Routinely “Under Water”

Monday, November 30th, 2009

Investors, fondly recalling the October 2007 high in the U.S. stock market, are undoubtedly anxious to see a full recovery of their capital. This is understandable. The promise of equities is clear - they offer the potential for growth as corporate profits increase over time in response to growing revenues and improved productivity. As illustrated below, $1.00 invested in U.S. large cap stocks on January 1, 1926 was worth $2,394 at the end of October 2009, after factoring in the reinvestment of dividends.

It is this ascending graph, featured in endless sales presentations during the last bull market, which enticed so many investors. “Stocks for the long-run” is the common mantra.

Unfortunately, this graph obscures a harsher reality. Over this almost 84-year history, U.S. large cap stocks experienced 105 periods where a drawdown occurred (i.e. where the value fell below its prior peak as measured at month-end) – about once every 10 months. And although the average decline from peak to trough was just -6.9%, there were eight periods where the decline was greater than -20% (see Table I at the end of the Commentary). The mother of all declines was the 83% plunge in the Great Depression followed by the recent 51% drawdown just endured from October 2007 through February 2009.

The average time from peak to trough was just three months, although this ranged from as little as a month to the 34 month decline at the outset of the Great Depression. Recoveries took longer – four months on average. The deeper the decline, however, the longer the recovery. Where the decline was in excess of -20%, it took an average of three and half years to recover.

As a result, investors spend the vast majority of the time with the value of their stock holdings below their prior high. In fact, as illustrated in the following chart, since 1926 investors in U.S. large cap stocks spent 33% of the time watching the values of their stock portfolio fall, 38% of the time watching them recover and only 29% of the time watching them hit new highs.

Source: Tacita Capital. Based on month-end values with dividend reinvestment.

What about adding bonds? Surely, a balanced approach will yield more inspiring results. Unfortunately, this is true only to a degree. In fact, a balanced investor with a portfolio comprised of 35% intermediate-term U.S. government bonds and 65% large-cap U.S. stocks endured 120 periods of drawdown, nearly 15% more than the stock only investor. The average decline period was the same – three months.

Where a balanced investor wins out is that their average decline was less: –4.4% versus -6.9% for the “stock only” investor. The ferocious bear markets were all buffered to a degree by the bond allocation (see Table II at the end of the Commentary). Also, the average recovery period was faster by a month.

However, on the measure of month-end portfolio experience, there was not much of a difference. As illustrated below, balanced investors spent 34% of the time watching their portfolios fall in value, 31% watching them recover and only 35% enjoying new highs.

Source: Tacita Capital. Based on month-end values with dividend and interest reinvestment.

Investors need to be aware that when measured against the previous high, their portfolio will be spending the majority of the time “under water.” Also, the greater the decline, the longer the period of submergence. Understanding the inevitability of this disheartening experience may make it a little easier to bear. A wiser approach is to take a longer-term view and compare today’s value against prior lows as well as prior highs. Markets are cyclical; performance comparisons need to recognize this reality.

Table I – Worst “Stock Only” Drawdowns

*Recovery duration includes the first month exceeding the prior high.

Table II – Worst Balanced Portfolio Drawdowns

*Recovery duration includes the first month exceeding the prior high.

Tacita Capital Inc. (”Tacita”) is a private, independent family office and investment counselling firm that specializes in providing integrated wealth advisory and portfolio management services to families of affluence. We understand the challenges of affluence and apply the leading research and best practices of top financial academics and industry practitioners in assisting our clients reach their goals.

Tacita research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it and is not intended to replace individually tailored investment advice. The asset classes/securities/instruments/strategies discussed may not be suitable for all investors and certain investors may not be eligible to purchase or participate in some or all of them. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Tacita recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor.

Tacita research is prepared for informational purposes. Neither the information nor any opinion expressed constitutes a solicitation by Tacita for the purchase or sale of any securities or financial products. This research is not intended to provide tax, legal, or accounting advice and readers are advised to seek out qualified professionals that provide advice on these issues for their individual circumstances.

Tacita research is based on public information. Tacita makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to inform any parties when opinions, estimates or information in Tacita research changes.

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Tags: 10 Months, Average Decline, Cap Stocks, Corporate Profits, Declines, Dividends, Drawdown, Four Months, Graph, Great Depression, Half Years, January 1, Mantra, Outset, Plunge, Sales Presentations, Stock Holdings, Stock Portfolio, Trough, U S Stock Market
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Jim Rogers on Gold’s Allure

Monday, November 30th, 2009

Maria Bartiromo writes about Jim Rogers thoughts in BusinessWeek:

I was on assignment in Singapore on Nov. 24 when gold hit an all-time high of $1,174 an ounce. That was fortuitous because Singapore is the home base of commodities guru Jim Rogers, creator of the Rogers International Commodities Index. Meantime, back in the U.S., reports were surfacing about growing discontent in the halls of Congress over the performance of Treasury Secretary Tim Geithner and the possibility he might be replaced by JPMorgan Chase (JPM) CEO Jamie Dimon. When I rang up Rogers, he was his usual low-key self, with quiet opinions about the future of gold prices, commodities to watch, and why Obama should dump Geithner.

Jim Rogers on Why Gold Is Glittering So Brightly, BusinessWeek, November 25, 2009

Tags: Advertisement, Allure, Businessweek, Ceo, Commodities, Congress, Discontent, Gold, Gold Commodities, Gold Prices, Gold Watch, Guru, International Commodities Index, Jamie Dimon, Jim Rogers, Jpm, Jpmorgan Chase, Maria Bartiromo, Ounce, Rogers International Commodities Index, Singapore, Tim Geithner, Treasury Secretary
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The World According to Americans

Monday, November 30th, 2009

A humorous look at the world from an American perspective.

Tags: American Perspective, Look At The World
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Why American Consumers Will Spend Lavishly Again

Monday, November 30th, 2009

Via Harvard Business -An excerpt:

Let me introduce you to Susan Householder.* Here she is, standing in the entrance of her garage in a middle class suburb of Ridgefield, New York. She is surveying a mountain of stuff: bicycles, toboggans, a work bench, exercise equipment, canned goods, Christmas decorations, a picnic hamper, board games, lots of wrapping paper, several boxes of stem ware, and lots and lots of containers, contents unknown. There’s so much stuff here, this ceased to be a garage a long time ago. It’s now a storage locker, Susan’s very own U-Store-It. (Cars are consigned to the drive way.) If we wanted a monument to all the spending Susan did in the 00s, this is it.What created this mountain of stuff? Was it irrational exuberance and cheap money? It was not. This crowded garage springs from cultural motives. These things were not purchased to express vanity or pursue status. They were purchased to help Susan build a life.

Source: Harvard Business

Tags: American Consumers, Bicycles, Board Games, Business Advertisement, Canned Goods, Cheap Money, Christmas Decorations, Christmas Hamper, Class Suburb, Excerpt, Exercise Equipment, Harvard Business, Householder, Irrational Exuberance, Life Source, Middle Class, Motives, Mountain Bicycles, Picnic Games, Picnic Hamper, Storage Locker, Vanity, Work Bench, Wrapping Paper
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Dubai – floating on an island of debt

Monday, November 30th, 2009

This post is a guest contribution by Dian Chu*, market analyst, trader and author of the Economic Forecasts and Opinions blog.

Stock markets around the world cracked on Friday with the Dow Jones industrial average down more than 150 points (Fig. 1), and commodities plunging as Dubai debt woes unnerved investors, and sent tremors of uncertainty throughout all markets.

The crisis flared after Dubai, a part of the United Arab Emirates (UAE) federation, asked to delay interest payment for six months on $60 billion of debt issued by the state-run conglomerate Dubai World and its main property unit Nakheel.

Concerns that a government-backed investment company risked default ripped through world markets. Investors read it as a sign of yet another sovereign implosion after Iceland and Ireland, and recoiled from risk and piled into dollars.

Las Vegas on Steroids

Dubai World has served as Dubai’s main driver of growth, operating ports, transportation groups, spearheading real-estate & infrastructure projects both at home and abroad. Its real-estate subsidiary Nakheel built Dubai’s iconic palm-tree-shaped island, packed with luxury villas and hotels, many still under construction. Real estate and construction accounts for about 23% of Dubai’s GDP.

With little oil, Dubai financed much of this rapid real estate development with debt. After incurring its estimated $80-$90 billion of debt in a four-year construction boom to transform its economy into a regional financial and tourism hub, Dubai suffered the world’s steepest property slump in the first global recession since World War II.

Deutsche Bank estimates that Dubai’s property prices, both commercial and residential, have halved since August last year, and could fall a further 15-20% this year.

U.S. Banks Less Exposed

Most analysts believe U.S. banks are probably less exposed than European rivals to a potential debt default by Dubai World, but a lack of transparency and the interconnection of the modern financial system make it difficult to know which institutions are ultimately exposed.

Dubai World’s largest creditors are reportedly domestic banks in Dubai and Abu Dhabi. MarketWatch noted data from the Bank for International Settlements which put cross-border banking exposure for the UAE as a whole at $123 billion at the end of June. Of that total, European banks hold 72%, with the United States and Japan only holding 9% and 7% of the exposure, respectively. The United Kingdom is by far the biggest creditor with a share of 41%.

Reminder of Other Risks

On a global scale, Dubai World’s debt problem seems relatively minor, but it illustrates the impact from one tiny country in an increasingly interconnected world. The Dubai news also cast doubt over the strength of the U.S. economic recovery, and the prospects for a bottoming of property prices.

Commercial Real Estate

As pointed out in my previous article that the commercial real estate sector posed a much greater threat than the over-hyped “mother of all carry trades.”  The Dubai debt crisis further reinforces this viewpoint.

The potential for contagion from Dubai’s debt woes could further unhinge an already fragile U.S. commercial real estate sector, whose values have already fallen 42.9% from their 2007 peak, close to the lowest since 2002, according to Moody’s. (Fig. 2) The latest Moody’s projection is for prices to bottom at 45-55% below their peak, but could drop as mush as 65% from their peak in a “stress case”.

As commercial property values fall, debt defaults rise. The $3.4 trillion outstanding in debt backed by commercial real estate poses a real threat to the recovery. Trepp LLC reported that last month, delinquencies on U.S. commercial real estate loans that were packaged into commercial mortgage-backed securities reached 4.8%, more than six times the year earlier level. Hotel loans, at 8.7% distressed, have begun falling into delinquency faster than any other kind of commercial real estate debt.

Write-downs and losses at banks around the world have risen to more than $1.7 trillion since 2007 as the credit crisis undermined the value of assets owned by financial institutions, according to data compiled by Bloomberg. Any further deleveraging and the resulting credit tightening from commercial real estate would impede the financial sector and probably derail the U.S. economy sending it into another recession.

Housing Market Mortgage Crisis

So far, the appearance of recovery in the housing sector is being driven primarily by reduced prices combined with federal programs to lower mortgage rates with the goal of bringing more buyers into the market.

Based on a study released by Zillow.com, the foreclosure crisis has moved beyond subprime mortgages and into the prime mortgage market. (Fig. 3) While subprime borrowers are still a factor in the current foreclosure epidemic, it’s becoming increasingly apparent that the weak labor market is the driving force behind the mortgage crisis we face today.

According to the Mortgage Bankers Association, one in seven U.S. home loans was past due or in foreclosure as of Sept. 30, putting that quarterly delinquency measure at its highest level since the report’s inception, 1972, and up from one in ten at the beginning of the year.

