Archive for May, 2011
Tuesday, May 31st, 2011
Below we provide our trading range charts for four key commodities. In each chart, the green shading represents between two standard deviations above and below the 50-day moving average, and moves above or below the green shading are considered overbought or oversold.
As shown, natural gas is now right at overbought territory, while oil is close to oversold territory. No, that’s not a misprint, natural gas really is at overbought territory, while oil is close to oversold territory.
Gold is also now close to overbought territory once again as it closed the week above $1,530. After the sharp pullback silver saw earlier this month, it has made a decent recovery as well.
The rally in commodities to close out the week coincided with a pullback in the dollar. The US Dollar index broke above its 50-day moving average a couple of weeks ago, and it was even close to breaking its long-term downtrend as we noted earlier in the week. Thoughts of the long-term downtrend coming to an end proved to be wishful thinking, however, and the Dollar index finished off the week back below its 50-day.
[AA] According to MarketClub’s technical indicators, gold is in a solid uptrend, with all three of their trade triangles pointing upward. The monthly triangle signalled in at $1,430.90, the weekly triangle turned on at $1,444.28 and the daily triangle turned on at $1,499.83. The Williams%R indicator says that gold is in overbought territory, and the MACD indicates accumulation. Currently, at the time of this chart, gold was trading at 1,537.68.
Silver shows an uptrend (+65), up 8.3% last week, following the substantial sell-off in the wake of margin requirements being raised. With the monthly (18.74) and daily (35.39) triangles, green, the near term weekly triangle (which turned red at 39.66) is set to turn green, as the price of silver nears the Donnchian channel (purple channel lines) mid-point, and MarketClub’s Adam Hewison says that silver could reach up into the low 40s in the short term. Williams%R took off into the overbought zone at the end of last week, and the MACD shows a solid divergence in favour of accumulation.
Oil too, is experiencing a strong recovery, in the wake of the selloff in early May, and shows a solid uptrend (+100), and monthly and daily MarketClub trade triangles green, and the Weekly triangle still red, having turned so at 106.44. Had you been in crude before the selloff, the effective red weekly sell triangle was loss minimizing.
Williams%R indicates oil is overbought, however, MACD indicates divergence in favour of accumulation.
Copyright © Bespoke Investment Group
Tags: Aa, Accumulation, Commodities, Crude Oil, Macd, Margin Requirements, Marketclub, Mid Point, Moving Average, Natural Gas, Price Of Silver, Range Charts, Shading, Sharp Pullback, Standard Deviations, Technical Indicators, Triangle, Triangles, Uptrend, Us Dollar Index, Wishful Thinking
Posted in Markets, Oil and Gas | Comments Off
Monday, May 30th, 2011
(May 23, 2011-Edinburgh, Scotland) Jim Rogers, Co-Founder of Quantum Group of Funds, talks to Dan Richards about why the commodity bull still has room to run.
Monday, May 30th, 2011
(May 23, 2011-Edinburgh, Scotland) Jim Rogers, Co-Founder of Quantum Group of Funds, talks to Dan Richards about why he is bullish on gold.
Monday, May 30th, 2011
by Trader Mark, Fund My Mutual Fund
Much like FPA’s Robert Rodriquez (highlighted yesterday), another of the world’s brightest financial minds, Templeton’s Mark Mobius says we wasted a crisis, and nothing really has been fixed – the same thoughts this humble writer offered in 2008 and 2009 as bailout after bailout was granted, with no fundamental change to the system. While Mobius says it is “around the corner” I have great faith than the world’s central banks will be able to print enough money to keep the balls juggling for quite a while more. Much like Rodriquez I have no idea when the proverbial manure hits the fan, but the seeds of said crisis are sown nicely. We can however be assured that a Fed who under Greenspan and Bernanke knows how to do nothing but create bubbles while kicking cans… and then crater the system, while being the bank’s drug dealer in chief, will have another mess (of their own making) to clean up in due time. And just like this last time around when the house comes burning down, The Bernank (or maybe easy money Yellen by that moment) will race to the scene of their crime, pour water on the burning system and tell everyone to thank them for rescuing us! And no one will ask why we keep having the same problems, and who is the nexus of them all.
