.

This could put some strength back into financials, at least until the commercial mortgage and credit card problems start having to be written off. At the least, it could make for another solid rise in the stock market until we start to get what I expect to be very bad 1^st and 2^nd quarter earnings.

Housing Sales Improve? Not Hardly

I opened the Wall Street Journal and read that new home sales were up in February. Bloomberg reported that sales were “unexpectedly” up by 4.7%. I was intrigued, so I went to the data. As it turns out, sales were down 41% year over year, but up slightly from January.

But if you look at the data series, there was nothing unexpected about it. For years on end, February sales are up over January. It seems we like to buy homes in the spring and summer and then sales fall off in the fall and winter. It is a very seasonal thing. If you use the seasonally adjusted numbers, you find sales were down 2.9% instead of up 4.7%. But the media reports the positive number. Interestingly, they report the seasonally adjusted numbers for initial claims, which have been a lot better than the actual numbers. Not that they are looking to just report positive news, you understand.

Plus, as my friend Barry Ritholtz points out, the 4.7% rise was “plus or minus 18.3%”. That means sales could have risen as much as 23% or dropped 13%. We won’t know for awhile until we get real numbers and not estimates. Hanging your outlook for the economy or the housing market on one-month estimates is an exercise in futility, and could come back to embarrass you.

But that brings up my final point tonight, and that is how data gets revised by the various government agencies. Typically with these government statistics, you get a preliminary number, which is a guess based on past trends, and then as time goes along that data is revised. In recessions like we are in now the revisions are almost always negative.

There is no conspiracy here. The people who work in the government offices have to create a model to make estimates. Each data series, whether new home sales, employment, or durable goods sales, etc., has its own unique sets of characteristics. The estimates are based on past historical performance. There is really no other way to do it.

So, past performance in a recession suggests higher estimates than what really happens. Then, the numbers in the following months are revised downward as actual numbers are obtained. But the estimates in the current months are still too high. That makes the comparisons generally favorable, at least for one month. And the media and the bulls leap all over the “data,” and some silly economist goes on TV or in the press and says something like, “This is a sign that things are stabilizing.” It drives me nuts.

Ignore month-to-month estimated data. The key thing to look for is the direction of the revisions. If they are down, as they have been for over a year, then that is a bad sign. Further, one month’s estimates are just noise. Look at the year-over-year numbers. When the direction of the revisions is positive and the year-over-year numbers are starting to stabilize, then we will know things are starting to turn around.

La Jolla, Copenhagen, London, etc.

April is a travel month. Next week I am going to a presentation in Irvine on the state of stem cell research, which I must admit fascinates me. Then I’m in La Jolla for my Strategic Investment conference, co-hosted with my partners Altegris Investments. Then home for a week. Easter weekend, all seven kids will be home. Then the next week I go to Copenhagen for a board meeting; and I will be in London, Thursday April 16 to meet with my European partners, Absolute Return Partners, and clients. The next weekend I go back to California for a conference, and then the next week I’ll be a day or so in Orlando, where I’ll speak at the CFA conference on the state of the alternative investment industry.

While I’m in London, I need to drop by and buy a pint for David Stevenson, a columnist for the Financial Times. Seems that he was asking his readers for nominations for best financial websites. For whatever reason, he decided I deserved a special award: “Best online commentator goes to US analyst John Mauldin, whose weekly letters at www.frontlinethoughts.com are required reading for all the big City-based bears I encounter.” It’s nice to be appreciated.

At the end of May (29-31), I will be in Naples, where I will be doing a seminar with Jyske Global Asset Management and Gary Scott. I will try to line up a web site where you can see whether you would like to attend.

It’s after midnight and time to hit the send button. The day simply vanished on me, although I did get to the gym, at least. I am working hard, but somebody turned the dial down on my metabolism.

Have a great weekend. It is spring in the northern hemisphere, and the azaleas in Texas are awesome this year. Make sure you stop and enjoy nature a little this spring (or fall, for you blokes Down Under).

Your getting more skeptical of data as I get older analyst,

John Mauldin

John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor.

Tags: April 4, Bad News, Fellow Writer, Fellow Writers, GDP, Ig, Invest Stocks, Investing In Stocks, Investment Writer, John Mauldin, Last Ten Years, Richard Russell, Risk Premium, Risky Stocks, Short Answer, Stocks Bonds, Term Money, Tribute Book, Tribute Dinner, Wilderness, Writer Richard
Posted in Bonds, Emerging Markets, Markets, Outlook | Comments Off

The Quiet Coup: How Wall Street Captured Government

Monday, March 30th, 2009

Read the complete article here.

Tags: Chief Economist, Dance Card, Emerging Market, Finance Industry, Imf, Imon, International Monetary Fund, Kwak, Last Ditch, Oligarchy, Painful Changes, Private Capital, Regional Trading, Running Out Of Time, School Of Management, Simon Johnson, Sloan School Of Management, State Of Affairs, True Depression, Unpleasant Truths
Posted in Emerging Markets, Markets | Comments Off

Words from the (investment) wise for the week that was (March 23 – 29, 2009)

Sunday, March 29th, 2009

Following Fed Chairman Ben Bernanke’s “money printing” announcement of last week, the action stayed on Capitol Hill with Treasury Secretary Timothy Geithner detailing his Public Private Investment Program (PPIP) as well the initial salvo on “new rules of the game” for the US’s broken system of financial regulation.

The US Treasury on Monday morning announced its highly-anticipated Private Public Investment Program (PPIP), rekindling investors’ hopes that the worst might be over for the beleaguered banking sector and the global economy is close to a bottom.

Up to $1.0 trillion will be spent in an attempt to support the balance sheets of financial institutions by removing toxic assets – mostly mortgage-backed securities. The Treasury plans to invest between $75 billion to $100 billion from its existing Troubled Asset Relief Program (TARP), and also to establish a separate initiative that will use the Fed’s Term Asset-backed Securities Lending Facility (TALF) and Federal Deposit Insurance Corporation (FDIC) funding to finance the PPIP.

Source: About.com

In reaction to the Obama administration’s plan, global stock markets extended their gains and the US dollar reclaimed a stronger footing, but government bonds suffered from indigestion on issuance worries and the haven appeal of commodities waned. The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.

Stock markets, led by financials, surged on the unveiling of the Treasury’s plan to deal with troubled assets, adding to the gains of the rally that commenced on March 10 (see table below). The Dow Jones Industrial Index moved up 497 points (+6.8%) on Monday, its fifth largest one-day point gain and 23^rd biggest one-day percentage gain on record.

Although stocks succumbed to profit-taking towards Friday’s close, indices nevertheless managed to register a third straight week of gains – only the third time since the bear market began 78 weeks ago. With two trading days to go, March has the potential of producing the third best monthly return for the broad market since 1950.

Elsewhere in the world stocks also performed strongly, with the MSCI World Index gaining 4.4% (YTD -10.4%) and the MSCI Emerging Markets Index ahead by 6.9% (YTD +4.3%). These indices have risen by 19.8% and 21.8% respectively since the low of March 9. Returns ranged from top-performers Peru (+17.4%), India (+12.6%) and Hong Kong (+10.0%) to Uganda (-5.7%), Côte d’Ivoire (-4.7%) and Bangladesh (-4.4%), which are still languishing in the red.

The Shanghai Composite Index (+3.9%) had another good week and remains at the top of the field for the year to date with a 30.1% gain in US dollar terms. (Click here to access a complete list of global stock market movements, in local currency terms, as supplied by Emeginvest.)

Emerging markets are showing mature markets a clean pair of heels, as can be seen from the rising trend line of the MSCI Emerging Markets Index relative to the Dow Jones World Index since late October. The fact that developing countries are now outperforming the developed ones is a sign that global investors are beginning to take more risk – a necessary ingredient for stock markets in general to improve further.

Source: StockCharts.com

As far as US exchange-traded funds (ETFs) are concerned, John Nyaradi (Wall Street Sector Selector) reports that the strongest funds this week were Claymore/MAC Global Solar Energy (TAN) (+32.1%), Market Vectors Solar Energy (KWT) (+25.8%) and iShares Dow Jones US Home Construction (ITB) (+20.8%). On the other end of the performance scale United States Natural Gas (UNG) (-12.6%), PowerShares DB Agriculture Fund (DBA) (�‘4.6%) and iShares Silver Trust (SLV) (-3.4%) performed poorly.

Among the ten US economic groups, the Financial Select Sector SPDR (XLF) (+12.3%) led the way, with defensive funds such as Health Care Select Sector SPDR (XLV) (+3.0) and Utilities Select Sector SPDR (XLU) (+1.8%) falling behind, as one would expect in a rising market.

In the coming week, as reported by the New York Times, the US administration is likely to extend more short-term aid to General Motors and Chrysler, but impose a strict deadline for bondholders and union workers to make concessions that would help the ailing automakers become viable businesses and avert bankruptcy.

Also on the agenda next week, is the summit of the Group of 20 in London – a “make or break event”, according to George Soros (via Reuters). In addition to the one-time increase of the IMF’s resources, there ought to be substantial annual special drawing rights (SDR) issues, say $250 billion, as long as the global recession lasts, he said. SDRs are an international reserve asset created by the IMF in 1969 that has the potential to act as a super-sovereign reserve currency.

Next, a quick textual analysis of my week’s reading. No surprises here with key words such as “banks”, “market”, “assets” and “plan” featuring prominently.

The nagging question remains: is the stock market rally for real, or is it just an upward correction in a bigger bear market? The worrying aspect is the rapidity with which the price increases have occurred. To gauge just how “violent” it has been, Mark Hulbert (MarketWatch) compared the rally since the March 9 lows to a composite of the stock market’s behavior over the first two weeks of all bull markets since 1900. The graph below indicates that the market is perhaps in need of catching its breath.

Regarding specific “targets”, Adam Hewison of INO.com prepared a short technical analysis presentation dealing with key levels. Click here to view the clip. As shown in the table below, the 50-day moving averages have been cleared for all the major US indices and the early January highs (not shown) are the next targets. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to endure.

Kevin Lane, technical analyst of Fusion IQ, said: “We think the S&P 500 can still rally up to the 850-860 in the near term on the heels of the unwinding of the deeply oversold conditions, the large piles of sideline liquidity, and additional money managers are allocating to stocks so as not fall too far behind their benchmarks. At the aforementioned S&P 500 level some more aggressive profit-taking is likely to ensue and it may be a good time to take some chips off the table (i.e. lock in some profits). We would then look to reallocate on the next aggressive pullback.”