The continued surge in delinquencies suggests that a recovery in the housing market could be hindered by the weak job market as well as by further fallout from the easy money and loose lending practices of the past. The foreclosures and delinquencies are expected to keep rising well into 2010, not leveling off until the unemployment rate starts to moderate.

In a study by First American CoreLogic found that one in four of all U.S. mortgage-borrowers owe more than the value of their properties in the 3rd quarter. And many experts didn’t expect U.S. home prices to hit bottom until early 2011, perhaps falling another 5-10%, as more foreclosures get pushed onto the market.

Negative equity is another outstanding risk hanging over the mortgage market.

Dubai Is No Lehman

The circumstances behind Dubai’s moves are murky, making it hard to gauge the exact risk to the pertaining bonds and Dubai’s own general creditworthiness. UBS cautioned that Dubai’s overall debt “might be higher than the generally assumed $80 billion to $90 billion, due to potential off-balance sheet liabilities. These could include unlimited and unquantifiable amount of credit default swaps (CDS) and other derivatives against the underlying assets, and once unraveled, could potentially erupt into a subprime-like crisis.

The current expectation; however, is that there’s a good chance that Dubai’s problems will probably prove a local issue. Most likely, Dubai, or its neighboring emirate, Abu Dhabi, won’t risk tarnishing their images and reputation further, and will come up with a reasonable resolution.

Even if Dubai goes into sovereign default, the amount is probably not enough on its own to threaten the financial system since any actual losses would be a fraction of the total. So, the problems in Dubai are unlikely to be as serious as last year’s Lehman Brothers collapse, nor is it a reflection on the ability of emerging markets to lead a global economic recovery.

Rational Expectations?

But Dubai could well spur a broader crisis of investor confidence in overly leveraged economies as market confidence world-wide is still fragile from the severity of the financial crisis.  The debts of many emerging markets have risen even further as the countries governments have fought the ravages of the global recession by issuing more stimulus debt to fill the gap voided by private investment.

The spread of credit-default swaps on developing-nation’s bonds jumped 14 basis points after the Dubai news broke, the most in a month, to 3.24 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index. There is also a clear sign of potential contagion effects of global risk aversion on basically all risky assets, with the dollar and yen being the prime beneficiaries.

Rational expectations or not, for now, the Dubai crisis is simply a reminder that the severe global recession has relegated much debt to near junk status, and there still remains a high degree of uncertainty as to the percentage recoverable on all outstanding debt which is going to be coming due over the next 5 years.

Despite some seminal signs of green shoots in the news headlines during this 9 month liquidity driven rally in many asset classes around the globe, we should be reminded that all that glitters is not gold, and that the global economic recovery is still on shaky ground.

*Dian Chu, Market analyst, trader and financial writer for Seeking Alpha, Zero Hedge, Daily Marksts, iStockAnalyst & StraightStocks. My articles also appear in Reuters, USA Today and BusinessWeek, etc. Professional credentials include M.B.A., C.P.M. and Chartered Economist with extensive professional experience in market segment forecasting and strategies. Previous employers include Enron, Time Warner & Clear Channel. I’m currently working in the U.S. for the energy sector.

Source: Dian Chu, Economic Forecasts & Opinions, November 28, 2009.

Tags: Commodities, Construction Boom, Debt Default, Debt Woes, Dian, Dow Jones, Dow Jones Industrial Average, Economic Forecasts, Emerging Markets, European Rivals, Global Recession, Gold, Implosion, Infrastructure Projects, Interconn, Interest Payment, Luxury Villas, Market Analyst, oil, Palm Tree Shaped Island, Tourism Hub, Transportation Groups, United Arab Emirates, World War Ii, Year Construction
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Words from the (Investment) Wise (November 29, 2009)

Sunday, November 29th, 2009

As shoppers were emptying their purses on Black Friday bargains, Dubai’s attempt to reschedule its debt roiled financial markets, plunging risky assets into the red. The government of Dubai requested a six-month payment freeze on the $59 billion debt issued by Dubai World - a state-owned conglomerate that has become known for its extravagant real estate projects.

Worries about Dubai’s debt woes rattled investors’ confidence, precipitating a sell-off in equities, high-yielding corporate bonds, commodities and the Baltic Dry Index, while mature-market government debt, the US dollar and the Japanese yen attracted safe-haven buyers. On Thursday and Friday, many emerging-market and high-yielding currencies declined sharply.

A fact not widely known is that Dubai has the worst debt per capita in the world. Ah well …

Source: Peter Brookes, Times Online

The credit-rating agencies promptly downgraded Dubai’s government-related debt and the cost of insuring against default jumped across the United Arab Emirates (UAE) region. As shown in the Bloomberg screenshot below, courtesy of Bespoke, the price of Dubai’s sovereign debt credit default swap (CDS) last week spiked up to 541 basis points. “Now that global markets have stabilized and exited crisis mode, an isolated event in Dubai where default risk doesn’t even spike to its 2009 highs [of almost 1,000 basis points] has caused a global market selloff,” remarked Bespoke.

Source: Bespoke, November 27, 2009.

Geoffrey Yu, strategist at UBS, said (via the Financial Times): “Although the majority of market observers believe the problems in Dubai are not insurmountable, the wider fallout has simply revealed how fragile markets are - and risk appetite may not be as strong as previously assumed, regardless of how profligate central banks globally have been in providing liquidity.”

Also as reported by the Financial Times, Julian Jessop of Capital Economics argued that Dubai’s move was unlikely to affect the positive outlook for emerging markets in the longer term: “We do not believe the events in Dubai mark a new phase in the global crisis. But if they are the catalyst for a more selective approach to investment, that might be no bad thing.”

In terms of banks’ exposure to Dubai, JPMorgan Chase comments (via The Big Picture) that the Royal Bank of Scotland underwrote more Dubai World loans than any other institution. In terms of capital at risk, HSBC has the largest exposure to the UAE.

The past week’s performance of the major asset classes is summarized by the chart below. Gold bullion (not shown on the graph) touched a record high of $1,194.90 on Thursday before tumbling to $1,136.80, but subsequently recovered to close 2.4% up for the week at $1,177.63. Similar volatility was seen in the oil price, with West Texas Intermediate Crude declining by more than $5 at one point on Friday, but later regaining some ground to end the week 1.8% down at $76.05.

Source: StockCharts.com

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

The MSCI World Index (-0.1%) last week marked time, whereas the MSCI Emerging Markets Index (-2.5%) experienced more selling from risk-averse investors. However, the aggregate indices mask greatly varying performances. For example, among mature markets the Japanese Nikkei 225 Index (-4.4%) recorded a fifth consecutive down-week, suffering from the strong Japanese yen that recorded a 14-year low versus the US greenback. On the other hand, the Brazillian Bovespa Index (+1.1%) and the Russian Trading System Index (+1.8%) bucked the broader downtrend among emerging markets.

As far as the US indices are concerned, Friday’s losses wiped out the gains from earlier in the week, reversing a new recovery high of 10,464 made by the Dow Jones Industrial Index on Wednesday. By the close of the Thanksgiving-shortened week on Friday, the S&P 500 Index remained unchanged on the week, whereas the other major indices experienced a second down-week. Five of the ten economic sectors (as measured by the SPDR exchange-traded funds) closed higher for the week, with Telecoms (+1.8%), Health Care (+1.3%) and Utilities (+0.9%) outperforming, and Financials (-2.2%) in the red.

The year-to-date gains in the US remain firmly in positive territory and are as follows: Dow Jones Industrial Index 17.5%, S&P 500 Index 20.8%, Nasdaq Composite Index 35.6% and Russell 2000 Index 15.6%.

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

Top performers among stock markets this week were Bangladesh (+5.7%), Ecuador (+4.3%), Kuwait (+3.4%), Kenya (+2.1%) and Estonia (+1.9%). At the bottom end of the performance rankings, countries included Cyprus (‑15.6%), Vietnam (-11.7%), Serbia (-8.8%), China (-6.4%) and Greece (‑6.2%). The declines in the Shanghai Composite Index came in the wake of a warning by China’s banking regulator that it would refuse approvals for expansion and limit banking operations if lenders did not meet new capital adequacy requirements.

Of the 98 stock markets I keep on my radar screen, 30% recorded gains (last week 39%), 65% (58%) showed losses and 5% (3%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included United States Natural Gas Fund (UNG) (+10.0%), Rydex S&P Equal Weight Utilities (RYU) (+3.0%), Currency Shares Japanese Yen (FXY) (+2.6%), PowerShares DB Gold (DGL) (+2.5%) and Vanguard Extended Duration Treasury (EDV) (+2.5%).

At the bottom end of the performance rankings, ETFs included iShares MSCI Turkey Investible Market (TUR) (-5.6%), SPDR S&P Emerging Europe (GUR) (-5.4%) and Market Vectors Russia (RSX) (-4.9%).

Referring to the bull market in gold, the quote du jour this week comes from Richard Russell, 85-year-old author of the Dow Theory Letters. He said: “There’s still loads of scepticism about the rising price of gold and the bull market in gold. It’s been so long since the US public (since 1971) realized gold was real Constitutional money that they don’t know what to make of the gold action. They think gold near $1,200 an ounce is expensive and they’d rather have dollar bills.

“I’ve coined the phrase, ‘dollar-bugs’ for these ignorant Americans. I guess they’ll have to get educated the hard way, which means holding on to their fading Federal Reserve Notes, no matter what. As far as I’m concerned, it’s an amazing example of mass brainwashing. ‘Hey, I’d rather have junk paper turned out by the Fed than the real thing - gold.’ Pathetic. And the happy thought is that you can (legally) still swap your junk fiat paper for gold.”

Still on the topic of gold, Ian McAvity (Ian McAvity’s Deliberations) said: “Gold bubble? I regard such talk as nonsense … Gold is about 52% higher than the peak weekly average price of January 1980. The US CPI is 177% higher, US M-2 Money Supply is 464% higher, and the S&P is 892% higher. I don’t think it untoward to suggest gold is badly lagging a number of important yardsticks and at these levels has some catching up to do.”

In other news, MarketWatch reported that the number of distressed banks in the US rose to the highest level in 16 years in the third quarter. The Federal Deposit Insurance Corporation’s (FDIC) Deposit Insurance Fund, which is used to protect depositors, swung to an $8.2 billion loss in the third quarter, the largest drop since the savings-and-loan crisis of the 1990s.

Separately, according to MarketWatch, rates on 30-year fixed-rate mortgages averaged 4.78% last week, matching April’s all-time low of in Freddie Mac’s weekly survey of conforming mortgage rates. The mortgage rate averaged 5.97% a year ago.

Next, a quick textual analysis of my week’s reading. This is a way of visualizing word frequencies at a glance. There is nothing specific to report here, other than that “gold” and “banks” are still prominent and “Dubai” is making an appearance.

Back to the stock markets: The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town) are given in the table below. With the exception of the Russell 2000 Index and the Bombay Sensex Index, the indices in the table are all trading above their 50-day moving averages, with all the indices also above their respective 200-day moving averages.

However, many stock markets have already fallen to below their 50-day lines (not shown on this table, but indicated on the performance table higher up), pointing to possible further weakness. Also, the Japanese Nikkei 225 Index last week became the first major market to breach its key 200-day moving average, pointing to a very weak technical picture.

The October lows are also given in the table. A break below these levels would indicate a reversal of the uptrend since March, i.e. reversing the progression of higher-reaction lows.

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

In addition to having retraced 50% of their bear market declines, the Dow Industrial and S&P 500 are up against significant medium-term downward trend lines. Also, negative divergences have been showing up in a number of breadth indicators, financial stocks and small caps, suggesting a more cautious tone.