Until then we dance!
- Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved. “There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said at the Foreign Correspondents’ Club of Japan in Tokyo today in response to a question about price swings. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”
- The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, said Mobius, who oversees more than $50 billion. With that volume of bets in different directions, volatility and equity market crises will occur, he said. The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in writedowns.
- “With every crisis comes great opportunity,” said Mobius. When markets are crashing, “that’s when we’re going to be able to invest and do a good job,” he said.
- The freezing of global credit markets caused governments from Washington to Beijing to London to pump more than $3 trillion into the financial system to shore up the global economy.
- The largest U.S. banks have grown larger since the financial crisis, and the number of “too-big-to-fail” banks will increase by 40 percent over the next 15 years, according to data compiled by Bloomberg. “Are the banks bigger than they were before? They’re bigger,” Mobius said. “Too big to fail.”
Copyright © Trader Mark, Fund My Mutual Fund
Tags: Bailout, Bernanke, Central Banks, Due Time, Easy Money, Emerging Markets Group, Enough Money, Executive Chairman, Financial Crisis, Foreign Correspondents Club, Fundamental Change, Great Faith, Humble Writer, Kicking Cans, Mark Mobius, Price Swings, Robert Rodriquez, S Central, Templeton Asset Management, Yellen
Posted in Markets | Comments Off
Monday, May 30th, 2011
by Trader Mark, Fund My Mutual Fund
FPA’s Robert Rodriquez is one of those rare breed who can invest prescient macro observations with an astute investing mind. He does not mind going against the masses, and waiting for his thesis to play out. More often than not he has been proven correctly. After taking a 1 year sabbatical from FPA in 2010 [Mar 12, 2009: "FPA Funds" Robert Rodriquez to Take 1 Year Sabbatical], he has returned to the company and in this recent interview with Money Magazine is warning we really have not fixed (nor learned) much of anything related to the crisis of 2008-2009.
Some excerpts below:
- Few mutual fund managers could pull off what Robert Rodriguez did. During the tumultuous 2000s, his FPA Capital stock portfolio, which is closed to new investors, managed to earn an annualized 9% even as the S&P 500 lost money. At the same time, he also co-managed FPA New Income, a bond fund that earned a spot on our Money 70 list of best funds.
- Rodriguez, 62, is known for thinking big: In early 2007 he laid out a detailed case for why housing debt could trigger a crisis. Now he’s just as worried about the federal debt.
- Rodriguez took a sabbatical in 2010 — he traveled the globe, read about the fall of Rome, indulged his car-racing hobby — and has returned to FPA as CEO, with an advisory role on the funds. He spoke with editor-at-large Penelope Wang; the conversation has been edited.
- Now that you’re back, do you have a different perspective on the economy? I would say a lot of nothing has changed. Before I left, I was vocal about the difficulties that were going to hit the U.S. economy: the growing federal debt and the lack of meaningful fiscal reform. These issues still have not been addressed. Meanwhile, banks are operating much as before — “too big to fail” is continuing. Investors are still chasing after higher yields and loading up on risky investments. The search for safety in the wake of the financial crisis lasted maybe two years. Very little has been learned.
- Won’t the economic recovery help us grow out of these problems? At best, we’re facing a substandard recovery. It will probably take another eight years for the consumer to recover. But mainly I worry about the swelling debt of the U.S. government, which is ballooning faster than the economy is expanding.
- So you see rates rising, and bond prices falling. How big will the correction be? Before my sabbatical, I told clients that if present trends in government continue, we will have another financial crisis within three to seven years — by 2018. I still believe that. We still have time to start the process of fiscal rectitude. But the window of opportunity is shrinking because 2012 will be an election year, when nothing happens. But it’s hard to put a forecast together because when problems occur, they don’t occur in a linear fashion. Take Greece. When the moment came that the emperor had no clothes, what happened to the Greek bond? It went from 4% rates to 10%.