The graph below shows the percentage of S&P 500 stocks trading above their 50-day moving averages. Altogether 66% of the stocks are currently trading above their 50-day lines. This is getting close to the 80% (overbought) level seen at prior peaks during this bear market.

Source: StockCharts.com

Short-term movements aside, more bulls are coming to the fore by the day. According to Bloomberg, Mark Mobius, executive chairman of Templeton Asset Management, said the next bull market rally has begun. Also, Barton Biggs, the former chief global strategist for Morgan Stanley who now runs New York-based hedge fund Traxis Partners, last week predicted the S&P 500 may jump by 30%-50%. Similarly, Jeff Saut, strategist at Raymond James, argued that the “odds are pretty good stocks have seen their lows”.

From across the pond, London-based David Fuller (Fullermoney) said: “I feel that it is a defining rally …. increasing evidence that the bear market mostly ended last November. However, while Wall Street is the big elephant in the room, casting a large shadow in terms of influence, it is certainly not the leader. Fullermoney themes, led by Asian emerging markets and South American resources markets, definitely bottomed out in October and November. Many have also gone on to complete base formations.

“In the short-term, stock markets are technically overbought so we can expect a pause and consolidation. However, if the S&P 500 Index can hold onto approximately half of its gains from this month’s lows, this would provide further evidence of recovery potential for the medium to longer term.”

On the other hand, Richard Russell (Dow Theory Letters), who has been studying markets since the 1950s, remains bearish: “The most helpful insights I’ve received during the course of this bear market are the Lowry’s statistics and comments. From the latest Lowry’s statistics I can see that although the Buying Power Index (demand) has risen sharply, the Selling Pressure Index (supply) has given ground rather grudgingly. Normally, if we were at the start of a new bull market, Selling Pressure should be collapsing. It is not.

“The conclusion is that there remains a surprising amount of Selling Pressure (supply) for this bear market advance to wade through. This is typical bear market rally action. Normally, prior to the start of a new bull market there will be an extended period in which the Selling Pressure Index slumps, indicating that sellers have exhausted their desire to sell. The inference is that we are experiencing a purely technical situation …”

One of the great concerns for the stock market rally is that the credit markets, the target of the rescue operations, are still far from “normal”. This was again seen during the past week when the US 30-day Treasury Bills dipped below zero on Thursday.

I believe stock markets are in a bottoming phase, but that this may take a while to play out. This is not a juncture at which one should go all-out bullish or bearish. Taking one step at a time, the next hurdle is the release of potentially ugly earnings and guidance announcements in April. By then a clearer picture should also start emerging on the results of the Fed’s medicine and whether credit markets are thawing and confidence is beginning to improve.

For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Risk appetite rekindled on hope of better days“, “Stock markets: Keep an eye on confidence measures” and “Technical Talk: Stocks nearing short-term resistance“. (And do make a point of listening to Donald Coxe’s webcast of March 20, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
“Global businesses remain remarkably pessimistic. Businesses say that sales fell sharply last week to a new record low and pricing power continues to evaporate as close to one third of businesses say they are cutting prices for their goods and services,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com.

According to RGE Monitor, the World Trade Organization said the collapse in global demand would drive trade volumes down by 9% in 2009 – the biggest contraction since World War II. Trade in developed countries would fall by 10% while in developing countries it would shrink by 2-3%. The fall in global trade in 2009 will be the first negative annual decline since 1982 led by the contraction in global growth, slump in manufacturing activity and capex, and crunch in trade finance. This might be exacerbated by growing protectionist measures around the world.

European business confidence has never been as dark and is near record lows, as indicated by the March Ifo Business Survey for Germany.

On a light-hearted note, the Financial Times reported last week that lingerie sales in Britain were looking better than the retail sector as a whole. One CEO in the industry told the FT that couples were staying home more and women were investing in “adventurous apparel” to cheer themselves up during the economic downturn. (Hat tip: US Global Investors – Weekly Investor Alert.)

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

March 27, 2009
– Consumer spending in Q1 most likely to show an increase

March 26, 2009
– Minor Q4 GDP revisions, corporate profits plunge
– Jobless claims – persistent upward trend remains in place

March 25, 2009
– New home sales – notable pickup in sales, but more is necessary
– Durable goods orders – glimmer of strength emerges but it is tentative

March 24, 2009
– Home prices – meaningful turnaround?

March 23, 2009
– Treasury’s Public-Private Investment Program – aims to unclog credit markets and promote credit extensions
– Existing home sales advance – noteworthy for several reasons

The past week witnessed a trend of better-than-feared economic reports. Of the twelve reports released, only three were weaker than the consensus forecast. Bespoke said: “While none of these reports can be classified as ‘good’, the fact that they are beating expectations is a positive sign. The next test will come this week when we get the first look at reports for the month of March. Will the relative strength follow through, or was the recent string of reports just an aberration?”

“We’ve passed the period where every indicator is plummeting, and that’s good news,” said Nariman Behravesh, chief economist at IHS Global Insight (via The Wall Street Journal). “We may not be exactly at the turning point, but we’re getting pretty close to it.”

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

What are the policy actions required in the US and abroad to lead to a recovery of the global economy and prevent an L-shaped global near-depression? Nouriel Roubini (RGE Monitor) summarized the following steps:

- Much more massive unorthodox monetary policy easing;
– Much more fiscal stimulus;
– Resolution of the banking crisis via a takeover of insolvent institutions and recapitalization and removal of toxic assets from the solvent but illiquid and undercapitalized ones;
– Actions to reduce the credit crunch and restore credit growth to creditworthy firms and households;
– Direct reduction – rather than restretching – of the debt burden of insolvent households;
– Tripling of IMF resources and financial help to emerging-market economies that are at risk of a liquidity crisis or a broader financial crisis; and
– Other measures of regulatory forbearance to reduce the procyclicality of the credit cycle (appropriate changes to mark-to-market, reduction in capital adequacy ratios, reduction of the countercyclical role of downgrades by rating agencies).

“Avoiding the L is possible, but it will require much more coherent and aggressive policy actions in the US, China and all over the world,” concluded Roubini.

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

Source: Yahoo Finance, March 27, 2009.

In addition to an interest rate announcement by the European Central Bank (Tuesday, April 2), the US economic highlights for the week include the following:

Source: Northern Trust

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

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

Source: Wall Street Journal Online, March 27, 2009.

Lau-Tzu said: “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” Wise words indeed, but hopefully the “Words from the Wise” reviews will assist Investment Postcards readers with their research to cast some light on the lie of the investment land.

That’s the way it looks from Cape Town (where I am about to embark on a long-haul flight to New York and San Diego).

Source: Walt Handelsman

CNBC: Geithner & toxic assets
“Treasury Secretary Timothy Geithner discusses his plan to deal with financial institutions’ toxic assets, with CNBC’s Erin Burnett.”

Part 1

Part 2

Source: CNBC, March 23, 2009.

CEP News: US Treasury unveils PIPP
“The US Treasury announced Monday morning it will spend up to $1.0 trillion in a bid to provide support to the balance sheets of financial institutions and support the ‘toxic debt’ market, which includes mostly mortgage-backed securities.

“The US Treasury will invest between $75 billion to $100 billion from its existing Troubled Asset Relief Program, and it plans to set up a separate initiative which will use the Federal Reserve’s Term Assets Backed Securities Lending Facility and FDIC funding to finance the highly anticipated Private Public Investment Program (PPIP).

“Five different private public funds will bid on toxic assets and sell them to the broader public. Meanwhile, the Federal Deposit Insurance Corporation will guarantee private-sector loans for these purchases, while the US Government will invest side by side with private equity using taxpayer capital.

“In a press conference following the official announcement, Treasury Secretary Timothy Geithner said he expects significant interest from the private sector, a sentiment which was confirmed by PIMCO’s Bill Gross following the announcement.

“Geithner said that while there is no doubt that the US government is taking risk with the PPIP, the taxpayer stands to make substantial returns on the investments. He also said that the Treasury should be able to implement the PPIP quickly.”

Source: CEP News, March 23, 2009.

BCA Research: Some hope for the US bank sector
“The Public-Private Investment Program (PPIP) is a significant positive step forward in restructuring the troubled US banking sector.

“The Treasury confirmed earlier this week its intention to remove toxic ‘legacy’ assets from bank balance sheets in order to improve the health of financial institutions and restore the flow of credit throughout the economy.

“Perhaps the most nagging issue facing policymakers in their efforts to solve the credit crisis has been what price to pay banks for their toxic assets. Too low a price would prompt further significant writedowns and could lead to additional bank failures. Too high a price would cheat taxpayers and reinforce previous bad investment decisions. The Treasury’s plan attempts to solve the issue by creating a public-private partnership, which determines asset prices using an auction process, while at the same time ensuring adequate financing (backed by the FDIC) and allowing the taxpayer to share in some of the upside.

“The plan does not directly support home prices, but it may stem the slide in real estate assets held by the banks. Even if the purchase of legacy assets leads to further writedowns, the government stands ready to contribute additional equity capital through its Capital Assistance Program (CAP) to maintain the bank as a going concern. Thus, creeping nationalization remains a possibility for those banks with a high proportion of legacy assets. Bank bonds, however, would seem to be well supported under this plan.”

Source: BCA Research, March 25, 2009.

The Wall Street Journal: Will the removal of assets make them any less toxic?
“Barrons Bob O’Brien talks about how the government will try to help the ailing economy by helping banks with toxic assets. This raises many questions including whether government help will chill public-private initiative.”

Source: The Wall Street Journal, March 23, 2008.

Nouriel Roubini (RGE Monitor): Obama’s toxic-asset plan shows promise
“So to clarify my view point: I see the Geithner plan as being relevant to banks that are solvent. For those that are found – after stress tests – to be insolvent I see as the proper solution to nationalize them and clean them up to prepare them for reprivatization.

“The stress test should do a triage between banks that are illiquid and undercapitalized but solvent given the provision of capital and liquidity and those that, under a reasonable stress scenario are effectively insolvent.

“Those that are insolvent should be nationalized.