According to Bespoke, last week’s sentiment survey from Investors Intelligence showed bullish sentiment among newsletter writers was near its highest levels since the March lows (50.6%), while bearish sentiment is at a five-year low (17.6%). This puts the spread between bulls and bears at 33, which is the highest level since December 2007. “High levels of bullish sentiment are typically considered contrarian, but we would note that sentiment can remain bullish for extended periods of time with little impact on the market. While it is true that markets typically peak when bullish sentiment is high, however, high levels of bullish sentiment don’t necessarily mean an imminent decline,” said Bespoke.

Source: Bespoke, November 25, 2009.

Casting his eye on 2010, Eoin Treacy (Fullermoney) said: “Most markets rallied from deeply oversold levels this year and have posted impressive advances since March. It is unreasonable to expect the same type of performance to be repeated next year. Nevertheless, monetary conditions are unlikely to pose a headwind and the environment is likely to remain largely bullish despite the potential for swift mean reversion in markets somewhat overextended relative to their 200-day moving averages.”

In my opinion, stock markets have run too far too fast - driven by an avalanche of liquidity - and they have moved out of alignment with economic and earnings growth that may not live up to the expectations being priced into equity valuations. I will bide my time while the fundamentals play catch-up.

For more discussion on the economy and financial markets, see my recent posts “Dubai’s latest mega-project - a massive default?“, “Japanese Nikkei 225 nosedives“, “Gold ETF makes it 9 up-days in a row“, “Gold bullion - overdue for a pullback?“, “Ritholtz: “Buy and hold” is a disaster“, “Charlie Rose in conversation with Barton Biggs“, “Picture du Jour: Will emerging-market outperformance last?” and “WealthTrack: Robert Kleinschmidt - reveling in contrarian investment philosophy“.

Twitter and Facebook
I regularly post short comments (maximum 140 characters) on topical economic and market issues, web links and graphs on Twitter. For those readers not doing so already, you can follow my “tweets” by clicking here. You may also consider joining me as a friend on Facebook.

Economy
“There has been no meaningful change in global business sentiment during the past three months. Since mid-August, business confidence has been consistent with a tentative global economic recovery,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses have remained consistently more upbeat about the outlook than their assessment of current conditions. Sales and hiring are soft, as are pricing and inventories. South American businesses and professional service firms are the most positive and North Americans and those working in government generally the most negative.”

Source: Moody’s Economy.com

Purchasing managers indices for the 16-country Eurozone region showed private sector activity expanding this month at the fastest pace in two years, led by France and Germany, reported the Financial Times. The composite index, covering Eurozone services and manufacturing, reached 53.7 in November, up from 53.0 in October, making it the fourth consecutive month of expansion.

As far as hard data are concerned, Germany’s economy expanded again in the third quarter of 2009. GDP rose by 0.7% on a seasonally adjusted basis from the previous quarter, when it expanded by a revised 0.4%. Economic activity was boosted by inventory restocking and spending on machinery and equipment.

Concerns remain about the pace of the global economic recovery, and therefore how quickly governments and central banks should withdraw emergency support measures. According to the Financial Times, Mr Strauss-Kahn, managing director of the International Monetary Fund, said the global economy stood at the cusp of recovery but remained vulnerable to shocks and policy missteps. Fiscal and monetary stimulus programs should not be stopped too soon, he said.

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

Tuesday, November 24
• Minutes of November 3-4 FOMC Meeting - spots of optimism are visible, concerns about dollar, commercial real estate loans, and low interest rates are noticeable
• Widespread revisions of Q3 GDP
• Home prices - signs of stability remain in place
• Consumer Confidence Index moves up slightly

Monday, November 23
• Low mortgage rates and tax credit lift sales of existing homes

A very handy graph to assess the current state of the US economy comes courtesy of Russell Investments. Click here to link to the interactive version.

Source: Russell Investments, November 22, 2009.

The minutes of the Federal Open Market Committee’s (FOMC) November 3-4 meeting point to continued aggressive monetary policy in the near term. Although participants agreed that the recession was over, they expected the unemployment rate to remain elevated and the inflation rate to remain below the central bank’s optimal level. Participants expected economic growth to slow a bit in 2010 and then pick up again after that.

On the topic of the magnitude of the US economic recovery, David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, provided the following interesting snippet:

“The recession in the US may be over, but what sort of recovery lies ahead remains in question. All we can say is that when looking at what is normal in the context of a post-recession rebound during the post-WWII era, the first quarter of growth is closer to 7.3% at an annual rate, not 2.8% as we just saw in the latest real GDP estimate - the median was 6.3%. The fact that with the massive amount of stimulus - without it, growth would have flirted with 0% - this first quarter of positive growth was basically one-third of what is typical, really says something.”

Food for thought indeed.

Source: Gluskin, Sheff & Associates - Breakfast with Dave, November 26, 2009.

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

Source: Yahoo Finance, November 27, 2009.

The European Central Bank (ECB) will make an interest rate announcement on Thursday (December 3). US economic data reports for the week include the following:

Monday, November 30
• Chicago PMI

Tuesday, December 1
• Construction spending
• ISM Index
• Pending home sales
• Auto and truck sales

Wednesday, December 2
• ADP employment report
• Fed Beige Book

Thursday, December 3
• Jobless claims
• Productivity
• ISM Services

Friday, December 4
• Nonfarm payrolls
• Factory orders

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

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

“Regardless of the dollar price involved, one ounce of gold would purchase a good-quality men’s suit at the conclusion of the Revolutionary War, the Civil War, the presidency of Franklin Roosevelt, and today,” said Peter Burshre (hat tip: Chart of the Day). Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist the readers of Investment Postcards to not only don decent suits, but also build considerable wealth with their investment portfolios.

That’s the way it looks from Cape Town (where I will be spending my time over the next few weeks, because my visit to New York had to be cancelled to attend to local business responsibilities).

Source: Wayne Stayskal, November 11, 2009.

Financial Times: Bets rise on rich country bond defaults
“The mounting level of debt in the industrialised world is prompting a growing number of investors to use the derivatives market to bet on the chance of rich governments defaulting on bonds.

“The volume of activity in sovereign credit default swaps - which measure the cost to insure against bond defaults - linked to the US, UK and Japan have doubled in the past year because of concerns about their public finances.

“CDS volumes for Italy, which has one of the highest debt burdens of the developed economies, are now the highest for an individual country, according to the Depository Trust & Clearing Corporation.

“In contrast, the outstanding volume of CDS linked to emerging nations such as Russia, Brazil, Ukraine and Indonesia have been flat or fallen in the past 12 months as investors have become less interested in trading the risks of those countries.

“In the past, the CDS market for developed countries was sluggish, because few investors saw the need to buy or sell protection against a risk of default that seemed exceedingly remote.

“However, rising debt levels and growing political and economic uncertainty have created a more active market, with more investors now seeking insurance. Meanwhile, many banks are prepared to offer protection in exchange for a fee.

“This fee has recently jumped, since the cost to insure the debt of developed countries has increased since the summer of last year, while the cost of insuring emerging market debt has fallen.

“Gary Jenkins, head of fixed income research at Evolution, said: ‘The biggest single risk hanging over the bond markets is the rapid rise in public debt in the industrialised world.

“‘If we get to a point where the market thinks the levels of debt are unsustainable, then we will see an almighty sell-off in the government bond markets, with yields soaring. Governments need to take action to cut deficits and debt.’

“Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, said: ‘It is not surprising that investors are increasingly worried about debt in the industrialised world. Debt to GDP of more than 100 per cent is difficult to sustain.’”

Source: David Oakley, Financial Times, November 22, 2009.

Financial Times: Dubai World
“Dubai has shocked investors by asking for a debt standstill at Dubai World, the government’s flagship holding company that has developed some of the world’s most extravagant real estate projects. The move raised the spectre of default in the Middle East’s trading hub just as early signs of economic recovery have emerged. John Paul Rathbone analyses recent developments in Dubai.”

Source: John Paul Rathbone, Financial Times, November 24, 2009.

Financial Times: Dubai shock after debt standstill call
“Dubai has shocked investors by asking for a debt standstill at Dubai World, the government’s flagship holding company that has developed some of the world’s most extravagant real estate projects.

“The move raised the spectre of default in the Middle East’s trading hub just as early signs of economic recovery have emerged. During the boom, Dubai rode the wave of easy credit generating phenomenal economic growth but was badly hit by the global credit crisis.

“Dubai’s surprise move angered some investors who had been reassured by local officials for months that the city would meet all obligations on its $80bn of gross debt in spite of recession and a real estate crash.

“‘Investors view this as shockingly bad news,’ said Rob Whichello of BNP Paribas. Two hours after announcing it had raised $5bn from two Abu Dhabi banks, the department of finance asked for a standstill until May 30 on all financing to the heavily indebted Dubai World and its troubled property unit Nakheel, which is due to pay back $4bn on an Islamic bond on December 14.

“Dubai also launched a restructuring of the government holding company, which oversees ports operator DP World, the UK-based P&O Ferries and troubled investment company Istithmar. Nakheel, the developer behind the city’s Palm Islands that boast celebrity owners such as David Beckham, has had to shed thousands of staff and left contractors out of pocket as local property prices halved and credit dried up.

“A symbol of Dubai’s pre-crunch excess, the government company has had to cancel plans for the world’s tallest tower and a constellation of reclaimed islands, as collapsing cash flow left the developer on the brink.

“‘This will destroy confidence in Dubai, the whole process has been so opaque and unfair to investors,’ said Eckart Woertz, economist with Dubai’s Gulf Research Centre.

“The gaping size of Dubai World’s $22bn debt problem has been apparent for a year. But the government’s level of support has been clouded by politics and a lack of clarity on how much it could raise from international markets and the oil-rich capital of the United Arab Emirates, Abu Dhabi.

“Bond markets reacted sharply to the news with investors demanding higher premiums to hold debt from the region. In London trade it cost about $460,000 annually over five years to insure $10m worth of Dubai government debt against default, compared with $360,000 on Tuesday. Prices rose for its neighbours with Abu Dhabi protection $100,000 more than on Tuesday.

“Standard & Poor’s and Moody’s Investors Service immediately downgraded the ratings of all six government-related issuers in Dubai following news of the repayment delay and left them on review for possible further downgrade.

“Moody’s cut ratings on some government-related entities to junk status, while S&P cut ratings on some entities to one level above junk.

“S&P said the restructuring ‘may be considered a default under our default criteria, and represents the failure of the Dubai government (not rated) to provide timely financial support to a core government-related entity’.”

Source: Simeon Kerr and Jennifer Hughes, Financial Times, November 25, 2009.

Eoin Treacy (Fullermoney): Dubai could trigger corrective phase
“Middle Eastern stock markets have been laggards over the last year despite the advance in oil prices. Laggards usually lag for a reason and these are now becoming apparent with yesterday’s announcement. This news has had little effect on the region’s stock markets which suggests either some expectations of credit problems are already in the price or the focus of these problems lies with the Dubai government and foreign creditors.

“Dubai took full advantage of loose credit conditions earlier this decade to build on a massive scale. A huge percentage of the world’s cranes were domiciled in the country and the ‘before and after’ pictures of the city were commonly used to illustrate the extent of the development. The aim of building a financial and tourist hub and becoming a gateway between Europe and Asia as a solution to the Emirate’s lack of oil and gas reserves is laudable, but as with any mania, the good idea was taken to excess. The contraction of global liquidity has put pressure on Dubai’s ability to attract investment and has contributed to the current problems.