- Speaking of stocks, your team doesn’t seem to see much opportunity there either — FPA Capital is 30% cash. Is there anything you like? So far the biggest opportunities we’re seeing in stocks are in energy, where we’ve been investing heavily for more than 12 years. It’s a supply-demand situation. Wherever I traveled last year, the one word that came to mind was “gridlock.” Cities from Korea to Moscow to South America were totally filled with cars. It makes the 4 o’clock rush on San Diego Freeway in Los Angeles look like a speedway in comparison. There will be more and more demand for oil as consumers’ incomes rise in developing nations.
Please follow the link above for the full interview if interested.
Copyright © Trader Mark, Fund My Mutual Fund
Tags: 2000s, Advisory Role, Bond Fund, Capital Stock, Car Racing, Different Perspective, Fall Of Rome, Federal Debt, Fiscal Reform, Fpa Capital, Fpa Funds, Money 70, Money Magazine, Mutual Fund Managers, Penelope Wang, Rare Breed, Risky Investments, Robert Rodriguez, Robert Rodriquez, Stock Portfolio
Posted in Markets | Comments Off
Monday, May 30th, 2011
The recent sluggishness in equity markets has certainly affected industrial commodities over the past few months, if not gold, which as pointed out earlier is just 2% below its nominal highs and rising despite the 4th margin hike on the Shanghai Gold Exchange overnight – once again gold is seen at the apex of the fiat currency replacement pyramid. So what could cause a rally in industrial commodities in the near term? Sean Corrigan lists the four key catalysts, whose occurrence listed in order of probability, could rekindle the recently faltering rally.
From the most recent edition of Sean Corrigan’s Material Evidence
So, the burning question now is whether commodity prices can shake off the disquiet caused by May’s sharp liquidation and validate the soundbite suppositions of the past few days.
With so much hot money still swilling around the world, readily available at low nominal and largely negative real rates of interest, we can never say never, but so many other beneficiaries of the Bernanke Bubble are either losing momentum and/or breaking trend, that it may be that the whole shell game has been busted pro tem.
Certainly, the fundamental backdrop is beginning to look less rosy, with Japan suffering a 13% decline in exports, Taiwan’s industrial expansion slowing, Thailand’s turning negative, US macro numbers registering a series of disappointments, UK businesses still cutting back on investment and broad swathes of China’s corporate landscape experiencing a severe margin squeeze.
Our feeling is that for a significant rally to take place from here (that is, without enduring any further, intervening weakness), one of four things has to happen soon, listed here in a loose order of their assumed probability:?
- The Japanese government will forego the chance to introduce the meaningful, permanent fiscal rebalancing to which it might accustom the electorate under the guise of a supposedly temporary, disaster?relief measure and inveigle the BOJ into monetizing (albeit at one remove) the vast reconstruction effort needed in the country instead.
- The Chinese will prematurely relinquish their fight against the inflation which was unleashed by their huge, unfocused stimulus’ efforts of the past two years, in the estimation that the threat to the regime’s predominance posed by slow growth and falling employment is now greater than that posed by rapidly rising prices.
- The Fed will find an excuse to revisit a programme of ’quantitative easing’ (i.e., money printing) without first being forced to sit by and watch a prolonged retrenchment in economic activity
- The US dollar will undergo a renewed, sharp decline, allowing existing carry?trades and ‘Risk On’ mixes to be reinstituted with the least demand for original thought. Here we should note that while, ceteris paribus, a flight from the dollar should not automatically boost commodity prices in other currencies, a combination of having a greater marginal impact in a much smaller market and the active contracting of paired trades does in practice tend to bring about such a broad appreciation.
If none of these US Cavalry troopers appear over the horizon in a timely enough fashion, or until there is unequivocal evidence that speculative appetite has otherwise fully returned, our worry is that the industrial commodities in particular remain at risk of another 10?15% correction and a more thoroughgoing purge of leveraged long positions before we can find some sort of meaningful base from which to re?enter a fuller exposure.