“Those that are solvent will still have many toxic assets that need to be disposed of; and the Geithner plan provides a way to properly dispose of the toxic assets of solvent banks.

“So my partial support of the Geithner plan – with all the appropriate caveats – is consistent with the complementary idea of nationalizing the insolvent financial institutions. The bad assets of insolvent banks that are nationalized could be separated from the good assets and then worked out by the government; or they could be sold to private investors through an auction mechanism along the lines of the Geithner plan; or they could be sold – together with the good assets – to the investors purchasing a privatized bank that was temporarily privatized (along the lines of the Indy Mac deal where the investors purchasing the bank received a government guarantee on the bad assets after a first loss).”

Source: Nouriel Roubini, RGE Monitor, March 24, 2009.

Tech Ticker (Yahoo Finance): James Galbraith – Geithner plan “extremely dangerous”, banks “massively corrupted”
“Professor James Galbraith didn’t pull any punches on TechTicker this. He hates the Geithner plan, calling it ‘extremely dangerous’. He says the banks may game the plan to bid up the prices for their own crap assets and that getting bad assets off their books won’t get them lending again. Like Paul Krugman, Galbraith thinks the FDIC should just put the banks into receivership and have the banks’ subordinated bondholders pick up some of the cost of restructuring them.”

Part 1: Getting crap assets off bank books won’t save economy

“Aaron Task, TechTicker: Like it or not, many people seem to be resigned to the idea there’s no alternative to the public-private investment fund scheme Treasury Secretary Geithner detailed this morning.

“That’s hogwash, says University of Texas professor James Galbraith, author of The Predatory State. Of course there’s an alternative: FDIC receivership of insolvent banks.

“So why isn’t the Obama administration pushing for FDIC receivership? ‘Political influence of big banks,’ the economist says.”

Part 2: Massive corruption

Source: Tech Ticker, Yahoo Finance, March 23, 2009.

Bloomberg: Nobel Prize winners clash on prospects of Geithner’s plan
“Treasury Secretary Timothy Geithner has a good chance of succeeding with his plan to cleanse banks of toxic assets, says Michael Spence, co-winner of the 2001 Nobel Prize in economics. Paul Krugman, the newest laureate, is so sure Geithner will fail that he’s full of ‘despair’.

“Even winners of the highest awards in economics can’t always be right. Which prediction proves correct depends in part on whether private investors can be enticed to bid on as much as $1 trillion of illiquid loans and securities that banks are now stuck with.

“‘This program is crucially dependent on the private sector as participants and price setters,” said Spence, who shared the Nobel Prize with George Akerlof and Joseph Stiglitz for a theory that found some government intervention can make markets more efficient. ‘It could work,’ Spence said in a telephone interview yesterday.

“That’s not an opinion shared by 2008 Nobel laureate Krugman. ‘The real problem with this plan is that it won’t work,’ Krugman, said in his New York Times opinion column yesterday.

“Geithner appears to be going back to the ‘cash for trash’ approach of his predecessor as Treasury Secretary, Henry Paulson, Krugman said. ‘This is more than disappointing. In fact, it fills me with a sense of despair.’

“Instead of financing the purchase of illiquid assets, the government should guarantee many bank debts, take control of ‘insolvent’ firms and clean up their books, similar to what Sweden did in the 1990s, Krugman said.

“While Spence, a Stanford University professor and former business-school dean, has more confidence in Geithner, even he isn’t positive the Treasury secretary can pull it off.

“The Treasury plan ‘is a little complex to implement,’ Spence said. ‘I assume the Treasury has done its homework, and has people lined up’ to commit private capital to Geithner’s public-private partnerships, he said.

“Stiglitz, speaking at a conference in Hong Kong today, said the plan ‘risks a major increase in our national debt.’

“‘You can take the bad assets off the banks, but where are they going to go?’ said Stiglitz, who served as chairman of former President Bill Clinton’s Council of Economic Advisers. ‘The one place for them to go is to the taxpayers.’”

Source: Scott Lanman and Vivien Lou Chen, Bloomberg, March 24, 2009.

Bill King (The King Report): TAPS – creating a derivative on derivatives
“Geithner’s plan effectively creates ‘calls’ on banks’ toxic assets. The US taxpayer will underwrite losses in this program. The call premium will be the private equity risk; the buyer gets the upside appreciation. The taxpayer provides the funding/leverage.

“Bill Gross sees private investor risk of 4% to 5%. This is the call premium for the toxic assets.

“Let’s think through this plan and the probable consequences.

“Everyone knows that solons are trying to engineer massive asset inflation. So if we are running a bank why would we sell any asset that has a chance to reflate?

“We would only sell assets that we deem hopeless. Are there enough private equity patsies to buy calls on assets that we deem have a low probability of increasing substantively in value?

“Most call buyers do not intend or wish to own the underlying assets. They are interested in a levered gain. So even if the toxic assets are inflated enough in value to produce a gain for the ‘call’ buyers, what patsies will appear as a dumping ground for the call buyers?

“Geithner’s toxic asset scheme is a repo with a call option. And unless end-user patsies appear at some point, the toxic assets will return to sender and the US taxpayer.

“We are in this mess due to excess derivatives and leverage. Ironically or absurdly, Geither’s toxic asset plan & solution (TAPS) creates a derivative on derivatives (toxic paper) and increases the leverage on levered toxic assets! You can’t make up stuff like this.

“Unfortunately for solons their expediency just delays the inevitable negatives. Solons have created extremely positive expectation for the TAPS. If the scheme does not go exceptionally well, the consequences will not be pretty … BTW, $1 trillion is not nearly enough.

“The first TAPS auction will probably go well because solons will exert intense pressure on the community to play nice. Entities that are already adjuncts of the Fed or Treasury, like PIMCO and Black Rock, will be subjected to enormous pressure to stand and deliver.”

Source: Bill King, The King Report, March 24, 2009.

CEP News: FDIC’s Bair says some US banks could be beyond help
“Federal Deposit and Insurance Corporation (FDIC) head Sheila Bair said Monday that some US financial institutions may be beyond help from US government agencies, and some banks will close.

“In a conference call with reporters, Bair touted the US Treasury’s plan introduced this morning to remove toxic assets from banks’ balance sheets.

“The public/private partnership to buy these assets and resell them to the public won’t necessarily be a 50/50 split, she said.

“Bair said the highest priority will be given to high-risk real estate loans, because the problems are with these assets.

“She said the most difficult part of the program will be to price the assets properly, but that government agencies will find the best possible structure to do so, adding that she expects the program will be profitable.”

Source: CEP News, March 24, 2009.

The New York Times: Battles over reform plan lie ahead
“Outlining a far-reaching proposal on Thursday to rebuild the nation’s broken system of financial regulation, the Treasury secretary, Timothy F. Geithner, fired the opening salvo in what is likely to be a marathon battle.

“‘Our system failed in fundamental ways,’ Mr. Geithner told the House Financial Services Committee. ‘To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.’

“On the surface, both the lawmakers who listened to the Treasury secretary and the financial industry’s lobbying groups made it sound as if they completely agreed with Mr. Geithner’s call for what he described as ‘better, smarter tougher regulation.’

“But in fact industry groups are already mobilizing to block restrictions they oppose and win new protections they have wanted for years. Even though Mr. Geithner carefully avoided specific details, laying out mostly broad principles for overhauling the system, financial industry groups are identifying issues they plan to pursue and lining up well-connected lobbyists and publicists to help make their cases.

“If history is any guide, Mr. Geithner’s proposals will start an equally intense battle among the regulatory agencies themselves – including the alphabet soup of banking regulators, the Securities and Exchange Commission and the Federal Reserve – to stay in business and enhance their authority.

“Hedge funds and private equity funds, which have been almost entirely unregulated, would have to register with the SEC and tell it about their risk-management practices. Many financial derivative instruments, like credit-default swaps, would come under supervision for the first time.

“Mr. Geithner’s most specific proposal, which Democratic lawmakers hope to pass in the next few weeks, would allow the federal government to seize control of troubled institutions whose collapse or bankruptcy might jeopardize the broader financial system.”

Source: Edmund Andrews, The New York Times, March 26, 2009.

CNBC: JPMorgan’s Dimon on meeting with Obama
“Jamie Dimon, CEO of JPMorgan, sits down for an exclusive interview with CNBC’s Erin Burnett. Dimon discusses the meeting he and other bank CEOs had with President Obama.”

Source: CNBC, March 27, 2009.

News N Economics: Real money supply: surging in some countries, not so much in others
“The Fed’s recent and extreme policies have made people nervous about inflation. They should be, but just not right now. Key central banks recently added hydrogen to their engines in the form of quantitative easing, causing high-powered money to surge. However, the multiplier is collapsing, and therefore, the new base is simply a measure to keep the money supply afloat. Some economies, though, are showing worrisome trends in their money growth rates.

“The chart below illustrates the 6-month annualized growth rate of the broad measure of real money in the US, the UK, Japan, and the Eurozone. In spite of the massive surge in the US monetary base, 231% over the last 6 months, the real US money supply grew just 22.6% over that same period. Can you imagine what would have happened had the Fed not eased so substantially? Troublesome deflation. The money multiplier is collapsing as banks hoard cash and consumers and firms pull back.

“Furthermore, like the Fed, the Bank of England (BoE) is engaged in quantitative easing, resulting in a similar 6-month money growth rate, 22.8%. The ECB and the Bank of Japan (BoJ) are still increasing their broader measures of real money on a 6-month basis, but at a much slower rate. Admittedly, the BoJ is engaging in alternative policy measures, but the ECB and the BoJ are not pulling out all of the ‘easing stops’ as are the Fed and the BoE.”

Source: Rebecca Wilder, News N Economics, March 24, 2009.

Reuters: Soros – G20 a “make or break” event for markets
“The Group of 20 nations meeting next week is a ‘make or break event’ for the global markets, investor George Soros said on Wednesday.

“‘Unless it comes up with practical measures to support the countries at the periphery of the global financial system, markets are going to suffer another sinking spell just as they did on February 10, 2009, when the authorities failed to produce practical measures to recapitalize the United States banking system,’ Soros said in testimony to the Senate Foreign Relations Committee.

“Soros said President Barack Obama could help make the G20 meeting a success by raising a possible solution that would involve increasing the amount that developing countries – from Eastern Europe to Africa – can effectively borrow from the International Monetary Fund.