“Countries that experienced the biggest building booms on credit alone are experiencing some of the deepest recessions. The US, UK, Ireland, Spain and a number of Eastern European and Middle Eastern countries share this characteristic. However, the stock market action of the last year demonstrates that not all countries have been affected the same way and those which avoided building to excess have largely avoided recessions and posted the best stock market performances.

“The extent to which British banks are exposed to Dubai World has begun to rekindle worries about contagion but I wonder how justified this is? Dubai’s big brother, Abu Dhabi, is on a sounder financial footing and remains likely to provide assistance. Creditors may have to endure a delay in getting their capital returned but massive writedowns akin to those experienced following Lehman Brothers’ bankruptcy are probably unlikely. However, the perception of these problems is more important in the short-term. Stock and commodity markets have had an exceptional run since March. The Dubai default could be a catalyst for a deeper corrective phase unfolding generally.”

Source: Eoin Treacy, Fullermoney, November 26, 2009.

Nouriel Roubini (Forbes): Will the world go shopping?
“Roughly one year ago, around the Thanksgiving festivities, the National Bureau of Economic Research announced that the US recession started in December 2007. One year later, though the US economy is in recovery mode, retailers are approaching the holiday season - which accounts for slightly less than one-fifth of yearly US retail sales - with some concern.

“A sharp collapse in US consumer spending since mid-2008 led to a particularly dismal 2008 holiday retail season. As per US Census Bureau estimates, core retail sales (which exclude autos, gasoline and building supplies) fell by 1.1% year on year during November and December 2008, compared to an average 4.6% year-on-year increase in holiday season sales over the past decade. Total retail sales suffered a larger collapse, falling 9.5% year on year.

“After collapsing in 2008, retail sales showed signs of stabilizing over the summer of 2009. While auto sales have fluctuated sharply during recent months due to the government’s ‘cash for clunkers’ initiative, core retail sales have risen for three consecutive months as of October 2009, creeping up at a pace of about 0.5% month on month. Entering the 2009 holiday season, the recent uptick in core sales offers hope for better than anticipated holiday retail sales.

“Economic indicators, however, suggest a note of caution. The renewal in US consumer confidence over the first half of 2009 faded. Successive grim reports on the employment situation revealed no quick end to labor market woes, lowering consumers’ income expectations. According to the October Reuters/University of Michigan Survey of Consumer Sentiment, in October 2009, consumers reported worsening personal finances for the 13^th consecutive month, the ‘longest and deepest decline in the 60-year history of the surveys’.

“The poor state of personal finances has driven consumers to reduce debt at an accelerated pace. In September, consumer credit fell for the eighth consecutive month at an annualized pace of 7.2%. The poor health of personal finances, labor market uncertainty and the ongoing household balance- sheet repair will continue to promote frugal behavior by US consumers. The Conference Board consumer confidence surveys tell a revealing story: Consumers’ plans to purchase big-ticket appliances have declined in the run-up to the 2009 holiday season. This is a bit unusual as plans to buy big-ticket appliances usually display a sinusoidal pattern, with a trough in the month of October and a peak sometime the following spring.

“A measure of weekly retail sales released by the International Council of Shopping Centers and Goldman Sachs indicates that same-store sales flattened over the first three weeks of November, though compared to 2008, sales are up by a promising average pace of 2.9%. The National Retail Federation projects retail sales will fall 1% during this holiday season, compared to an average 3.4% annual gain in holiday sales over the past decade. After the sharp slide in 2008, a decline of ‘only’ 1% or even a small positive gain in 2009 holiday sales may seem like a welcome number; however, accounting for the base effects of a dismal 2008 season, the underlying reality for retailers remains grim for this holiday season.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, November 26, 2009.

Financial Times: Divisions emerge on stimulus strategy
“Stark divisions are emerging among economic policymakers about how quickly governments and central banks should withdraw emergency support measures, with Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warning on Monday about the risks of early exit.

to shocks and policy mis-steps. Fiscal and monetary stimulus programmes should not be stopped too soon, he said.

“He added: ‘It is too early for a general exit. We recommend erring on the side of caution, as exiting too early is costlier than exiting too late.’

“His words may be of some use to the Obama administration, which is boxed in by increasingly shrill calls to reduce the budget deficit and by appeals from some liberal Democrats and economists to spur job creation with more public money.

“On the monetary policy side, Ben Bernanke, US Federal Reserve chairman, last week said ‘inflation seems likely to remain subdued for some time’ and reiterated that interest rates were likely to remain exceptionally low for ‘an extended period’, although he also said he was ‘attentive’ to the value of the dollar.

“Mr Strauss-Kahn’s stance contrasted with warnings by the European Central Bank that delays in unwinding exceptional measures taken to combat the economic crisis could backfire. Last Friday, Lorenzo Bini Smaghi, an ECB executive board member, said history showed that the late implementation of ‘exit strategies’ could cause future crises.

“Speaking in Madrid on Monday, Jean-Claude Trichet, ECB president, said the threats to public finances posed by government stimulus packages meant ‘there is an increasingly pressing need for ambitious and realistic fiscal exit strategies and for fiscal consolidation’. He said it was ’still premature to declare the financial crisis over. But when the appropriate time comes, there should be no concern about the ECB’s determination and ability to exit.’

“Mr Strauss-Kahn said the worst of the financial storm had passed but the global economy remained in a holding pattern - ’stable, and getting better, but still highly vulnerable’.”

Source: Brian Groom, Ralph Atkins and Tom Braithwaite, Financial Times, November 23, 2009.

Financial Times: Fed sees risks in low rates policy
“Federal Reserve officials have expressed concerns that near-zero interest rates could fuel ‘excessive risk-taking in financial markets’ but believe the possibility of such an outcome is ‘relatively low’ minutes from its November meeting show.

“Both China and Germany warned this month that the weak dollar and the Fed’s policy to keep US interest rates ‘exceptionally low’ for an ‘extended period’ could be laying the groundwork for a new speculative bubble.

“The central bank’s Federal Open Market Committee already had discussed this risk, according to the minutes released on Tuesday. In their meeting on November 3-4, the officials ‘noted the possibility that some negative side-effects might result from the maintenance of very low short-term interest rates for an extended period’.

“The minutes said: ‘While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks.’

“The committee members took a fairly sanguine view of the dollar’s recent decline, which they described as ‘orderly’ and linked to improved risk appetite. However, the minutes note that ‘any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching’.

“In the meeting, the committee decided to stick to its interest-rate policy, saying the US economy was continuing to improve but that inflation risks were low. The committee members upgraded their forecasts for US growth in 2009 and 2010, but reduced their forecast slightly for 2011. They also lowered their unemployment expecations, forecasting a rate between 9.3 and 9.7 per cent next year, down from a previous forecast of between 9.5 and 9.8 per cent.

“The minutes were released after the commerce department said gross domestic product grew at an annual rate of 2.8 per cent in the third quarter, below its first estimate of 3.5 per cent.”

Source:  Sarah O’Connor, Financial Times, November 24, 2009.

CNBC: FOMC minutes - reaction
“Dissecting the FOMC minutes with James Bianco of Bianco Research, Zane Brown of Lorb Abbett and CNBC’s Steve Liesman.”

Source: CNBC, November 24, 2009.

MoneyNews: Interest alone on Federal debt - $4.8 trillion
“When you think about the government’s exploding debt burden, you probably don’t focus on interest payments.

“But those payments will likely total $4.8 trillion over the next 10 years, amounting to more than half the government’s $9 trillion in debt.

“Interest rates are near zero now, thanks to the Federal Reserve’s massive monetary stimulus. But at some point the Fed will have to reverse that easing.

“‘When interest rates rise, even a small amount, the interest payments go up a lot because of the size of the debt,’ Charles Konigsberg, chief budget counsel of the Concord Coalition, told CNNMoney.com.

“The $4.8 trillion interest-payment estimate made by the Congressional Budget Office assumes some interest rate appreciation. But if rates rise higher than its estimates, the dollar total will be higher.

“The Obama administration has pledged to cut the budget deficit to 3 percent of GDP, down from 10 percent last year. But that goal may be more fantasy than reality.

“‘Even under the president’s (2010) budget as evaluated by the CBO, we do not get anywhere close to that,’ William Gale, a senior fellow at the Brookings Institution, told CNNMoney.com.”

Source: Dan Weil, MoneyNews, November 23, 2009.

Asha Bangalore (Northern Trust): Widespread revisions of Q3 GDP
“Real GDP grew at an annual rate of 2.8% in the third quarter, previously estimated as a 3.5% increase. Lower estimates of consumer spending (+2.9% vs. +3.4% in the advance report), outlays on structures ((-15.1% vs. -9.0% in the advance report), residential investment expenditures and (+19.5% vs. +23.4% in advance report), including a smaller contribution from inventories and a wider trade gap more than offset the upward revisions of government spending and equipment and software spending.

“Going forward, real GDP is projected to show a slightly slower pace of growth in the fourth quarter of 2009 and first quarter of 2010, partly because car sales of the future have been borrowed to take advantage of the ‘clash for clunkers’ program.

“Corporate profits from current production rose 10.6% in the third quarter, following a revised 3.7% gain in the second quarter. From a year ago, corporate profits fell 6.7%, the first single-digit decline after three straight quarters of significantly weaker profits. Corporate profits of the financial sector advanced 36.4% in the third quarter and made up the larger share of corporate profits. Corporate profits of the non-financial sector increased only 2.0%. The financial sector’s performance is artificially boosted by the support programs in place.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 24, 2009.

Clusterstock: The bloodbath in American manufacturing is over
“Manufacturing has been one of the hardest hit sectors around, but the pain is going away.

“Today’s chart shows the number of mass layoff events (at least 50 people whacked in one blow) per month in manufacturing, and as you can see, it’s way down from its peak, and now below the peak of the 2001-2002 recession.

“Still, we’ve got to see a lot of improvement before we’re at pre-crisis levels.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - The Business Insider, November 20, 2009.

Standard and Poors: S&P/Case-Shiller - Home prices show sustained improvement
“Data through September 2009, released today [Tuesday] by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, show that the US National Home Price Index improved in the third quarter of 2009, posting its second consecutive quarterly increase and further improvement in its annual rate of return.

“The chart above depicts the annual returns of the US National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller US National Home Price Index, which covers all nine US census divisions, recorded an 8.9% decline in the third quarter of 2009 versus the third quarter of 2008. This is a marked improvement over the 14.7% decline in the annual rate of return reported in the second quarter of 2009, and the 19.0% drop in the first quarter. The 10-City and 20-City Composites recorded annual declines of 8.5% and 9.4%, respectively. These two indices, which are reported at a monthly frequency, have generally seen improvements in their annual rates of return every month since the beginning of the year.

“‘We have seen broad improvement in home prices for most of the past six months,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s. ‘However, the gains in the most recent month are more modest than during the seasonally strong summer months.’”

Source: Standard and Poors, November 24, 2009.

Asha Bangalore (Northern Trust): Low mortgage rates and tax credit lift sales of existing homes
“Sales of all existing homes rose 10.1% to an annual rate of 6.1 million units in October. Attractive mortgage rates and the first-time home buyer tax credit of $8,000 helped to boost sales of existing homes. The tax credit program has been expanded and extended to April 30, 2010.

“Sales of single-family existing homes advanced 9.7% to an annual rate of 5.33 million units in October. Sales of single-family existing homes have moved up nearly 32% from the cycle low of 4.05 million homes in January 2009. The peak of single-family existing home sales was in September 2005 (6.34 million units).