Copyright © Sean Corrigan, via ZeroHedge.com
Tags: Burning Question, Catalysts, Commodity Prices, Corporate Landscape, Corrigan, Disappointments, Disquiet, Fiat Currency, Gold Exchange, Hot Money, Industrial Commodities, Industrial Expansion, Japanese Government, Macro Numbers, Material Evidence, Rebalancing, Shell Game, Sluggishness, Suppositions, Uk Businesses
Posted in Markets | Comments Off
Monday, May 30th, 2011
by Jeff Young, Nexgen Financial
Commodity markets around the world have been under pressure of late as investors are taking profits on increasing evidence of a slowdown in the global economic recovery. The S&P/TSX with its heavy commodity weight has been one of the weaker performing indexes and is now down slightly for the year to date. Most other developed market indices have held on to low single digit gains. While all commodities have been under pressure since the beginning of May, silver has seen the highest percentage losses. As Figure 1 illustrates silver was unable to sustain the parabolic advance it had in April and has fallen 35% from its ephemeral highs.
Figure 1: Spot Silver Prices
While there are a number of likely reasons for the recent weakness in commodity prices, what is of real interest is understanding if the fundamentals that have supported the multi year secular uptrend in commoditiy prices have changed to the point that we can expect the long term uptrend to end, or if this is just another shorter term cyclical correction. As with all things economic, one needs to look at supply and demand.
While the supply side of the equation is relatively understandable given the scarcity of various commodities and the long lead times needed to bring new projects on stream, the demand side remains more prone to uncertainty. Since 2008, the primary driver of real demand has been the global economic recovery with developing nations and China in particular playing a starring role. Financial demand has also been very high with ultra loose monetary conditions and an ever weakening USD steering investors into commodities as an alternative store of wealth. Real and financial demand are not mutually exclusive as many of the same drivers impact both sources.
Looking first at real demand, recent reports have shown a slowing in global economic growth. Figure 2 shows the Global Composite Purchasing Managers Index which dropped in April for the second consecutive month and is showing its weakest level since 2009. Investors fear an acceleration of this downtrend as fiscal and economic stimulus measures are reduced around the world.
Figure 2: J.P. Morgan Global Composite Purchasing Managers Index
China and the US, as represented in Figures 3 and 4, respectively, have also seen potential peaks in their manufacturing growth.
Figure 3: China Manufacturing Purchasing Managers Index
Figure 4: ISM Manufacturing Purchasing Managers Index
While we have seen a slowdown in the rate of global growth it is too early to conclude that this is anything more than a mid-cycle slowdown. That said; given the large gains in commodities and commodity related equities since last summer investors appear to be booking profits as a precautionary measure.
In addition to concerns relating to real (end user) demand for commodities monetary tightening in Asian and European countries is reducing financial market liquidity making it more expensive for investors to hold commodities. The looming end of QE2 in the US will only exacerbate this trend. Many countries around the world are facing a growing inflation problem and are using various measures to ensure inflation expectations don’t get out of control. Whatever the measure taken, the impact is less liquidity which pressures both economic growth and asset prices.
An increase in the margin requirements for several commodities futures contracts in the US also hasn’t helped matters. A conspiracy theorist might suggest that the US is attempting to bring down commodity prices, a key source of recent inflationary concerns, in the near term to buy themselves some room to continue a highly accommodative monetary policy (and perhaps introduce QE3) as they focus on improving the US employment situation. Any hint of a QE3 would have an immediately positive impact on commodity prices and a negative impact on the USD which would, of course, be beneficial to US exporters.
Figure 5 is an interesting table from a recent Morgan Stanley market discussion piece. It looks at Industry group performance at various stages of the ISM (Institute for Supply Management PMI) cycle. As earlier discussed, the ISM, shown above in Figure 4, recently looks to have peaked at just over 60 and is potentially rolling over. This would represent stage 3 in Figure 5.