“The urgent task of re-inflating the global economy has to be carried out mainly by the IMF, ‘imperfect and beleaguered as it is, because it is the only institution available,’ Soros said.

“While the IMF’s resources were likely to be doubled at the G20 meeting of big developed and developing countries, that would not provide a systemic solution for the developing world, Soros said.

“But a systemic solution was readily available in the form of special drawing rights (SDRs), an international reserve asset created by the IMF in 1969 that has the potential to act as a super-sovereign reserve currency.

“In addition to the one-time increase of the IMF’s resources, there ought to be substantial annual SDR issues, say $250 billion, as long as the global recession lasts, he said.”

Source: Reuters, March 25, 2009.

Asha Bangalore (Northern Trust): Minor Q4 GDP revisions, corporate profits plunge
“Real GDP is estimated to have dropped at an annual rate of 6.3% in the fourth quarter of 2008. This is virtually unchanged from the earlier estimate of a 6.2% drop of real GDP. In 2008, real GDP increased 1.1% after a 2.03% increase in 2007.

“On a Q4-to-Q4 basis, the 0.85% drop in real GDP in the fourth quarter is the first decline in real GDP since the 1990-91 recession. The economy is expected to post another sharp quarterly reduction in real GDP in the first quarter of 2009 (-6.1%), with these two quarterly declines chalking up to be the weakest quarters of the current recession.”

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

Asha Bangalore (Northern Trust): Consumer spending in Q1 most likely to show increase
“Contrary to our earlier expectations, consumer spending in the first quarter is most likely to show an increase. The sharp upward revision of inflation adjusted consumer spending in January (+0.7% versus +0.4% in the original report) is the main reason for this revision. Nominal consumer spending moved up 0.2% in February after a 1.0% increase in January. However, after adjusting for inflation, consumer spending fell 0.2% in February. A conservative assumption for March results in an overall increase of consumer spending in the first quarter of 2009 of roughly 0.6%-0.8%. This in turn will result in a modification of the headline GDP forecast, which we are working on as of this writing.

“The near term trend of consumer spending is most likely to be weak owing to the severe declines in payroll employment.”

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

Asha Bangalore (Northern Trust): Durable goods orders – glimmer of strength emerges
“Orders of durable goods increased 3.4% in February after a downwardly revised drop in January of 7.3% (originally estimated as a 4.5% decline). The 35.3% increase in orders of defense items and the 6.6% jump in bookings of non-defense capital goods excluding aircraft stand out in the report. Orders of aircraft (-28.9%) and autos (-0.6%) dropped but that of machinery (+13.5%), computers (+5.6%), and appliances rose (+1.6%) during February. The main message is that the pickup in orders of durables is significant but consistent monthly gains will be necessary to declare that the factory sector has pulled out of the current doldrums.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 25, 2009.

Asha Bangalore (Northern Trust): New home sales – notable pickup but more is necessary
“Sales of new homes rose 4.7% to an annual rate of 337,000, following an upward revision of sales in January and December. On a regional basis, sales of new homes increased in the South (+9.7%) and West (+6.6%) but fell in the Northeast (-3.3%) and Midwest (-9.1%). The fact that sales advanced in February is noteworthy but additional monthly gains will be necessary to reduce the inventory of unsold new homes and bring about stability in this sector.

“Sales of new single-family homes are down 43.8% in February from a year ago, after a 47.7% plunge in January. Sales of new homes have dropped 75.7% from the peak in July 2005. The trough for new home sales appears to be January 2009, for now.

“The median price of a new single-family home declined 18.1% from a year ago in February, the largest year-to-year drop on record. The median price of a new single-family home has fallen 23.5% from the peak in March 2007, also the largest peak-to-trough decline on record.

“Additional declines in prices of new homes are nearly certain given the large inventory of unsold new homes. The good news is that the inventory unsold homes fell slightly to a 12.2-month mark from the record high of 12.9 months in January.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 25, 2009.

CEP News: Fed’s Rosengren says programs will lower consumer, business loan costs
“Recent actions by the Federal Reserve should help lower the cost of credit to consumers and businesses, according to Boston Fed President Eric Rosengren speaking before the House Financial Services Committee on Monday.

“While credit availability continues to be a significant source of concern for the Federal Reserve, the Fed has ‘acted proactively and creatively to address these concerns,’ said the central banker.”

Source: Erik Kevin Franco, CEP News, March 23, 2009.

Zillow: Federal Reserve announcement drives mortgage rate drop
“Driven by the news that the Federal Reserve plans to spend an additional $750 billion to buy mortgage-backed securities, the weekly average rate borrowers were quoted on Zillow Mortgage Marketplace for thirty-year mortgages fell to 5.06%, down from 5.21% the week prior, according to the Zillow Mortgage Rate Monitor.”

Source: Zillow, March 24, 2009.

Financial Times: Ron Paul – believer in small government predicts 15-year depression
“Pension trustees and insurance company portfolio managers look away now. Your increased commitment to government bond holdings in recent times is about to blow up spectacularly.

“At least, that is the view of Ron Paul, the US congressman who ran against John McCain in last year’s Republican Party presidential nomination.

“His is a minority view. Yields on government bonds worldwide have been falling fast over the past few months and in the UK, the commencement of ‘quantitative easing’ this month sent bond prices soaring.

“But the credibility of both western governments and their currencies is waning, and has been ever since the gold standard was abandoned in 1971, says Mr Paul. And that means even ‘safe’ investments are far from safe, he claims.

“‘People will start to abandon the dollar as current and past economic policies create a steep rise in interest rates,’ Mr Paul says.

“‘If you are in Treasuries, you will need to be watchful and nimble to time your escape.’

“Unfortunately, cashing out will not protect the value of investments, he insists, because ‘fiat’ currencies will all decline over the coming years as measures to try to haul the world economy out of recession fail. ‘The current stimulus measures are making things a lot worse,’ says Mr Paul.

“‘The US government just won’t allow the correction the economy needs.’ He cites the mini-depression of 1921, which lasted just a year largely because insolvent companies were allowed to fail. ‘No one remembers that one. They’ll remember this one, because it will last 15 years.’”

“And don’t even mention shares to Mr Paul: ‘The last place you want to be is in the stock market,’ he says. ‘It may not bottom out for 10 years – just look at Japan.’”

Click here for the full article.

Source: Phil Davis, Financial Times, March 22, 2009.

Financial Times: Credit market concerns
“While equities responded strongly to the Treasury’s plan to get bad loans off banks’ balance sheets, the rally in credit markets was more muted, says FT’s Aline van Duyn.”

Source: Aline van Duyn, Financial Times, March 24, 2009.

Bespoke: S&P 500 sector breadth measures
“The S&P 500 is currently trading 3.73% above its 50-day moving average, while the average stock in the index is 5.34% above its 50-day. This is a positive breadth measure. Below we provide the same analysis for the ten S&P 500 sectors.

“As shown, the Energy sector has the most positive breadth with a difference of +4.58% between the average stock’s distance from its 50-day versus the sector’s distance from its 50-day. Consumer Discretionary ranks 2nd, followed by Technology and Telecom.

“On the negative side, the Financial sector as a whole is trading 10.12% above its 50-day, while the average stock in the sector is 5.06% abvoe its 50-day. Only two sectors remain below their 50-days after this significant market rally and they are both defensive in nature – Health Care and Utilities.”

Source: Bespoke, March 26, 2009.

Bespoke: Sector trading ranges – nearing overbought levels
“In the chart below, we highlight the current levels of each S&P 500 sector with respect to their normal trading ranges. Red shading indicates that the sector is overbought (with dark red indicating extreme overbought levels), while green shading is indicative of an oversold reading.

“Over the last week, the S&P 500 and each of its sectors have moved closer to overbought levels. There are currently four overbought sectors, no oversold sectors, and six sectors in neutral territory. Given the Nasdaq’s brief push into positive YTD territory yesterday, it’s no surprise that the Technology sector is the most overbought one in the market. Health Care, on the other hand, is the furthest from overbought levels. It is currently attempting to recover from the sell off that took place in late February after the release of the Obama budget plan.

“Over the coming weeks, it would not be surprising to see investors rotate out of the tech sector, which is nearing extreme overbought territory, and into the less extended Health Care sector.”

Source: Bespoke, March 27, 2009.

Bloomberg: Mobius says stocks at beginning of a bull market rally
“The next bull market rally has begun and there are bargains in every emerging market following a record slump in stocks, Templeton Asset Management’s Mark Mobius said.”

Click here for the article.

Source: Bloomberg, March 23, 2009.

Bloomberg: Roubini – stocks will drop as banks go “belly up”
“US stocks will fall and the government will nationalize more banks as the economy contracts through the end of 2009, said Nouriel Roubini, the New York University professor who predicted last year’s economic crisis.

“‘The stock market is a bit ahead of the real macroeconomic and financial news,’ Roubini, a professor at NYU’s Stern School of Business and the chairman of consulting firm Roubini Global Economics, said in an interview with Bloomberg Television in London today. ‘We’ll have some major banks going belly up that will need to be taken over.’

“The global equity rebound in March that sent the Standard & Poor’s 500 Index to its best monthly advance in 17 years is a ‘bear-market rally’ and US Treasury yields will ‘remain relatively low’ as investors flock to the safest assets, Roubini said. Treasury Secretary Timothy Geithner’s new plan to remove toxic debt from financial companies won’t be enough for insolvent banks, he said.

“Roubini’s outlook contrasts with predictions this week from Templeton Asset Management’s Mark Mobius and Traxis Partners’ Barton Biggs, who said that equities are poised to rally as government efforts to revive the economy and banking system begin to work. Investors are ‘way too optimistic’ about the prospects for a recovery in the economy and earnings, Roubini said.”

Source: Michael Patterson and Maithreyi Seetharaman, Bloomberg, March 26, 2009.

MarketWatch: Keeping hope alive – bear market rally or new bull market?
“Is it possible to have too much of a good thing? Mae West didn’t think so, though I have it on reliable authority that she wasn’t talking about the stock market.

“And when it comes to rallies off of market lows, it is indeed possible for stocks to overdo it. That at least is the argument being made by at some of the investment newsletter editors I monitor.

“According to them, bear market rallies are almost by their very nature powerful and impressive. If we were to endow the bear market with intent, we would say that the very purpose of a rally is to draw as many gullible investors back into the market before the next leg down commences.