“The median price of an existing single-family home declined 1.6% to $173,100 in October from the prior month and it is down 6.8% from a year ago. The year-to-year decline of the median price shows a significant moderation, with the October reading the smallest since June 2008.

“As a result of the low mortgage rates and the first-time home buyer tax credit of $8,000, the supply of unsold single-family existing homes in October dropped to nearly 7-month supply, which is slightly below the historical median of 7.2-month supply.

“The important implication is that the declining trend of the number of unsold existing homes should establish price stability. Additional home sales will be possible as the economy recovers and hiring recovers.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 23, 2009.

Clusterstock: The “distressing” gap between new and existing home sales
“This morning’s existing home sales number showed that sales surged in October by a surprising 10.1%. But new home sales continue to remain quite weak.

“Today’s chart, showing the ‘distressing’ gap between the two measures, comes courtesy of Calculated Risk, which explains:

“‘The initial gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn’t compete with the low prices of all the foreclosed properties.

“‘The recent spike in existing home sales was due primarily to the first time homebuyer tax credit.

“‘But what matters for the economy - and jobs is new home sales, and new home sales are still very low because of the huge overhang of existing home inventory and rental properties.’”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - The Business Insider, November 23, 2009.

MoneyNews: Nearly 11 million US homes underwater
“Some experts say the housing market has bottomed, but one statistic indicates otherwise.

“The portion of US homeowners who are ‘underwater’ on their loans - that is, they owe more on the mortgage than the home is worth - surged to 23 percent in the third quarter, or almost 10.7 million households, according to First American CoreLogic, a real estate research firm.

“Many of the underwater homes will end up in foreclosure or on the already bulging market of homes for sale.

“Of the 10.7 million homes underwater, nearly half have a mortgage that is at least 20% percent higher than the home’s value, according to First American.

“More than 520,000 of these homeowners are in default on their mortgages.

“This ‘is an outstanding risk hanging over the mortgage market’, Mark Fleming, chief economist of First American, told The Wall Street Journal.

“‘It lowers homeowners’ mobility because they can’t sell, even if they want to move to get a new job.’

“Some homeowners who are underwater are fully capable of paying their mortgages, but are ditching their homes anyway - to the tune of 588,000.”

Source: Dan Weil, MoneyNews, November 24, 2009.

Clusterstock: We’re still generating too many negative equity mortgages
“In Washington, DC, the prevailing view these days is that unemployment is now the leading driver of mortgage defaults. This is one reason you can expect to see the next stage of the government’s attempt to rescue the housing market focus on saving jobs.

“But a new study out of Amherst Securities indicates that negative equity is by far the best default predictor of defaults. If that view is correct, the fact that we are still producing mortgages that quickly slip into negative equity should be terrifying. And, in fact, much of the recovery in the housing market appears to be built on thinly capitalized mortgages subsidized by low loan-to-value FHA guaranteed mortgages and the home-buyer tax credit.

“As the chart below shows, even home buyers who took out mortgages as late as this year are finding themselves with negative equity at historically high rates. We’ve come down from the worst levels of the housing boom but we are still well above healthy levels.

“In short, we may be witnessing a policy mistake of stunning proportions as lawmakers and regulators focus on job creation while ignoring the still problematic loan-to-value ratios in the housing market.”

Source: John Carney and Kamelia Angelova, Clusterstock - The Business Insider, November 24, 2009.

Yahoo Finance - Tech Ticker: Housing bottom? “Not even close,” Barry Ritholtz says
“A fifth-straight monthly gain for the Case-Shiller Index Tuesday and Monday’s stronger-than-expected existing home sales report is giving renewed hope to the housing bulls.

“‘Disregard them,’ says Barry Ritholtz, CEO of Fusion IQ, who notes the existing home sales number was juiced by sales of cheap condos and various government programs. Meanwhile, the Case-Shiller results were below expectations.

“We are ‘not even close’ to a bottom in housing, says Ritholtz, who estimates national house prices remain 15-20% overvalued, based on the traditional metrics of: median income-to-median sales price, the cost of owning vs. renting, and housing stock as a percent of GDP.

“‘Until we start seeing a healthy housing market that can stand on its own, without government props, without distressed properties selling 60% off peak levels - that’s how you know the bottom is in,’ says the blogger and Bailout Nation author.

“The likely best-case-scenario for housing is several years of sideways action for prices, wherein population growth and a firmer economy combine to sop up the still huge inventory of homes on the market.

“‘And that’s if we’re lucky,’ Ritholtz says, citing the lackluster environment for jobs and wages, as well as CoreLogic’s analysis that 23% of all US mortgage holders are under water. With so many Americans owing more money than their homes are worth, the recent rise in foreclosures and so-called jingle mail is ‘not nearly done’, he warns.

“In sum, expect more homes for sale at distressed prices and more downward pressure on prices overall - unless the ‘real’ economy shows dramatic improvement, which Ritholtz doesn’t see anytime soon.”

Source: Aaron Task, Yahoo Finance - Tech Ticker, November 24, 2009.

Clusterstock: US weekly jobless claims the lowest since September 2008
“The Department of Labor reported today [Wednesday] that initial jobless claims for the week ending November 21 fell 35,000 on a seasonally-adjusted basis from the previous week.

“They rose 68,080 on a not-seasonally-adjusted basis, but this basically means that jobless claims rose less than normal for this time of year. Seasonal adjustments are widely used to spot overall unemployment trends since the employment market is indeed seasonal.

“As shown below, at 466,000, this most recent seasonally-adjusted claims number represents the best data point we’ve had since the week of September 13, 2008.

“Regardless of the potential for static in the weekly numbers, or errors due to seasonal adjustments, it’s now pretty clear that the overall rate of new jobless claims has indeed slowed substantially.”

Source: Vincent Fernando and Kamelia Angelova, Clusterstock - The Business Insider, November 25, 2009.

Angry Bear: Unemployment claims - 1975, 1982-83 and 2009
“The weekly initial unemployment claims are widely reported and various charts show how they have been falling since the peak. But it is hard to compare the drop in claims this cycle compared to after other severe recessions in the standard charts showing claims over time.

“So to make such comparisons easier I though readers might find a chart showing claims after the 1974 and 1982 recessions and this recession on the same scale.”

Source: Spencer, Angry Bear, November 25, 2009.

Asha Bangalore (Northern Trust): Consumer Confidence Index moves up slightly
“The Conference Board’s Index moved up to 49.5 during November from 48.7 in the previous month. The Present Situation Index (21.0 vs. 21.1 in October) fell, while the Expectations Index rose to 68.5 in November from 67.0 in the prior month. The number of respondents indicating that ‘jobs are hard to get’ rose to 49.8 from 49.4 in the prior month, while those noting that ‘jobs are plenty’ fell to 3.2 from 3.5 in September. The main message is that hiring remains weak.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 24,2009.

MoneyNews: Dreman - brace for 10 percent inflation
“David Dreman says investors should be prepared for high inflation rates - as high as 10 percent - to start within the next three years, and that the Obama administration is powerless to stop it.

“Dreman, the well-known contrarian investor and CEO of Dreman Value Management, told Fox Business that the stock market will see a correction, although ‘it’s anybody’s guess’ when that correction will occur.

“He said inflation could rise to be as high as 8 percent to 10 percent within the next three years.

“Dreman advises investors to hold onto their current stocks and ‘ride through’ the correction. He also advises investors to stay out of long-term bonds because they will take a hit.

“Instead, investors should go for very short-term bonds, equities, and real estate, he said.

“Dreman predicts that interest rates will remain low since ‘no administration’ will attempt to raise them with high unemployment rates. He said the current administration is both trapped and powerless.

“Dreman also said that gold is currently undervalued, despite breaking records daily.”

Source: MoneyNews, November 25, 2009.

Bloomberg: Late card payments rose in October, Moody’s reports
“US credit-card delinquencies climbed last month to the highest level since February as five of the six biggest card lenders posted increases, Moody’s Investors Service said.

“Loans at least 30 days overdue, a signal of future defaults, rose to 6.12 percent in October from 5.97 percent in September, Moody’s said in a report dated Nov. 20 and distributed today. So-called early-stage delinquencies, payments 30 to 59 days late, were unchanged at 1.66 percent.

“Banks typically write off card loans after 180 days, and defaults fell last month to 10.04 percent from 10.72 percent in September, reflecting lower delinquency rates earlier in the year. Credit-card defaults and delinquencies tend to track US unemployment, which climbed to 10.2 percent in October, the highest since 1983.

“‘Weak job creation, elevated bankruptcies and rising unemployment continue to weigh on results,’ John McDonald, an analyst with Sanford C. Bernstein & Co., said in a November 17 research note. ‘It still feels too early to declare victory.’

“Write-offs may peak at 12 percent to 13 percent in 2010, Moody’s analysts Will Black and Jeffrey Hibbs said in the report.”

Source: Peter Eichenbaum, Bloomberg, November 23, 2009.

Bloomberg: Strauss-Kahn says half of bank losses are undisclosed
“Dominique Strauss-Kahn, managing director of the International Monetary Fund, talks about bank losses and the outlook for a global economic recovery. Strauss-Kahn answers questions from delegates at the Confederation of British Industry’s annual conference in London.”

Click here for the article.

Source: Bloomberg, November 23, 2009.

Financial Times: S&P raises fears over health of some banks
“A study by Standard & Poor’s has raised questions over the financial strength of some of the biggest banks ahead of new rules that could require them to raise more funds.

“The analysis by S&P showed that HSBC is the best capitalised bank in the world, while Switzerland’s UBS, Citigroup of the US and several of Japan’s biggest banks are among the weakest.

“The ranking of 45 of the world’s leading banks will unnerve investors, highlighting once again the capital shortfall that institutions still need to make up over the coming years.

“Although some banks will be able to top-up capital through retained profits, analysts expect a string of rights issues from weaker banking groups as they try to raise tens of billions of dollars.

“S&P’s risk-adjusted capital (RAC) ratios - a measure of balance sheet strength - foreshadow the new capital ratio regime expected to be set by the Basel committee on banking supervision early next year.

“Its report, published on Monday, gave HSBC a 9.2 per cent ratio, compared with barely 2 per cent for the likes of UBS, Citigroup and Mizuho.”

Source: Patrick Jenkins, Financial Times, November 23, 2009.

The Wall Street Journal: Banks scramble as debt comes due
“Banks have spent the past year dealing with a mountain of bad assets. Now attention is turning to trillions of dollars of debt they have maturing over the next few years.

“Banks unable to maneuver around the challenge could be forced to refinance their debt at sharply higher costs.

“The situation was caused by banks engaging in cheap borrowing during the credit-market boom that began in the middle of the decade and lasted through 2007. As financial markets hit crisis mode, banks were propped up by government guarantees that enabled them to keep selling debt - but with much shorter maturities.

“About $10 trillion of debt comes due by the end of 2015, including $7 trillion by 2012, according to Moody’s Investors Service, which highlighted growing concerns about the banks’ looming liabilities in a report this month.

“The life span of bank debt has shrunk to historically low levels, forcing banks to deal with the problem sooner rather than later. Globally, the average maturity of new debt rated by Moody’s fell from 7.2 years to 4.7 years in the past five years.

“‘We thought that we should send a signal’ of warning, said Jean-Francois Tremblay, a Moody’s analyst and one of the report’s authors.

“The problem is especially acute for US and UK banks, which have been among the hardest hit by the financial crisis. In the US, banks have seen maturities drop to 3.2 years from 7.8 years in the past five years. In the UK, the average maturity for new debt fell to 4.3 years from 8.2 years, Moody’s said.”