Figure 5: Industry Group Performance
While energy and materials typically do well during this phase of the ISM cycle, the US Fed’s quantitative easing efforts may have pull forward the out-performance phase of these sectors. While energy and materials stocks have been correcting we are continuing to see strength in many of the other sectors that typically outperform in Stage 3. This has largely been a positive for the funds given the strong representation of many companies from these sectors.
In summary, from a macroeconomic perspective we are seeing a slowing in global growth, reduced liquidity, particularly in the developing world as these countries fight to keep inflation in check; increased margin requirements in commodity markets; and a strengthening (at least temporarily) in the USD. All are headwinds to the “risk on” trade which favours commodities, emerging markets and US exporters. A return to the “risk on” trade could come from an end to monetary tightening in China; any hints of a QE3 in the US, renewed USD weakness or an uptick in global growth rates.
On the corporate front we are now largely through Q1 earnings reporting in Canada and the US and the results have been less positive than those of recent quarters. In Canada, the aggregate earnings surprise, that is the amount by which reported earnings are different than consensus analyst estimates, has come in at a market cap weighted -4.4%., Figure 6 shows the percentage earnings surprise for quarterly reports since 2006. It is rare to see a negative result so these results are disappointing. The energy and materials sectors were the largest sources of negative earnings surprises. On the other hand the Telecom sector was a source of positive surprise. Portfolio holdings Telus and BCE both reported stronger than expected earnings, raised their dividends and have seen their stock prices react favourably. Overall, the US results were much more in line with recent quarters.
Figure 6: Earnings Surprise by Quarter (%)
Source: CIBC world Markets
As Figure 7 illustrates, reported revenue growth was also disappointing in Canada, although better in the US. With corporate margins near all-time highs we continue to depend on increasing revenue to drive earnings growth in the quarters ahead.
Figure 7: Revenue Surprise by Quarter
For Canada, Figures 6 and 7 do not include the Q2 results from the banks which will report over the next two weeks. While we do have some concerns that mortgage lending in Canada will slow we expect increasing business lending, strong capital positions and an improving US economy will support continued earnings and dividend growth.
The underrepresentation of cyclical stocks has been beneficial for the portfolios as these sectors have borne the brunt of recent market weakness. While the funds will always maintain their focus on dividend stocks continued outperformance in “defensive” sectors may stress their valuations. In this case we expect to take advantage of any further market weakness by adding more cyclical companies where we expect to see higher dividend growth rates as (and if) these companies become more attractive from a relative valuation standpoint. We believe that the economic recovery will be uneven but will continue; supported by favourable monetary conditions.
Copyright © Nexgen Financial
Tags: Canadian Market, Commodities, Commodity Markets, Commodity Prices, Consec, Developing Nations, Economic Recovery, Figure 1, Global Economic Growth, Indexes, Lead Times, Market Indices, Monetary Conditions, New Projects, Purchasing Managers Index, Scarcity, Slowdown, Spot Silver Prices, Supply And Demand, Term Uptrend, Tsx
Posted in Canadian Market, Markets | Comments Off
Monday, May 30th, 2011
Schwab Perspectives: Shifting Sentiment
Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.,
Brad Sorensen, CFA, Director of Market and Sector Analysis, Schwab Center for Financial Research, and
Michelle Gibley, CFA, Senior Market Analyst, Schwab Center for Financial Research
May 27, 2011
- Economic headwinds are causing growth expectations to be reevaluated, resulting in choppier action in a majority of asset classes, including stocks. This trend seems likely to continue in the near-term, with uncertainty somewhat elevated over the next few months.
- The Fed is moving steadily closer to ending its purchases of Treasuries but we don’t believe it’s a major market event. Normalization of monetary policy still seems slow in coming, while a game of brinkmanship in Washington has the potential to rattle markets, although we believe QE2 ending on schedule is nearly certain.
- Europe’s debt crisis continues to plague the eurozone. Solutions appear to be limited and agreement is still anything but assured. Meanwhile, China’s slowdown is also weighing on investors, but we don’t believe a hard landing is in store.