“… whatever else you say about the rally that began two weeks ago, it has indeed been ‘violent’ and has occurred with ‘amazing rapidity’.

“To gauge just how violent and rapid it has been, I compared the rally since March 9 to a composite of the stock market’s behavior over the first two weeks of all bull markets since 1900.

“To come up with a list of those bull markets, I followed the lead of Ned Davis Research, the institutional research firm. For them, a bull market requires one of three conditions to hold: (1) at least a 30% rise in the Dow Jones Industrial Average in 50 calendar days, (2) at least a 13% rise in the Dow in 155 calendar days, or (3) at least a 30% reversal in the Value Line Geometric Index.

“Since the beginning of 1900, according to the research firm, there have been by this set of criteria no fewer than 34 bull markets.

“It turns out that the recent rally has been markedly more powerful than the average beginning of prior bull markets. Over the last two weeks, for example, the Dow has gained 18.8%. The Dow’s average gain over the first two weeks of past bull markets, in contrast, has been 8.4%, or less than half as much.

“In fact, of the 34 bull markets identified by Ned Davis Research, only one of them produced a greater gain in its first two weeks than in the recent rally. That was the one that began on November 13, 1929, and is hardly one that the bulls would want to brag about. That bull market lasted just five months and led to an increase of just 48% in the Dow – making it one of the most modest of bull markets in the sample, despite have one of the most impressive returns in its first two weeks.

“These historical comparisons don’t automatically mean that the market’s strength over the last two weeks is just a bear market rally, of course. But those comparisons do highlight the possibility that the recent rally, impressive as it otherwise is, will in the end prove to be just a bear market rally.”

Source: Mark Hulbert, MarketWatch, March 24, 2009.

Jeffrey Saut (Raymond James): Bear market rally or something more?
“In recent weeks, copper, steel, and energy prices have crept higher. Additionally, building permits and housing starts have come in better than expected. Meanwhile, tax refunds are up 13.3% when compared to this time last year, which is probably why retail sales have stabilized despite rising unemployment.

“Only time will tell, but it feels like the economic deterioration is no longer accelerating? Could it be that the huge increase in money supply, negative real interest rates (inflation adjusted rates) and the reintermediation we have been speaking about are beginning to have a positive impact on the economy?

“The stock market might just be sensing that, having leaped off of a generational oversold condition into a 20%, ten-session, upside stampede that produced four 90% upside days (March 10th, 12th, 17th, and 18th) within a two week period. Such enthusiastic buying has tended to be associated with the start of new bull markets. Yet as the Lowry’s service notes, ‘Our 2002 study of 90% days showed that the start of new bull markets are typically identified by a single 90% upside day, representing a rush of enthusiastic buyers which typically calms down after the first dramatic day. On rare occasions, two 90% upside days have been recorded in the first 30 days of a new bull market.’

“While we are cautious, we remain hopeful and continue to favor the upside until proven wrong, which is why we are still ‘long’ various indexes and have selectively been accumulating stocks.”

Source: Jeffrey Saut, Raymond James, March 23, 2008.

Richard Russell (Dow Theory Letters): Get used to bear market rallies
“Moving on to the stock market, subscribers will have to get used to bear market action. In bear markets, counter-intuitively much of the time is spent with stocks rising, due to the frequent upward correction. For instance, during the horrendous 1929-32 bear markets there were no less than nine 15% rallies, the average lasting 15 days.

“During the 1937 to 1942 bear market, there were nine rallies of 15% or more with the average correction lasting 82 days

“During the 1946 to 1949 bear market there were two 15 % or more rallies averaging 57 days each.

“During the recent 2000 to 2002 bear market there were three 15% or more rallies averaging 5 days each.

“From November 2009 to January 2009 there were two rallies, one short and one longer one that stopped just short of 15%.

“So we have to get used to rallies in the bear market. One difficulty in dealing with bear rallies is that they can end as suddenly as they started. This is because bear market rallies don’t end with a period of distribution. The buying just stops, and down they go. This is opposite to bull market advances that usually terminate after a period of deliberate distribution.”

Source: Richard Russell, Dow Theory Letters, March 24, 2009.

David Fuller (Fullermoney): Don’t look to Wall Street for the lead
“The US stock market is the big elephant in the room, casting a long shadow, but it seldom leads market moves. New bull markets are led by emerging economies, subject to governance, with their better valuations near the lows, competitive currencies, superior GDP growth prospects and comparatively thin markets. … growing list of market indices which bottomed in October and November, and have now broken up out of their trading ranges during the current rally. This is very bullish action and the way new uptrends commence.

“Many other stock market indices tested their lows established last year and found good support near those levels, evidenced by their persistent rallies towards the upper-middle of their ranges. This is consistent with base formation development. Lastly, most of the stock markets that clearly broke beneath last year’s lows earlier this month have not maintained those downward breaks. Further rallies by these indices would also confirm base development.

“Long-dated government bond markets are no longer performing. Everyone knows that their yields are not attractive for any economic environment other than a deflationary depression. Some of the money currently in bonds came from stock markets and will return to equities as confidence improves. Corporate bonds are performing and they are a lead indicator for equities.

“Copper is leading industrial commodities higher, as it did in 2003.

“Lastly, the US dollar and yen in particular are weakening against yield / resources currencies such as the Australian and New Zealand dollars. This indicates that carry trade deleveraging has not only ended but is also reversing.

“Returning to global stock markets, I maintain that the bear market mostly ended in October and November. The January to early-March sell-off looks like a successful test of support from last year’s lows for most non-Western stock markets.

“I do have some remaining concern over Wall Street and its leash effect. However, technology is a leading indicator and the tech-heavy Nasdaq 100 Index did not break downwards. The S&P 500 Index did not maintain its break beneath the November low and is pushing above psychological resistance at 800. A move above 880 would, in my view, confirm a significant downside failure and resumption of the yearend base formation development.

“Interestingly, stock markets have been extending this month’s rally against a background of short-term overbought indicators. This indicates that bears are being squeezed and that bulls are emboldened. I have previously mentioned that a significant rally would be indicated by its persistence. We now have some distance between current levels and the early-March lows, which should provide a cushion of support during the next consolidation.

“In conclusion, if the bear market is not continuing, the new bull market is already underway, although most people do not yet realise it. However this will not be fully confirmed, as I have said before, until the majority of stock markets are trading above rising 200-day moving averages. Moreover, even though the balance of technical evidence increasingly suggests that a new bull market is gradually commencing, this does not mean that all of the developing bases can support uptrends at this time. The leading Asian emerging markets and South American resources markets may actually be commencing uptrends, but many others are likely to extend their bases in coming months.”

Source: David Fuller, Fullermoney, March 26, 2009.

BCA Research: Demystifying Chinese holdings of US assets
“In an unusual disclosure, Chinese Premier Wen Jiabao publicly expressed his concerns about the safety of China’s holdings of US assets, putting the country’s massive yet largely furtive foreign exchange assets into the spotlight.

“Our research finds that China currently has about 64% of its foreign reserves in US assets, a level that has declined gradually from as high as 84% in 2003. The majority of Chinese holdings of US assets are risk free and long-term in nature, but there has been a clear trend in China’s reserve holdings that shows a persistent increase in exposure to risky assets and non-US assets over the past five years.

“Although, China’s net purchases of risky US assets have dropped sharply since mid-last year, while its net purchases of Treasurys have jumped. This underscores the authorities’ reduced risk appetite amid the ongoing global storm. Their reserve diversification process could accelerate again when global financial markets stabilize. Importantly, China’s net purchases of short-term US Treasurys have jumped dramatically over the past year, accounting for the majority of the country’s total net purchases of US government paper. This is an unprecedented development and a situation that warrants close attention going forward.”

Source: BCA Research, March 23, 2009.

The Wall Street Journal: China takes aim at dollar
“China called for the creation of a new currency to eventually replace the dollar as the world’s standard, proposing a sweeping overhaul of global finance that reflects developing nations’ growing unhappiness with the US role in the world economy.

“The unusual proposal, made by central bank governor Zhou Xiaochuan in an essay released Monday in Beijing, is part of China’s increasingly assertive approach to shaping the global response to the financial crisis.

“Mr. Zhou’s proposal comes amid preparations for a summit of the world’s industrial and developing nations, the Group of 20, in London next week. At past such meetings, developed nations have criticized China’s economic and currency policies.

“This time, China is on the offensive, backed by other emerging economies such as Russia in making clear they want a global economic order less dominated by the US and other wealthy nations.

“However, the technical and political hurdles to implementing China’s recommendation are enormous, so even if backed by other nations, the proposal is unlikely to change the dollar’s role in the short term. Central banks around the world hold more US dollars and dollar securities than they do assets denominated in any other individual foreign currency. Such reserves can be used to stabilize the value of the central banks’ domestic currencies.

“Monday’s proposal follows a similar one Russia made this month during preparations for the G20 meeting. Like China, Russia recommended that the International Monetary Fund might issue the currency, and emphasized the need to update ‘the obsolescent unipolar world economic order’.”

Source: Andrew Batson, The Wall Street Journal, March 24, 2009.

Bespoke: Gold testing downside support
“Just one week after the Federal Reserve devalued the dollar by announcing that they would start buying US Treasuries, one would think gold would be in rally mode and in overbought territory. However, while gold had an initial spike following the Fed’s announcement, since then the yellow metal has come back down to earth. Gold is currently close to testing its 50-day moving average, which is a level that has provided reasonable support over the last few months. If that level fails to hold, the next level of support is around its 200-day moving average at 859.”

Source: Bespoke, March 25, 2009.

Platts: Chinese buying spree sparks fears of base metal shortage in Asia
“Robust Chinese demand could result in a supply shortage of base metals in Asia even as the rest of the world grapples with low demand, market sources said this week.

“Japanese copper smelters producing a total 120,000 mt/month of copper cathode have sold out of April-May shipments. Two smelters producing 20,000-40,000 mt/month each said they may be able to offer spot cargoes in June.

“Asia’s copper market has tightened as a result, sources said. Premiums for Japanese copper for prompt shipment within 60 days have risen to $150/mt plus London Metal Exchange cash CIF Shanghai this month, from $80-100 mt/plus LME CIF Shanghai in February.