Source: Carrick Mollenkamp and Serena NG, The Wall Street Journal, November 25, 2009.

Financial Times: Better climate for hedge funds
“The hedge fund sector looks to be going through the early stages of recovery, with industry flows turning positive and redemptions largely normalising to historical levels, says Huw van Steenis, head of banks and financials research at Morgan Stanley.

“‘Next year is likely to be a pivotal year for hedge funds, with the sector set to benefit from the rise in demand for better risk adjusted returns, the migration of talent from investment banks and trading off the back of a successful 2009,’ he says.

“Mr van Steenis believes sovereign wealth funds, foundations and pension funds have overtaken endowments and high net worth hedge fund of funds as the largest source of inflows - and thinks the market is underestimating the potential upsurge in demand for absolute return funds from private clients and smaller institutions.

“‘In the UK, in the third quarter alone, there were $2.1bn of inflows into absolute return funds - three times that in the first quarter. Our base case estimates that global assets under management in the sector will reach $1,750bn by the end of 2010 - where we were in the first half of 2007 - although we see risks posed by performance, regulation and reputational issues.

“‘The outcome of US/EU regulatory changes remains uncertain, but growing pragmatism should be the order of the day; we estimate that hedge funds funded 30-40 per cent of capital raised by US and European banks this year.’”

Source: Huw van Steenis, Financial Times, November 24, 2009.

Bespoke: Sovereign default risk
“Below we highlight current credit default swap prices and the year-to-date change for the sovereign debt of 39 countries. As shown, default risk has declined for every country except Japan in 2009, including Dubai.”

Source: Bespoke, November 27, 2009.

Yahoo Finance - Tech Ticker: A bad economy could spell good news on Wall Street for years to come
“The economic recovery isn’t as strong as first thought. Revised GDP figures released this morning [Tuesday] show the economy grew at a 2.8% annualized pace in the third quarter, less than the 3.5% initially reported. The revision was in line with expectations but shows the economy didn’t have as much momentum heading into the fourth quarter as previously believed.

“Unlike Wall Street traders, consumers seem to know the recovery is ‘anemic’, as Barry Ritholtz, CEO of Fusion IQ, describes it. The Conference Board’s latest confidence survey shows Americans feel worse about the current economic situation than they did in March, when the stock market was making new lows.

“What’s driving the disconnect between Wall Street and Main Street?

“Ritholtz says it’s a classic example of bad news being good news on Wall Street. ‘We’re in a cycle that’s not based on profitability, not based on expanding economy but based on all sorts of government supports,’ he says. ‘Bad news is going to be good news for the next couple of quarters probably.’

“That’s because low interest rates and liquidity provided by the Federal Reserve, coupled with government stimulus are enticing traders to buy into the market. ‘Cash is trash,’ says Rithotlz, who remains bullish on stocks.

“Ritholtz is confident that eventually fundamentals will prevail and thinks the market will take a hit once the economy shows signs of improvement, meaning the ‘extraordinary’ stimuli can be removed.

“But predicting the timing is anyone’s guess. ‘You could have this disconnect that goes on for not days, weeks or months but years and years,’ he says.

“So, in the meantime, Ritholtz - who correctly predicted the 2008 crash and told Tech Ticker’s audience ‘the mother of all bear market rallies’, was upon us in March - is still long stocks and likes commodities (thanks to a weak dollar) and emerging markets.”

Source: Peter Gorenstein, Yahoo Finance - Tech Ticker, November 24, 2009.

Financial Times: Getting technical
“There is one group of investors that has few doubts about the direction of the US stock market. Technical analysts - who scour price moves in charts for patterns of behaviour that they think will be repeated and drive future action - see plenty of signals that justify a continued move higher in the S&P 500 index of US stocks.

“Although there are many reasons to doubt the relevance of technical analysis, there are many investors who do trade on these signs. Indeed, much of the computer-driven, high-speed trading that has become a feature of stock trading uses such analysis to programme trades. At the very least, it is important to be aware of the key price levels that technical analysts are targeting.

“At its simplest in terms of technical signals, a rising support line connects the dips seen in the S&P 500 since it started its rally in March. This backs the idea that such a support will continue to prop up prices after any dips.

“In terms of specific levels, the most widely watched ones are those that cluster round key ratios identified by the mathematician Fibonacci in the 13th century. Under these ratios, technical analysts believe that once markets have rallied 50 per cent from a low, they tend to progress to a level marking a 61.8 per cent retracement.

“Taking the 2007 S&P 500 high of 1,576 as the top and the March 2009 low of 667 as a bottom, the eyes of these analysts are on the S&P reaching 1,121 - a level that would mark a 50 per cent retracement of the decline from the peak. The subsequent 61.8 per cent retracement level would be 1,229.

“Technical analysts similarly argue that charts signal continued dollar declines and rises in gold, silver and oil prices. With fundamental factors sending mixed pictures, more traders may grasp for the cryptic clues on short-term market moves provided by technical analysis.”

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

Bespoke: Where are the Financials?
“Probably the main reason why the S&P 500 has struggled to take out old highs in recent weeks is the performance of the Financial sector. It’s actually surprising that the market is where it is given how poorly the Financials have done. As shown in the first chart below, the S&P 500 Financial sector can’t even get above its 50-day moving average, much less test its bull market highs from a month or so ago.

“The Financials led us into and out of the bear, and it’s hard to imagine the overall market continuing its bullish pace over the next few months without a resurgence in the Financials. The question right now is whether to treat the stagnation as a bullish signal to gain exposure to the sector or a bearish signal to sell the broad market.”

Source: Bespoke, November 23, 2009.

Bespoke: Goldman can’t get out of its own way
“While there probably aren’t a lot of people shedding tears over it, the stock of Goldman Sachs (GS) can’t seem to get out of its own way. We’ve highlighted the relative weakness in this stock several times over the last few weeks, so this shouldn’t come as any surprise, but GS is now on pace to close at its lowest levels since early November.

“Politicians in Washington and conspiracy theorists may be rejoicing in Goldman’s misery, but if there’s one thing Goldman employees can be thankful for it is that with the stock lagging the overall market, the intensity of public backlash directed towards the company seems to have abated. Next thing you know, the conspiracy theorists will claim that ‘evil’ Goldman is purposely making their stock weak just so they can buy back the stock at lower prices.”

Source: Bespoke, November 25, 2009.

Financial Times: Asian asset bubble fears overblown
“Fears that asset bubbles are being created in Asia by foreign capital inflows look overdone at this point, says Michael Spencer, Deutsche Bank chief Asia economist.

“He says that while a few narrow real estate markets may be starting to look pricey, equity markets for the most part appear to be at or near fair value.

“‘The bigger problem facing a number of key Asian economies is the extent to which their currencies are pegged to the dollar, and the Federal Reserve’s very stimulative policy stance.

“‘The monetary stimulus and capital flows these pegs are engendering are forcing [Asian] authorities to adopt more restrictive prudential regulations in an effort to avoid the inevitable inflation pressures and asset bubbles this arrangement will bring.’

“Mr Spencer says the possibility that this extends to capital controls cannot be ruled out - but argues that they would be used only as a last resort if monetary control could not be established through currency appreciation, rate hikes and sterilisation.

“‘We would anyway dispute the argument that capital flows or asset prices are at extremes. Asian equity prices may have risen sharply since the beginning of the year, but the regional index is only about 5 per cent higher than it was last summer. In a similar vein, while property prices in general are going up, it is only the luxury end that is ‘frothy’.’”

Source: Michael Spencer, Financial Times, November 25, 2009.

Reuters: Templeton’s Mobius eyes Libyan market
“Templeton Asset Management fund manager Mark Mobius said he was eyeing private equity and other investments in Libya and said the stock market had enormous potential for growth.

“Mobius, a prominent emerging market investor, told Reuters at the launch of a new Egyptian brokerage office in Tripoli he saw potential for tourism, infrastructure and telecoms investments.

“Libya, holder of Africa’s largest oil reserves, has attracted a wave of interest from Arab and international companies, operating mainly in energy and construction, since most international sanctions were lifted in 2004.

“‘This market is very exciting now because the government is embarking on a privatisation programme to list many of the state enterprises. Although the market is small now, the potential for growth is enormous,’ Mobius said, speaking late on Sunday.

“Libya has said it plans to sell shares in four state firms via initial public offerings (IPOs) in 2010 and will enact a law next year offering tax breaks to companies listing on the stock exchange in an attempt to get more Libyans to invest.

“The Libyan exchange now has 10 listed firms, mostly banks and insurance companies. Shares worth about 2.1 million dinars ($1.75 million) traded in October, a stock market report said.

“Foreign firms have been lining up for oil deals and infrastructure contracts in a country which boasts a long Mediterranean coastline but few top class hotels.

“‘The potential here for hospitality and tourism is tremendous. That’s one area. The other area is infrastructure, roads, bridges, whatever, if that’s privatised,’ Mobius said.”

Source: Shaimaa Fayed, Reuters, November 23, 2009.

MoneyNews: Forecasters see dollar decline next year
“The top performing forecasters in Bloomberg’s survey of 46 firms predict the dollar will continue falling next year.

“The sluggish economic recovery and exploding government debt burden will weigh on the currency, they say.

“Standard Chartered bank, which placed first in estimating the dollar-euro rate over the 18 months ended June 30, sees the euro rising 5.5 percent against the dollar next year, to $1.58.

“‘History tells us the dollar shouldn’t start rising on a sustained basis until 12 months after the Fed starts to lift rates,’ Callum Henderson, the bank’s head of foreign exchange strategy told Bloomberg.

“‘It’ll take time to drain the oversupply of dollars from the market. The dollar will remain weak until the Fed’s rates rise above the competitors.’

“All three of the top performers in Bloomberg’s survey see the dollar falling against the euro next year.

“That includes Aletti Gestielle (an Italian money management firm) and HSBC in addition to Standard Chartered.

“The dollar bears are contrarians, as 24 of the 37 predictions on dollar-euro have the greenback rising next year.

“But some of the most renowned currency experts anticipate the dollar will depreciate further.

“‘I think the dollar is an over-owned currency,’ Pimco managing director Bill Gross told CNBC. ‘The Chinese, the Asians have basically owned too many dollars for too long.’”

Source: Dan Weil, MoneyNews, November 23, 2009.

Richard Russell (Dow Theory Letters): Why gold?
“Let’s say you’re a multimillionaire. You’re seriously worried about what to do with your millions in savings. You don’t want to keep your money under your mattress or in your Frigidaire, so where should you keep it? US T-bills are now in a state of zero or even negative interest - you pay the government to hold your money, but you’re SAFE. T-bills have behind them the full faith and credit of the United States. Great, but, now you’re thinking the unthinkable - How good is the full faith and credit of the US? There are rumors that the credit rating of the US could actually be lowered. And with the massive unfunded debt of the US, that could happen, and worse - the dollar could cave in. What to do?

“And you ask yourself, ‘What’s safer than T-bills or even top-grade foreign short-term debt?’ The answer is that there is one item that’s safer - gold. Gold represents intrinsic value in and of itself and by itself. Gold needs no nation to back or guarantee its value. Gold is no single nation’s liability. Furthermore, gold has no maturity date and gold is so safe that it doesn’t need to pay interest to those who hold it. You decide to put your savings into gold rather than T-bills. And unlike T-bills today, gold doesn’t depend on anyone’s ‘full faith and credit’.

“The fact is that the so-called ‘opportunity cost’ of buying or holding gold is zero today. T-bills pay you nothing. The fact is that it’s cheaper, safer, and it makes more sense to hold gold at this time than at almost any time in my memory. And a lot of knowledgeable, big money investors are doing just that - buying and holding gold for safety and as a store of value.”