There has been a downshift in economic growth lately that has caused markets of all types to gyrate. Commodities moved sharply lower before rebounding modestly; Treasury yields have moved even lower; the dollar has shown some strength; and stocks have been more volatile, but have still moved in a roughly sideways fashion. While disconcerting, this type of action is to be expected as some of the “dollar carry trades” unwind and investors adjust to a slower growth phase.
This is an excellent example of why investing with a short-term view can be so difficult. Investing has to be viewed through a longer time horizon with objectives and risk tolerances well established ahead of time. We believe that the most likely path of the stock market over the next few months is sideways, although there is certainly the potential for sizable moves in both directions depending on news flow. We remain confident that the longer-term trend in the stock market is higher, while bond prices are likely to head at least somewhat lower (resulting in higher yields) over time.
Data tells a story of deceleration
Recent economic data has been somewhat weaker. Regional manufacturing surveys dropped sharply last month, although they are notoriously volatile and mostly remained in expansion territory. Industrial production was flat in April, versus expectations of a gain of 0.4%, while capacity utilization fell 0.1%, and remains 3.5% below the 1972-2010 average. These indications of a slowdown in growth has been confirmed by Treasury yields moving lower, indicating growth concerns trump inflation. It is a bit surprising that investors continue to loan to companies and the government at such low rates; locking in a low return if held to maturity and the potential for somewhat worse results if rates start to move higher. Investors who have over-weighted fixed income may do well to take some profits and look to have a more balanced portfolio.
It’s easy to get mired in the disappointing. Growth has indeed slowed and concerns are justified, but the majority of indicators still indicate economic expansion. Additionally, there have been several external factors we believe have impacted data temporarily. The Japanese natural disasters disrupted supply chains that are starting to come back online, while extreme weather impacted production and distribution in the United States. Further, the spike in oil prices above $110 per barrel seemed to have a large affect on sentiment among businesses but we have seen that improve with the recent weaker oil price. And while the Index of Leading Economic Indicators fell 0.3% in April, it was only the second negative monthly reading since March of 2009, and we believe it will resume its positive trend in May as some of these temporary factors dissipate.
LEI dip likely temporary
Source: FactSet, U.S. Conference Board. As of May 23, 2011.
Employment conditions illustrate some of the aforementioned distortions. Jobless claims had moved steadily higher over several weeks recently, moving well above the 400,000 level considered key in indicating an improving job market. However, we maintained that a majority of those gains were likely unsustainable as they were impacted by the late Easter holiday, weather, and several other temporary events and we have seen claims again start to move lower again. The job market likely remains key to further improvement in the economy, as increased confidence in job prospects leads to increased spending, greater demand, and even greater hiring. We have seen nascent signs of more rapid improvement, but still want and expect to see more hiring.
At this point, an improved jobs picture seems to be the only thing that may help the struggling housing market. Housing starts were down 10.6% in April; permits were down 4.0%; and existing home sales were down 0.8%—all confirming the year-over-year median price drop we saw in existing homes as foreclosures and other distressed sales continue to plague the market. The silver lining is that mortgage rates remain extremely low, pricing is more attractive, and the impact on the US economy of housing has dropped substantially. We continue to believe the healing of the housing market is going to be a multi-year process, but a more rapid improvement in job growth would likely accelerate that development.
Commodity action helps out Fed, debt drama continues
With an eye on the still-lackluster housing market, the Fed continues to buck the global trend and maintain its extremely easy monetary policy; again reiterating that QE2 will be completed in full and rates will be on hold for an “extended period.” The Fed has maintained their belief that the headline inflationary pressures remain temporary in nature, and the recent action in commodity prices likely bolsters their case.
Commodity action means easing inflationary pressures
Source: FactSet, Standard & Poor’s. As of May 23, 2011.