“There is no shortage yet, and no copper consumer in Asia has yet been forced to curtail production of coils or cables due to a shortage of copper feedstock, sources said.

“But if demand in recession-hit Japan does start to pick up unexpectedly, Asia may suffer shortages, impacting smaller consumers in particular that have no protection from long term contracts.”

Source: Mayumi Watanabe, Platts, March 27, 2009.

David Fuller (Fullermoney): Where do oil prices go from here?
“The consensus view is usually a contrary indicator. Near the July 2008 peak at just under $150, many analysts were forecasting $200 and higher. This trend extrapolation was often influenced by their firms’ and clients’ own speculative positions, not least in tracker funds. Around $40, the consensus was for $25, suggesting sizable short positions.

“Price charts gave a very good signal that crude oil’s bull run was over in mid-July 2008 and since December we have interpreted the ranging price action as base formation development centred on $40. I do not assume that the lows will be retested and the base might even have been completed. If so, the next reaction and consolidation, representing the first step above the base, would most likely encounter support at $47 or higher.

“Historically, demand for crude oil has only experienced a small decline during deep recessions. Global consumption of crude continued to rise during the 2001-2002 recession, albeit at a slower rate. We are currently seeing a dip in demand but as Matthew Simmons points out, it is only slight and mostly in terms of consumption in the US.

“Meanwhile, OPEC has reduced supplies, while worldwide exploration and development of oil reserves has been curtailed by low prices and financing difficulties in the global recession. The search for viable alternatives has become a priority for oil-importing countries but it is a slow process.

“Energy is a Fullermoney secular theme and our view is that it has become a bull play once again, in all its various forms. The short to medium-term risk is probably limited to additional base formation development before significant uptrends occur. That will mark the return of commodity price inflation.”

Source: David Fuller, Fullermoney, March 24, 2009.

Ifo: Further decline in the Ifo Business Climate Index
“The Ifo Business Climate for industry and trade in Germany has cooled again somewhat in March. The firms have reported a further worsening of their current business situation. With regard to the business outlook for the coming six months, they are again slightly less pessimistic. An economic turning point has not yet been reached, in the opinion of the survey participants.”

Source: Ifo, March 25, 2009.

CEP News: Fall in German PMIs starts moderating
“German manufacturing and services output continued to contract at severe rates in March. However, the pace of contraction unexpectedly eased over the month, Markit Economics noted.

“On Tuesday, Markit Economics reported that the German manufacturing purchasing managers rose to 32.4 in March, up modestly from February’s 32.1 level. Economists had expected the PMI to fall back to its record low 32.0 level.

“Output in the services sector also showed unexpected strength, as reflected in the services PMI rising to 41.7 from February’s 41.3 level. Expectations had been for a fall to an all-time low of 41.0.

“Taking the two PMIs together, the composite index came to a two-month high of 37.7, up 1.4 points from February’s figure.

“‘The rise in the headline composite index provides some tentative hope that the downturn has passed its nadir,’ Markit economist Mark Smith said.”

Source: CEP News, March 24, 2009.

CEP News: ECB may turn to “unconventional policy” if rates reach limit
“The European Central Bank may take unconventional measures if its key policy rate hits its lower boundary, ECB Governing Council member Nout Wellink said on Thursday.

“‘The ECB could use unconventional monetary policy, on top of the unusual expansion already implemented, if the interest rate instrument can’t be used further because of [almost] reaching the zero-rate limit,’ Wellink said in the Nederlandsche Bank’s annual report.

“The policy maker also said that months of negative price growth could not be ruled out in the euro zone. ‘[Negative inflation] isn’t a problem in itself as long as consumers don’t continuously postpone spending in the hope on further price declines,’ Wellink said.

“Wellink also said that the global economic environment is unprecedentedly uncertain.’ He added, ‘The financial system has been under unprecedented pressure since August 2007.”

“However, the central banker said that it was ‘not unrealistic to expect that the world economy will get going’ by next year.”

Source: CEP News, March 26, 2009.

Financial Times: Take-up of City offices at new low
“Take-up of new offices in the City of London has fallen to its lowest for more than 20 years as the slowdown in the economy has reined in financial services businesses from expanding and moving to new buildings.

“There has been just 220,000 sq ft of new occupied space in the Square Mile since the beginning of the year, half the previous lowest office take-up during the last recession, when 500,000 sq ft was let in the third quarter of 1991.

“The economic downturn has hit the City office market hard, with many businesses looking to cut staff and reduce office occupation. Some are also looking to sub-let their own space.

“According to data compiled by Atisreal property consultancy since 1987, the vacancy rate in the City is 12.4%, or 10m sq ft, still significantly less than the last recession, when a fifth of offices were empty.

“Even so, there are a number of new buildings set for completion in the next two years that will add to those figures.

“City rents have also fallen sharply. Dan Bayley, head of national sales and lettings at Atisreal, said that prime rents were now about £45 per sq ft, down about a third from the peak of the market in 2007 when offices were being let at about £67.50 per sq ft.

“Mr Bayley said: ‘With rents continuing to fall, landlords are experiencing further pain. However, the positive factor is that a number of occupiers really are seeing value for money and, like the West End, may start seeing more activity in the coming quarters.’”

Source: Daniel Thomas, Financial Times, March 22, 2009.

CEP News: BOJ minutes reveal steps to buy assets
“The Bank of Japan’s minutes from the February 18-19 meeting revealed the bank felt that buying corporate bonds was necessary to stabilize financial markets.

“At the meeting, the central bank held the target rate unchanged at 0.1% as expected, but also announced further measure to boost corporate financing.

“The bank said it would begin purchases of corporate bonds and extend the period of time they will buy commercial paper. The bank has met since then and expanded their purchases of Japanese government bonds.”

Source: Megan Ainscow, CEP News, March 23, 2009.

Tags: Asset Backed Securities, Ben Bernanke, Bill Gross, Commodities, Deposit Insurance Corporation, Dow Jones Industrial, Dow Jones Industrial Index, Emerging Markets, energy, ETF, Federal Deposit Insurance, Federal Deposit Insurance Corporation, Federal Deposit Insurance Corporation Fdic, Global Stock Markets, Government Bonds, India, Investment Program, Money Printing, Mortgage Backed Securities, Natural Resources, oil, Percentage Gain, Point Gain, Ppip, Timothy Geithner, Treasury Secretary, Troubled Assets, Us Treasury
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Fed monetization – not what it buys, but how much of anything it buys

Saturday, March 28th, 2009

This post is a guest contribution by Paul Kasriel* of Northern Trust Company.

Last week the Fed announced that it would purchase $300 billion of longer-maturity Treasury securities. The mainstream media got all excited, talking about the Fed “printing money”. But the Fed figuratively “prints money” or creates credit whenever it acquires assets – loans or investments.

For example, when the Fed purchases a mortgage-backed security, it pays for the security simply by crediting the deposit (reserve) account of the security seller’s bank. The seller’s bank, in turn, credits the seller’s deposit account. If the seller happens to be a bank, then just the bank’s reserve account gets credited.

Either way, the Fed is figuratively creating credit and, in the case when the seller of the security is a nonbank, money “out of thin air”. To create credit out of thin air, it does not matter whether the Fed purchases a mortgage-backed security or a Treasury security. Moreover, when the Fed lends to banks through its discount window, it also is creating credit out of thin air. In fact, when the Fed pays its employees, it is creating credit and money out of thin air.

Suppose the Treasury issues an additional $100 billion of securities and the Fed purchases an additional amount of mortgage-backed securities. Is the Fed “monetizing” the Treasury debt? Directly, no. Indirectly, yes. Funds are fungible. All else the same, the Treasury’s increase in the supply of securities is offset by a decrease in the amount of mortgage-backed securities as a result of the Fed’s purchase. So, the amount of securities to be held by the non-Fed public is unchanged. Indirectly, then, the Fed has monetized the increased debt issuance by the Treasury.

Getting back to the Fed’s announcement last week, not only did it say that it would purchase $300 billion of longer-maturity Treasury securities, but it also would purchase an additional $750 billion of mortgage-backed securities and an additional $100 billion of direct debt of government-sponsored agencies (e.g. Fannie and Freddie debt). So, the Fed announced “monetization” in an amount of $1.15 trillion, all else the same.

But wait, there’s more. The Fed also has begun another monetization program via the Term Asset-backed securities Loan Facility (TALF). TALF currently is permitted to provide up to $1 trillion of new credit to the financial system – thus, another $1 trillion of monetization.

From December 2007 to December 2008, Federal Reserve Bank credit more than doubled, increasing from about $877 billion to $2.2 trillion. Mama mia, that’s a lot of monetization! But a sizeable portion of the increase in Fed credit just ended up as idle excess reserves on the books of banks and other depository institutions. Federal Reserve Bank credit minus excess reserves went from $875 billion in December 2007 to almost $1.5 trillion in December 2008 (see chart below).

Just as the non-bank public’s demand for money to hold has increased in the past year, banks’ demand for “money” or reserves to hold also has increased. Had the Fed not satisfied both the banks’ and the non-bank public’s increased demand for money by creating more of it, economic activity would have been even weaker than it was.

In the coming months, the federal government is going to be increasing its debt issuance to finance its increased spending as a result of the recently-passed fiscal stimulus program. The Congressional Budget Office is forecasting a federal budget deficit for fiscal year 2009 of about $1.8 trillion. As mentioned above, the Fed is on course to create about $2.15 trillion of new credit in the months ahead.

All else the same, the Fed’s monetization of debt through the purchase of mortgage-backed securities, Treasury securities or through the TALF program in conjunction with the federal government’s increased spending will generate stronger economic activity. If the increased federal spending were being funded with increased taxes, then those paying higher taxes would cut back on their spending as the federal government increased its spending. Net, net, there would not be much increase in total spending.

The same would hold true if the federal government’s increased spending were being funded with increased Treasury debt purchased by the non-bank public and not offset by Fed purchases of some kind of debt.

But if the Fed purchases some kind of debt in amounts equal to the federal government’s increased debt issuance, then the federal government can increase its spending without any one else having to cut back on his or her spending. In the short run, this will boost real economic activity. Of course, farther down the road, this will increase the rate at which prices rise – prices of goods, services and assets. Ben Bernanke’s “money-dropping” helicopter has been replaced by a C-5 Galaxy transport!

Source: Paul Kasriel, Northern Trust – The Econtratian, March 23, 2009.