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

TheStreet.com: $8,000 gold
“James Turk, author and founder of GoldMoney, argues that gold will hit $8K in 6 years’ time.”

Source: TheStreet.com, November 25, 2009.

International Monetary Fund: IMF announces sale of 10 metric tons of gold to the Central Bank of Sri Lanka
“The International Monetary Fund (IMF) announced today the sale of 10 metric tons of gold to the Central Bank of Sri Lanka. The sale was conducted on the basis of market prices prevailing on November 23, 2009 with proceeds equivalent to US$375 million. This transaction is part of the total sales of 403.3 metric tons approved by the Executive Board in September 2009, and it adds to the total of 202 metric tons already sold to the Reserve Bank of India and the Bank of Mauritius.”

Source: International Monetary Fund, November 25, 2009.

Financial Times: Gold rush forces US to clip Eagle sales
“The rush by retail investors into gold has forced the US government to suspend sales of the world’s most popular bullion coin, the American Eagle, after running out of inventories.

“The shortage, the second since the start of the financial crisis in August 2008, is the latest sign of investors seeking a safe haven into bullion amid the US dollar woes. Safe-haven buying spurred by concerns about the health of Wall Street and a spike in inflation due to a lax monetary policy have also benefited gold sales.

“‘The US Mint has depleted its current inventory of 2009 American Eagles one-ounce bullion coins due to the continued strong demand,’ the mint said in a statement late on Wednesday. It added that selling will resume ‘once sufficient inventories … can be acquired to meet market demand’.

“The US Mint has sold about 1.19m ounces of American Eagles so far this year, up almost 75 per cent from the same period last year and on track to be the highest annual volume in ten years, according to official data. Sales of American Eagle’s silver coins have hit 26m ounces, the highest level in at least 23 years.”

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

MoneyNews: Banks say too much gold to store
“Gold prices have been soaring this year thanks to a weak dollar, and everyone wants in on the investment.

“For some banks, though, it is becoming clear that only the big institutional investors are welcome to store the precious metal in their vaults.

“So they’re telling smaller investors to get their gold out and store it elsewhere.

“HSBC has told retail clients to remove their small gold holdings from its vault in New York City, The Wall Street Journal reported.

“Small retail investors don’t turn enough profits for the bank like the big institutional investors do, the newspaper reported.”

Source: Forrest Jones, MoneyNews, November 24, 2009.

David Fuller (Fullermoney): Gold’s advance is not a bubble
“Intrinsic or not, I think value is in the eye of the beholder. The Fullermoney view for the last nine years is that gold is being gradually remonetised in the eyes of investors. That process has accelerated over the last year because we have witnessed nothing less than the greatest monetary reflation in history.

“What might we expect from gold over the short to medium term?

“Technically, gold looks temporarily overstretched and $1,200 is a minor psychological level. Consequently, we could easily see a short-term reaction and consolidation of perhaps $30 to $50 before this secular bull market powers on into 1Q 2010. If the consistency of the two earlier cycles commencing in September 2005 and September 2007 is maintained, gold should reach at least $1,300 between March and May of next year.

“I do not think that gold’s current advance is a bubble, although it is likely to become one eventually. A genuine bubble, as opposed to a market that happens to be rising at a time when most people are underinvested and therefore envious observers, will include gold fever of the sort we have not seen since 1979-1970.

“To put recent events in perspective, bullion consolidated for eighteen months prior to the last three month’s gains. It has rallied about $200 since the September breakout, which is approximately $100 less than the two earlier advances referred to above. Comparing those three moves, gold’s recent percentage move is clearly less to date than we saw on the two earlier advances. Lastly, the Amex Gold Bugs Index has yet to clear its 2008 high. This does not suggest a bubble to me.”

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

Financial Times: Oil prices are too high
“An oil price at $80 a barrel is inconsistent with supply and demand dynamics, inventory levels and the current macroeconomic environment, says Alexander Redman, strategist at Credit Suisse.

“‘US gasoline demand is at lower levels than this time a year ago, while distillate demand remains well below the five-year range and jet plane storage continues to climb. Overall, US oil demand is still down by 3 per cent year-on-year.’

“At the same time, he says, US petroleum inventories are among the highest levels of this decade and a further 100m barrels of oil is being held globally offshore in tankers.

“Mr Redman says an examination of the longer-term association between the real oil price and global spare oil capacity indicates two important factors.

“‘First, the oil price only tends to spike up once spare capacity falls below the critical 2-3 per cent level - the International Energy Agency does not project this occurring again until 2014. Second, using the IEA’s estimate of 2010 spare capacity of about 8 per cent, the oil price would typically be closer to $40 a barrel.

“‘For now, the market appears to be pricing in the return to a tighter supply environment well into the next decade and disregarding the current glut in supply.

“‘Going forward, the Credit Suisse oil team is targeting $70 a barrel for WTI - and $68 a barrel for Brent Crude.’”

Source: Alexander Redman, Financial Times, November 26, 2009.

Financial Times: Eurozone PMI growth reaches two-year high
“The eurozone recovery is gathering pace in the final months of 2009, but warning signs of weaker growth next year have appeared.

“Purchasing managers’ indices for the 16-country region on Monday showed private sector activity expanding this month at the fastest rate in two years, with France and Germany powering the revival. However, the survey also pointed to a loss of momentum in coming months.

“The results add to evidence that the eurozone has returned to expansion, but that it risks seeing growth fade once government and central bank support measures are ended. The results are likely to add to policymakers’ wariness about the outlook for 2010.

“In a speech in Madrid, Jean-Claude Trichet, European Central Bank president, said: ‘We can spot a number of signs of stabilisation. But the crisis has debilitated the real economy … [and has] proved so deep because it has deprived our citizens of confidence.’”

“The eurozone recession ended in the third quarter, when gross domestic product rose by 0.4 per cent.

“November’s purchasing managers’ indices suggest the fourth quarter will see growth of a similar pace or faster. The composite index, covering eurozone services and manufacturing, reached 53.7 in November, up from 53.0 in October, making it the fourth consecutive month of expansion.

“However, Chris Williamson, chief economist at Markit, which produces the survey, said November ‘also saw the first signs of growth peaking’. New orders grew at a slower rate than in October, especially in the service sector. Job losses remained high and ‘highlighted the fragility of the recovery’, he added.”

Source: Ralph Atkins, Financial Times, November 23, 2009.

Financial Times: Japan says economy back in deflation
“The Bank of Japan moved towards a neutral stance on the risk of inflation on Friday even as the government formally declared that the world’s second-largest economy has entered deflation for the first time since 2006.

“The government’s declaration sets the scene for heightened tension with the bank, which has been resisting public calls by politicians for greater aggression in the fight against deflation.

“‘We want the BoJ to extend support on the monetary policy front in overcoming deflation,’ said Naoto Kan, deputy prime minister. Hirohisa Fujii, finance minister, and Shizuka Kamei, financial services minister, have also called on the central bank to do more.

“The bank’s policy board kept interest rates on hold at 0.1 per cent on Friday, but said ‘there is a possibility that inflation will rise more than expected’ due to higher commodity prices, offset by a risk it could fall due to lower public expectations for medium- to long-term inflation. In previous statements it only mentioned the risk of inflation declines.

“Consumer prices were down by 2.2 per cent on the previous year in September, or by 1.0 per cent excluding fresh food and energy. Although year-on-year inflation first turned negative in February, the government only now declared that ‘the Japanese economy is in a mild deflationary phase’.”

Source: Robin Harding, Financial Times, November 20, 2009.

Financial Times: Japanese export growth eases recession fears
“Strong demand from China and other Asian economies lifted Japanese exports, which last month fell at their slowest rate for a year, boosting hopes that the economy will continue to report healthy growth.

“In October, exports fell 23.2 per cent from a year earlier, compared with a 30.6 per cent decline in September, according to data released by the Ministry of Finance on Wednesday. The figure represented the smallest drop since October 2008, when exports fell 7.9 per cent.

“On a seasonally adjusted basis, the value of shipments rose for the third straight month by 2.5 per cent from September.

“Junko Nishioka, economist at RBS in Tokyo, said the fall in exports last month was smaller than expected and marked a ‘clear improvement’.

“‘It shows how rapidly the growth rate is improving. Overall, we can safely say that the worst is over and downside risk is limited,’ said Ms Nishioka.

“Japan’s economy grew at an annualised rate of 4.8 per cent in the third quarter, fuelled by a mix of stimulus-induced domestic demand, a bounceback in exports and rebuilding of inventories.”

Source: Justine Lau, Financial Times, November 25, 2009.

Financial Times: China banks prepare to raise capital
“China’s banks are preparing to raise tens of billions of dollars in additional capital to meet regulatory requirements following an unprecedented expansion of new loans this year, according to people familiar with the matter.

“China’s 11 largest listed banks will have to raise at least Rmb300bn ($43bn) to meet more stringent capital adequacy requirements and maintain loan growth and business expansion, according to estimates from BNP Paribas.

“China’s banking regulator has warned it would refuse approvals for expansion and limit banking operations if lenders did not meet new capital adequacy requirements, a move that has prompted the country’s largest state-owned banks to prepare capital-raising plans for next year and beyond.

“Expectations of giant cash calls from the listed Chinese banks spooked investors on Tuesday, helping to send the benchmark Shanghai Composite Index down 3.45 per cent on a day of record turnover on the Shanghai and Shenzhen markets.

“China’s banking regulator ‘is definitely aware of potential asset quality issues and is pushing for higher capital adequacy requirements to offset deterioration in asset quality’, according to Dorris Chen, an analyst with BNP Paribas.

“Following government orders to prop up the domestic economy in the face of the global crisis, Chinese banks extended a record Rmb8,920bn in loans in the first 10 months of the year, up by Rmb5,260bn from the same period a year earlier.

“This unprecedented loan expansion resulted in a record fall in their core capital adequacy rates from just over 10 per cent at the end of last year to 8.89 per cent by the end of September, a drop that worries regulators.”

Source: Jamil Anderlini, Financial Times, November 24, 2009.

Infectious Greed: China leaps to second spot in global science
“The latest Thomson ISI science data shows that China has leaped to second-spot worldwide in academic science, as measured by papers produced. The US still leads the way, at 340,000 publications per year (not shown), but China could surpass US production within five years at current rates of relative growth.

“Of course, paper production is only one measure. Citations matter at least as much, and that isn’t captured here. Nevertheless, it is striking stuff.”

Source: Paul Kedrosky, Infectious Greed, November 21, 2009.

MoneyNews: Roach - buy China after collapse
“Buy China, advises Morgan Stanley Asia chairman Stephen Roach - but only after it tanks following a market correction Roach says is long overdue.

“‘I think right now the markets have run too fast too far, liquidity-driven and they have moved out of alignment with what I think is a very sluggish underlying recovery in the global economy,’ Roach told CNBC.

“Roach says the Chinese have focused too much on its investment growths and depended too much on export sales.

“‘The crisis is a wake-up call that the external demand from the West won’t be there for a long time,’ Roach says, pushing China to find new sources of demand.

“‘Korea has shifted its major external market from America to China, as has Japan … so there’s a lot riding on the ability of the Chinese to stimulate this new source of internal demand that could benefit not just the Chinese, but the Koreans and the Singapore too,’ Roach notes.

“Overall, however, Roach remains bullish on China, seeing an upside in its services sector over the next 5 to 7 years.”