*Paul Kasriel is Senior Vice President and Director of Economic Research at The Northern Trust Company. The accuracy of the Economic Research Department’s forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul’s 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst.

Tags: Assets, Banks, Credit Loans, Debt Issuance, Investments, Mainstream Media, Maturity Treasury, Mortgage Backed Securities, Mortgage Backed Security, Northern Trust Company, Paul Kasriel, Printing Money, Prints, Thin Air, Treasury Issues, Treasury Securities, Treasury Security
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FRONTLINE: Ten Trillion and Counting

Friday, March 27th, 2009

In case you missed it, you can view last week’s PBS FRONTLINE, Ten Trillion and Counting, here:

Summary courtesy of PBS.org:

All of the federal government’s efforts to stem the tide of the financial meltdown have added hundreds of billions of dollars to an already staggering national debt, a sum that is expected to double over the next 10 years to more than $23 trillion. In Ten Trillion and Counting, FRONTLINE traces the politics behind this mounting debt and investigates what some say is a looming crisis that makes the current financial situation pale in comparison.

The journey begins as FRONTLINE correspondent Forrest Sawyer takes viewers to a secret location: the Treasury’s debt auction room, where the U.S. government sells securities backed by the “full faith and credit of the United States.” On this day, the government is auctioning $67 billion of Treasury securities. The money borrowed will be used to fund services and programs that the government cannot pay for through tax revenues alone.

Observers warn that the United States’ reliance on borrowing to fund essential programs is a dangerous gamble. For the first time, investors are beginning to question the ability of federal government to meet its growing financial obligations, and fading confidence can have dire consequences. “You might have a situation where there is one day when the government says we need to sell several billion dollars of bonds, and nobody shows,” Economist reporter Greg Ip tells FRONTLINE. “No money to pay the Social Security checks, no money to give to the states for their Medicaid programs. Cut, cut, cut, cut, cut.”

Yet more borrowing is exactly what the Obama administration plans to do: hundreds of billions to bail out the banks and other financial institutions; tens of billions more for the auto industry; $275 billion for homeowners and mortgage lenders; and a giant $787 billion stimulus package to jump-start an economy spiraling downward. Just like the Bush administration before it, Obama and his team are going to borrow big. “That’s the paradox of the situation that we’re in now,” observes Matt Miller, author of The Tyranny of Dead Ideas. “Government has got to run big deficits to stimulate the economy, deficits that would have been unthinkable … because government’s the only entity with the wherewithal to prop up a demand in the economy when businesses and consumers are all pulling back.”

Tags: Auction Room, Auto Industry, Billion Dollars, Dangerous Gamble, Financial Institutions, Financial Meltdown, Financial Obligations, Financial Situation, Forrest Sawyer, Full Faith And Credit, Medicaid Programs, Mortgage Lenders, National Debt, Pbs Frontline, Secret Location, Social Security Checks, Stimulus Package, Tax Revenues, Time Investors, Treasury Securities
Posted in Bonds, Credit Markets, Economy, Markets | Comments Off

Wall Street’s ‘Coup d’État’

Friday, March 27th, 2009

This past week’s Rolling Stone magazine presents a hard-hitting in-depth investigative article, a Wall Street expose, The Big Takeover, by Matt Taibbi. This lengthy ‘can’t stop reading this’ article presents some widely held and not-so-widely held allegations about Wall Street’s inner sanctum.

Here are some excerpts:

The global economic crisis isn’t about money – it’s about power. How Wall Street insiders are using the bailout to stage a revolution.

“It’s over – we’re officially, royally f—-d. No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline – a corporation that got rich insuring the concrete and steel of American industry in the country’s heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.”

“The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history – some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That’s $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG’s 2008 losses).”

. . .”People are pissed off about this financial crisis, and about this bailout, but they’re not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d’état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.”

“The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — “our partners in the government,” as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.”

. . .”The best way to understand the financial crisis is to understand the meltdown at AIG. AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror. This is a company that built a giant fortune across more than a century by betting on safety-conscious policyholders – people who wear seat belts and build houses on high ground – and then blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people’s money would make his dick bigger.

I. Patient Zero

That guy – the Patient Zero of the global economic meltdown – was one Joseph Cassano, the head of a tiny, 400-person unit within the company called AIG Financial Products, or AIGFP.”

. . .”In a span of only seven years, Cassano sold some $500 billion worth of CDS protection, with at least $64 billion of that tied to the subprime mortgage market.”

. . . “The CDS was popularized by J.P. Morgan, in particular by a group of young, creative bankers who would later become known as the “Morgan Mafia,” as many of them would go on to assume influential positions in the finance world.”

. . .”Cassano’s outrageous gamble wouldn’t have been possible had he not had the good fortune to take over AIGFP just as Sen. Phil Gramm – a grinning, laissez-faire ideologue from Texas – had finished engineering the most dramatic deregulation of the financial industry since Emperor Hien Tsung invented paper money in 806 A.D.”

. . .”When Morgan presented their plans for credit swaps to regulators in the late Nineties, they argued that if they bought CDS protection for enough of the investments in their portfolio, they had effectively moved the risk off their books. Therefore, they argued, they should be allowed to lend more, without keeping more cash in reserve. A whole host of regulators – from the Federal Reserve to the Office of the Comptroller of the Currency – accepted the argument, and Morgan was allowed to put more money on the street.”

Read this whole, must-read, article here.

Source: The Big Takeover, Matt Taibbi, Rolling Stone, March 19, 2009

Matt Taibbi is a jounalist and political writer, and columnist for Rolling Stone magazine.

Tags: American Household, Big Takeover, British Empire, Buffoons, Chasing The Shadow, Concrete And Steel, Coup D, Coup D Etat, Death Power, Final Three Months, Global Economic Crisis, Inner Sanctum, Insurance Giant, Investigative Article, Juice Boxes, Laughingstock, Matt Taibbi, National Decline, National Economy, Profound Symbol, Rolling Stone Magazine, Street Insiders, Timothy Geithner, Treasury Secretary
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Risk appetite rekindled on hope of better days

Friday, March 27th, 2009

Following Fed Chairman Ben Bernanke’s “nuclear option” announcement of last week, the action stayed on Capitol Hill with Treasury Secretary Timothy Geithner outlining his Public-Private Investment Program as well as “new rules of the game” for the financial services industry.

Whereas Nouriel Roubini’s reaction to the administration’s new plan to buy toxic assets was surprisingly positive, James Galbraith and Paul Krugman were not impressed. These gentlemen are included in this week’s harvest of video clips, sharing the platform with the likes of Bill Gross, Paul McCulley, John Bogle, Wilbur Ross and Jeremy Siegel.

As stock markets look set for a straight third week of gains, the debate as to the longevity of the nascent rally rages on. The featured video material sees Mark Mobius saying “the next bull market has begun”, Jeff Saut arguing the “odds are pretty good stocks have seen their lows”, but Laslo Birinyi taking a bearish stance and advising to sell stocks that gained in the rally.

The selection starts with a great discussion across the pond on the “future of capitalism” and ends with an educational clip about the ins and outs of quantitative easing.

Financial Times: Future of capitalism – London panel
“Does the financial crisis signal the end of the Reagan-Thatcher model of free markets and globalisation? FT editor Lionel Barber leads a discussion with Howard Davies, director of the London Schoof of Economics, Donald Brydon, incoming chairman of the Royal Mail, and John Studzinski, of US private equity firm Blackstone.”

Source: Financial Times, March 26, 2009.

CNBC: Geithner & toxic assets
“Treasury Secretary Timothy Geithner discusses his plan to deal with financial institutions’ toxic assets, with CNBC’s Erin Burnett.”

Part 1

Part 2

Source: CNBC, March 23, 2009.

Financial Times: Geithner’s toxic asset plan
“The government has given the financial sector what it has wanted for a long time; it will pay investors to take the toxic assets off banks’ balance sheets. But the supercharged political environment could endager the program, says FT’s Francesco Guerrera.”

Click here for the article.

Source: Francesco Guerrera, Financial Times, March 23, 2009.

CNBC: Bill Gross buys in
“Pimco is intrigued by the potential double-digit growth from the toxic asset plan, says William Gross, co-chief investment officer/founder.”

Source: CNBC, March 23, 2009.

CNBC: Market masters wigh in on the Treasury’ plan
“The economy’s performance utimately drives stock prices, with Abby Joseph Cohen, Goldman Sachs, Paul McCulley, PIMCO, John Bogle, The Vanguard Group, and Bob Doll, BlackRock.”

Source: CNBC, March 24, 2009.

PBS News: Toxic asset plan may woo investors, but long-term impact is unclear
“While markets rose Monday on details of the toxic asset plan, critics voiced concern over taxpayer risk and the need for a long-term fix to financial sector troubles. New York Times columnist Paul Krugman and Donald Marron of Lightyear Capital debate the details.”

Click here for the article.

Source: PBS News, March 23, 2009.

Bloomberg: Roubini says Geithner plan won’t stop nationalizations
“Nouriel Roubini, economist and professor at New York University’s Stern School of Business, talks with Bloomberg’s Maithreyi Seetharaman about US Treasury Secretary Timothy Geithner’s plan to remove toxic assets from the books of the nation’s banks. Roubini, speaking in London, also discusses the outlook for the meeting between the Group of 20 leaders in London.”

Source: Bloomberg, March 26, 2009.

Tech Ticker (Yahoo Finance): James Galbraith – Geithner plan “extremely dangerous”, banks “massively corrupted”
“Professor James Galbraith didn’t pull any punches on TechTicker this morning. He hates the Geithner plan, calling it ‘extremely dangerous’. He says the banks may game the plan to bid up the prices for their own crap assets and that getting bad assets off their books won’t get them lending again. Like Paul Krugman, Galbraith thinks the FDIC should just put the banks into receivership and have the banks’ subordinated bondholders pick up some of the cost of restructuring them.

Part 1: Getting crap assets off bank books won’t save economy

Part 2: Massive corruption

Source: Tech Ticker, Yahoo Finance, March 23, 2009.

CNBC: EU politician slams US economic recovery plan
“A top EU official slams the US economic recovery plan, calling it a way to hell, reports CNBC’s Carolina Cimenti.”

Source: CNBC, March 25, 2009.

CNBC: Ross: Due diligence integral to success of US plan
“The key issue would be how much due diligence the US government allows private investors to conduct in its toxic asset plan, says Wilbur Ross, chairman & CEO of WL Ross & Co. He speaks with CNBC’s Martin Soong & Sri Jegarajah.”

Source: CNBC, March 23, 2009.

Financial Times: “New rules of the game”
“Treasury secretary Tim Geithner’s regulatory overhaul is ambitious, but the question is whether he can follow through, says FT’s Helen Thomas.”

Source: Financial Times, March 26, 2009.

CNBC: Restoring investors’ trust
“The stress test on banks is an essential step in restoring trust for investors, says Jeremy Siegel, Wharton School at The University of Pennsylvania professor of finance.”

Source: CNBC, March 26, 2009.

CNBC: AIG hearing – Timothy Geithner’s statement
“Treasury Secretary Timothy Geithner says AIG’s failure would have caused catastrophic damage.”

Source: CNBC, March 24, 2009.

CNBC: AIG Hearing – Ben Bernanke’s statement
“Fed Chairman Ben Bernanke discusses the importance of bailing out AIG.”

Source: CNBC, March 24, 2009.

Bloomberg: FDIC’s Bair says goldman should return US aid if able
“Federal Deposit Insurance Corp. Chairman Sheila Bair talks with Bloomberg’s Kathleen Hays about the possible return of government bailout funds by Goldman Sachs Group. Goldman Sachs is talking with US regulators about repaying the $10 billion it received from the government by mid-April, a person familiar with the matter said. Bair also discusses Treasury Secretary Timothy Geithner’s plan to remove toxic assets from the books of US banks.”

Source: Bloomberg, March 24, 2009.

Charlie Rose: An update on the economy with Krugman et al
“An update on the economy with Paul Krugman, Joe Nocera and Andrew Ross Sorkin.”

Source: Charlie Rose, March 23, 2009.

John Authers (Financial Times): Credit market gloom
“Perhaps the greatest cause for concern amid the equity rally is that credit markets, the target of all the rescue operations, are still working on the assumption of absolute disaster, says John Authers.”

Click here for the article.

Source: John Authers, Financial Times, March 27, 2009.

60 Minutes: President Barack Obama
“From the AIG bonuses, to the economic meltdown, to the war in Afghanistan, it has been an eventful two months in office for President Obama. Steve Kroft has the behind-the-scenes interview.”

Part 1

Part 2

Source: 60 Minutes, March 22, 2009.

Bloomberg: Mobius says stocks at beginning of a bull market
“The next bull market has begun and there are bargains in every emerging market following a record slump in stocks, Templeton Asset Management’s Mark Mobius said.”

Click here for the article.

Source: Bloomberg, March 23, 2009.

Bloomberg: Saut says odds “pretty good” stocks have seen their lows
“Jeffrey Saut, chief investment strategist at Raymond James & Associates, talks with Bloomberg’s Julie Hyman about the outlook for US stocks. Saut, speaking from St. Petersburg, Florida, also discusses the Treasury’s Public-Private Investment Program and financial stocks.”

Source: Bloomberg, March 23, 2009.

Bloomberg: Laszlo Birinyi – sell stocks that gained in rally
“Laszlo Birinyi, president of Birinyi Associates, talks with Bloomberg’s Betty Liu about his equity investment strategy. Birinyi, speaking from Westport, Connecticut, says investors who own stocks that rose as the Standard & Poor’s 500 Index rallied 20% since March 9 should consider selling them.”

Source: Bloomberg, March 26, 2009.

John Authers (Financial Times): Reading copper leaves
“Recovering commodity prices may signal that we have reached the bottom of this bear market.”

Click here for the article.

Source: John Authers, Financial Times, March 24, 2009.

Financial Times: Benita Ferrero-Waldner on eastern Europe
“Benita Ferrero-Waldner, the EU’s external affairs commissioner, says eastern Europe is important to the European Union. Ms Ferrero-Waldne also says the EU must re-engage in a broad dialogue with Russia to avoid another energy crisis.”

Source: Financial Times, March 23, 2009.

Marketplace: Quantitative easing
“Now the Federal Reserve has effectively cut the target lending rate to zero, it only has one more weapon in its arsenal. Quantitative easing. Senior Editor Paddy Hirsch explains what this ‘nuclear option’ is, and what the Fed hopes it’ll do.”

Source: Marketplace (via Vimeo), December 2008.

Tags: Ben Bernanke, Bill Gross, Birinyi, Cnbc, Galbraith And Paul, Howard Davies, Incoming Chairman, James Galbraith, Jeremy Siegel, John Bogle, John Studzinski, Lionel Barber, Nouriel Roubini, Paul Krugman, Paul McCulley, Private Equity Firm, Risk Appetite, Royal Mail, Timothy Geithner, Treasury Secretary, Wilbur Ross
Posted in Bonds, Emerging Markets, Gold, Markets, Outlook | Comments Off

Howard Marks: Will it Work?

Thursday, March 26th, 2009

Howard Marks’ letters to Oaktree Capital investors have become as highly renown and anticipated by the investment community as those of Warren Buffett, particularly to denizens of the debt market. Oaktree runs about $50-billion in assets including high yield debt, convertible bonds, distressed debt, private equity, real estate, and about 1.2-billion in equities.

Marks’ March letter is now available; in it Marks discusses the Fed and the government’s plans to get the economy and the credit market functioning normally again, and what the likelihoods are in his highly-esteemed view.

Here are some excerpts:

The other day, my son Andrew – college senior and credit-analyst-to-be – asked whether I think Treasury Secretary Geithner is doing the right things. As has happened before, his question elicited a fatherly response that grew into this memo.

Solutions in economics aren’t nearly as dependable as engineers’ calculations, and there may not be a tool that’s just right for fixing an economy. Of course, the toolbox offers lots of possibilities, including interest rate reductions; quantitative easing; tax cuts, rebates and credits; stimulus checks; infrastructure spending; capital injections; loans, rescues and takeovers; regulatory forebearances and on and on. But no one should think there’s a “golden tool,” such that solving the problem is just a matter of figuring out which one it is and applying it. Anyone who holds the problem solvers to that standard is being unfair and unrealistic. There are a number of reasons why, including these:

· Every situation is different, and none is exactly like any that has come before. That means fixed recipes can’t work. Certainly this one has never been seen before.
· Most policy actions aren’t all good or all bad. They merely represent imperfect compromises as to ideology, goals, problem solving and resource allocation.
· Economic problems are multi-faceted, meaning the solution for one aspect might not work on – and in fact might exacerbate – another aspect.
· Economies are dynamic, and the problems are moving targets. The environment changes constantly, rather than sitting still and waiting for a solution to work.
· The main ingredient in economics is psychology, and the workings of psychology clearly can’t be fully known, controlled or fixed.

. . .The Bottom Line

There are so many moving parts to the current situation – and to its causes and what we hope will be its solution – that I’ve tried to boil things down to the essentials. In order to right the system and get the economy moving forward again, I think three main things have to be accomplished:

· Our economy and its component parts have to be delevered;
· The vast destruction of capital has to be dealt with; and
· Confidence has to be restored.

. . .Debt has to be reduced, and it’s happening (other than at the federal level, of course). But the way it happens is usually unpleasant: bankruptcies, foreclosures and debt restructurings. “Debt reduction” sounds like a good thing, but it’s likely to be accompanied by the painful loss of the assets that had been bought with borrowed money.

Many assets are worth far less than they used to be – that’s one of the main reasons why the debt load has become unbearable and has to be reduced. Investors, consumers, homeowners and financial institutions will have to rebuild their capital as they – and the economy – attempt to again move ahead.

And confidence has to be rebuilt, too. The willingness to borrow, spend and invest will rebound only when people believe incomes and asset values will resume their growth.

To read the complete letter, click here.

Source: Howard Marks, Oaktree Capital

About Oaktree:
Oaktree was founded in April 1995 by Howard Marks, Bruce Karsh, Steve Kaplan, Larry Keele, Richard Masson and Sheldon Stone. These Oaktree principals joined together beginning in the mid-1980s to manage high yield bonds, convertible securities, distressed debt and principal investments.

Today, Oaktree is comprised of nine principals and over 530 staff members in Los Angeles (headquarters), New York, Stamford (Connecticut), Amsterdam*, Frankfurt, London, Luxembourg*, Paris, Beijing, Hong Kong, Seoul, Shanghai, Singapore and Tokyo.

About Howard Marks
From the rise of junk bonds to the dot-com collapse to today’s economic crisis, Howard Marks has ridden the ups and downs of the financial markets.

From the day he began his professional career in 1969, Marks has been deeply immersed in sophisticated financial instruments. As the high-yield bond manager for Citibank starting in the late 1970s, he was one of Michael Milken’s first customers. In 1985, he became chief investment officer of investment titan TCW Group Inc., based in downtown Los Angeles. And with several decades of experience under his belt, Marks set out on his own in 1995 and founded Oaktree Capital Management LLC with a handful of TCW executives.

The firm, which now boasts a $55 billion investment portfolio, has become one of the elite investment firms in the Western United States. In building Oaktree into an investment powerhouse, Marks has amassed his own fortune. On the Business Journal’s annual list of the wealthiest Angelenos, Marks ranked No. 29 with an estimated net worth of $1.5 billion, though he acknowledges he’s taken a major hit as a result of the financial crisis.

These days, the 62-year-old Marks is more interested in dispensing his wisdom on the markets than in actively managing portfolios. He oversees the direction of the firm, but spends a good deal of his time penning closely watched memos on the state of the financial industry. Marks recently met with the Business Journal in the firm’s downtown offices to discuss his life, career and the chaos in the markets.

Read more: “Interview with Oaktree Co-Founder Howard Marks – Stephen’s Posterous” – http://stephenlaughlin.posterous.com/interview-with-oaktree-co-foun#ixzz0AvAbB9aP

Tags: Andrew College, Array, Capital Injections, Capital Investors, Compromises, Convertible Bonds, Credit Analyst, Debt Market, Denizens, Distressed Debt, Economic Problems, Geithner, Interest Rate Reductions, Investment Community, Main Ingredient, Moving Targets, Policy Actions, Private Equity, Problem Solvers, Renown, Resource Allocation, Son Andrew, Takeovers, Treasury Secretary, Warren Buffett
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