Source: Julie Crawshaw, MoneyNews, November 23, 2009.

Tags: Baltic Dry Index, Black Friday Bargains, BRIC, Central Banks, China, Commodities, Corporate Bonds, Credit Default Swap, Credit Rating Agencies, Crisis Mode, Debt Woes, Default Risk, Dollar And The Japanese Yen, Emerging Markets, Estate Projects, ETF, Gold, India, Jessop, Market Observers, Mature Market, oil, Peter Brookes, Risk Appetite, Risky Assets, Sovereign Debt, Swap Cds, United Arab Emirates
Posted in Emerging Markets, Gold, India, Markets | No Comments »

David Rosenberg: 2010 Global Outlook

Saturday, November 28th, 2009

In case you missed David Rosenberg on CNBC last Tuesday, sharing his global outlook with Morgan Stanley’s Thomas Lee Chief Global Strategist.

Press play to watch:

(hat tip: Barry Ritholtz, The Big Picture)

Tags: Advertisement, Barry Ritholtz The Big Picture, Cnbc, David Rosenberg, Global Outlook, Global Strategist, Hat Tip, Last Tuesday, Morgan Stanley, Press Play, Thomas Lee
Posted in Markets | No Comments »

Dubai’s latest mega-project – a massive default?

Saturday, November 28th, 2009

This post is a guest contribution by James Pressler* of The Northern Trust Company.

Over the past few years, Dubai has built a reputation not just locally but worldwide. As the fastest growing of the seven emirates making up the United Arab Emirates, it has become known for its astonishing creations - the largest manmade islands (three at latest count), one of the world’s largest ports, and the Burj Dubai - the tallest manmade structure in the world. Unfortunately, its latest creation is not receiving the same kind of oohs and ahhs. The announcement on Wednesday requesting a six-month payment freeze on the $59 billion in debt issued by Dubai World, a state-run conglomerate behind all this grand development, made markets shudder at another prospect - the largest sovereign default since Argentina in 2001.

While technically this week’s announcement does not yet constitute a formal default, international markets are treating it like one. Credit default spreads have broadened to what one analyst called “Icelandic” levels, investors have cut back positions and headed for the safety of the US$(?), and everyone is reconsidering just how safe some safe bets are. If a shamelessly-wealthy Gulf country could potentially default, what about countries with rising debts, huge deficits and shaky recoveries?

The complexities of the UAE’s governmental structure make the situation difficult to grasp at first glance, but the problem can be captured by a few basic points. First, Dubai is the second-largest emirate in the UAE next to Abu Dhabi, but Abu Dhabi is also the power of the national government and has been challenged by Dubai’s meteoric rise. Next, the UAE has a sovereign wealth fund estimated at one half-trillion dollars in case of emergency, so money is clearly available at the national level to bail out Dubai if that route is chosen. Lastly, the national government wants to emerge from this situation with international markets assured that a state-run entity has the backing of the government and will be subsequently subject to reform and accountability. Taken together, these points plus an appreciation of the politicial undercurrents suggest a scenario that avoids outright default.

In our base case, Abu Dhabi offers support from a national level so Dubai World can meet its financial obligations and implement some debt restructuring, all in exchange for ownership of significant Dubai-owned assets - Emirates airlines has been suggested in recent reports. In addition, Abu Dhabi forces Dubai World to restructure its business model from the dysfunctional “build it and they will come” ideal. These conditions would satisfy Abu Dhabi’s emirate-level interest in retaining dominance while also securing the national interest of retaining some international market confidence, all while avoiding a formal default. We will be monitoring events for key markers suggesting this scenario is playing out - replacement of Dubai World board members by more technocratic people favored by Abu Dhabi, the transfer of Dubai’s assets, and a general humbling of the indebted emirate in a way that places Abu Dhabi firmly in charge.

However, it would be irresponsible to not also mention what worries us looking forward. Aside from the off-chance that Dubai and Abu Dhabi are unable to converge on a cohesive recovery, what are the chances that Dubai World is just the first of more possible defaults to come? Since the UAE does not release public debt figures and estimates are sketchy at best, there is a chance that another public company could announce an excessive financial burden and a need for bailing out. This applies not just for the UAE but for any of the fast-developing Gulf countries experiencing an asset bubble collapse. With widening credit default spreads throughout the region and even into emerging Asia, any entity dependent on the recent flood of cheap money to roll over its debts could easily find itself out of options. Few would be as singularly vulnerable as Dubai World, but a significant default could set forth a vicious cycle of contraction and collapse that could take a number of victims.

The first sign of things to come could be as early as the first week in December, when Gulf markets re-open from the Eid al-Adha holiday (Dubai World announcing its debt postponement plans just before Eid celebrations was in all likelihood not a coincidence). This will mark the first chance for officials to state positions and make confidence-building claims, with the further interest of calming international markets. Between that time and the December 14 due date for Dubai World’s next debt payment, we expect to see a concrete plan laid out for bailing out the conglomerate and some pressure taken off the credit markets. However, if no settlement can be reached, it would not surprise us if another major entity started talking about restructuring or a debt freeze before year-end – and not necessarily a company in the UAE.

* James Pressler is an associate international economist at The Northern Trust Company, Chicago.

Source: Northern Trust - Daily Global Commentary, November 27, 2009.

Tags: Abu Dhabi, Bets, Burj Dubai, Complexities, Conglomerate, Credit Default, Debts, Emirate, First Glance, Governmental Structure, International Markets, James Pressler, Manmade Islands, Meteoric Rise, National Government, Northern Trust Company, Tallest Manmade Structure, Trillion, Uae, United Arab Emirates
Posted in Emerging Markets, Markets | No Comments »

Advisor Alert - November 27, 2009

Friday, November 27th, 2009

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Tags: asset class, Canada, Census Bureau, Chief Investment Officer, China, Commodities, Congressional Budget Office, Economic Trend, Emerging Markets, Federal Budget Deficit, Federal Budget Outlays, Federal Deficits, Frank Holmes, Global Investors, Gold, Gold Equities, India, Market Groups, Medicare Medicaid, National Debt Clock, oil, Reputable Sources, Social Security Benefits, Treasury Department, Trend Data, Unfunded Liabilities, War Efforts
Posted in Bonds, Emerging Markets, Gold, India, Markets, Outlook, US Stocks | No Comments »

Alternative Treatments for Common Ailments | The Origin of Famous Brands | Garlic is the Best Investment in China | Men Married to Smart Women Live Longer | “Goodnight Keith Moon”

Friday, November 27th, 2009

Here is our selection of reading diversions for this weekend:

Alternative Treatments for Common Ailments
November-24-09, 11:04 AM

From garlic to honey, to lemonade and chicken soup, there are time-honored treatments from grandma’s remedy chest to heal yourself and speed your recovery from common ailments. Just head to the kitchen next time you are feeling ill, and whip up a remedy for what ails you. Below are some of the most common and easily prepared remedies for everything from stomachache to cold and congestion to household burns.

What’s in a Name? The Origins of Famous Brands
November-25-09, 9:50 AM

Our lives are full of brand names and trademarked products that we use every day, from the Apple computer I turn on every morning to the bowl of Quaker oatmeal I eat for breakfast. At the birth of every company that makes a product we can’t live without, somebody trying to come up with a memorable and successful name was present. Many of us know that a real Ben and Jerry, Wendy, and Ford exist, but the funny-hatted man on my oatmeal box is a figment of the founders’ imagination, thought to evoke images of honesty and value. Although many brand names are simple acronyms or versions of their founders’ names, some of the companies we trust every day actually have fascinating-and surprising-back stories.

Hold your nose: garlic is best investment in China
November-27-09, 11:04 AM

The price of garlic in China has nearly quadrupled since March, propelled by its very pungency to rank ahead of gold and stocks as the country’s best-performing asset this year.

Men married to smart women live longer
November-27-09, 9:28 AM

There is a lingering suspicion among girls (as the unpopularity of science subjects demonstrates) that boys don’t value cleverness as an essential quality in a life partner. Given a choice between gorgeous or brainy, there is no guarantee they’ll do the right thing, because men think they’re clever enough for two. Well, it turns out they’re wrong. Swedish scientists have discovered that long life and good health have nothing to do with a man’s education and everything to do with his wife’s. Men married to smart women live longer - simple.

“Goodnight Keith Moon”: A Creepier Version Of The Classic Kid’s Book (VIDEO)
November-27-09, 9:59 AM

“Goodnight Moon”: Everyone’s favorite children’s book about a notorious drummer who died of a drug overdose. Wait, that’s not what it was about? Well, authors Bruce Worden and Clare Cross have updated the classic story to revolve around the death of The Who’s Keith Moon with hilarious results.

Tags: Ails, Alternative Treatments, Apple Computer, Back Stories, Brand Names, Chicken Soup, China, China Men, Cleverness, Common Ailments, Diversions, Emerging Markets, Figment, Gold, Goodnight, Keith Moon, Life Partner, Pungency, Quaker Oatmeal, Science Subjects, Smart Women, Stomachache, Trademarked Products
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David Rosenberg: Government Bonds are on Fire

Friday, November 27th, 2009

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

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

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

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

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

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

Tags: asset class, Bear Share, Bond Market, Canada, Canadian Bond, Cnbc, Commodities, Complacency, David Rosenberg, Economic Backdrop, GDP Growth, German Bund, Gilt Yields, Gluskin Sheff, Government Bonds, Half That Amount, Light Volume, Lows, Nyse Volume, Squawk Box, Treasuries, Vix Index, Year Treasury Note
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Stephen Jen: Sovereign Buyers Could Tip Gold into Stratosphere

Friday, November 27th, 2009

Stephen Jen (Blue Gold Capital), who was formerly Morgan Stanley’s expert on sovereign wealth funds believes that China, India and Russia’s continuing purchases of gold bullion could be the catalyst for gold to rise in price into the stratosphere. He says that as their foreign exchange reserves as a percentage of their GDP is nearing 100%, the pressure to diversify away from fiat currency could reach a critical tipping point, should they decide to simply double their exposure to gold. As of this week, it turns out that India may emerge as the buyer of the remaining half of the IMF’s 400-ton sale of gold.

Here is an excerpt from Ambrose Evans-Pritchard’s Telegraph article:

China, India, and Russia have all been buying gold on a large scale over recent months.

Why should that stop when the AAA club of sovereign debtors is pushing towards the danger threshold of 100pc of GDP?

These new players account for almost all the accumulation of foreign currency reserves worldwide over the last five years, so what they do matters enormously.

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After crunching the numbers, Mr Jen found that the share of gold in their reserves is just 2.2pc compared to 38pc for the Old World (perhaps we should just call them the deadbeats from now on). They would have to buy $115bn of gold at current prices to raise their bullion to just 5pc of total reserves, and $700bn to reach just half western levels.

The killer-term here is at current prices since any such move in the tiny global market for gold would send prices into the stratosphere.

The reality is that sovereign debtors to the US may not be able stop supporting their symbiotic monetary relationship with the dollar, by buying US treasuries, but they can increase their proportionate  interest in gold denominated reserves.

Read the article here.

Tags: 2pc, Aaa Club, Accumulation, Ambrose, Blue Gold, China, Currency Reserves, Deadbeats, Debtors, Emerging Markets, Evans Pritchard, Fiat Currency, Foreign Currency, Foreign Exchange Reserves, Gold, Gold Bullion, Gold Capital, Imf, India, Morgan Stanley, Proportionate Interest, S 400, Stratosphere, Telegraph Article, Tipping Point, Treasuries
Posted in Emerging Markets, Gold, India, Markets | No Comments »