Readings on inflation are measured in terms of changes in price over time. Therefore, commodity prices don’t necessarily have to fall further to cause more moderate inflation readings; they simply have to stop going up. With some recent strength in the dollar, and global central banks tightening monetary policy, we believe that commodity prices are likely to remain relatively flat or even fall a bit further in the near term. With headline inflation likely to ease, and core inflation still tame, with excess capacity still ample and virtually no wage growth; the Fed will likely feel little pressure to accelerate its path toward normalization in the near term.
In contrast, the pressure in Washington continues to rise as the debt ceiling has now been reached and no agreement to raise it appears imminent. As noted before, the Treasury has various accounting “tricks” it can use to move the reckoning date into at least early August, but the closer we get, the more jittery markets may become. We have little doubt this will come down to the last few days, but are also quite positive that the United States will not default on its debt. But the struggle over this relatively routine maneuver illustrates the fight for the 2012 budget is likely to be a bruising one.
Eurozone debt worries linger
Such events are unsettling in the United States, but circumstances in the eurozone are even more complicated given diverse economies with independent national budgets using a common currency, the euro.
The situation in the eurozone has heated up because Greece has not met its fiscal goals agreed to in its bailout plan for the third quarter in a row. Due to Greece’s missed fiscal targets, cash may be running low. Without either a restructuring or additional funds, Greece could default if it runs out of cash to fund interest or principal payments due this summer.
Therefore, investors increasingly view a restructuring as a necessity. Restructuring can be done either by extending maturities (also called a “soft” or voluntary restructuring, or re-profiling), or reducing principal (involuntary). Bondholders would take losses in an involuntary scenario, while receiving reduced payments each year in a voluntary scenario. Complicating matters, the European Central Bank said it may pull funding for Greek banks in the event of a restructuring.
While Greece itself is a small portion of the global economy and debt markets, markets are skittish about the broader implications of a Greek restructuring or default due to the interconnectedness of the eurozone banking system, as well as the risk of contagion to other countries. In May, leading French bank Credit Agricole had its credit rating downgraded due to its Greek exposure, and Moody’s warned that a default by Greece could result in credit downgrades in other peripheral nations.
We think policymakers will provide Greece with more money, but writing a new adjustment plan will be a tough sell. Voters in fiscally prudent eurozone countries have already pushed back, unwilling to pay for bailouts in fiscally weak countries, and have ushered in political changes. These changes have increased uncertainty over bailout responses, as well as fiscal spending plans. Government uncertainty was cited in both Italy’s and Belgium’s lowered sovereign credit ratings outlooks in May; and investors are concerned that new off-balance sheet liabilities for Spanish local governments may come to light under new leadership.
Why eurozone debt matters
We believe the inability of eurozone policymakers to speak and act with unity is creating an ongoing eurozone debt hangover. With eurozone debt concerns continuing to hit headlines, what does it all mean?
Our attention on eurozone sovereign debt ultimately relates to the European banking system due to cross-country holdings of debt. We are concerned European banks could recoil from lending, the lifeblood of economic growth. Eurozone banks may either lend conservatively to preserve capital or raise lending rates. The first quarter Europe Bank Lending Survey showed a tightening in credit standards and banks expect further tightening. A eurozone bank CEO recently said that many eurozone banks are facing higher funding costs due to the sovereign debt crisis, often higher than the companies they lend to, which is “clearly unsustainable.” Unlike in the United States, European companies are more reliant on bank loans than capital markets for funding.
Sovereign debt concerns hit European banks
Source: FactSet, STOXX. As May 24, 2011.
European bank stocks have sold off due in part to these worries. A reduction in eurozone economic growth due to a moderation in lending would subtract from global growth. As a region, the eurozone ranks as the second-largest economy, only slightly smaller than the US economy, and roughly twice the size of China’s.
China slowdown worries arise
China’s growth tends to evoke strong emotions in both bulls and bears, and a likely slowdown in growth will result in bears becoming more vocal. Concerns have shifted from growing too fast and the risk of inflation, to slowing too much. We believe the truth will likely fall somewhere in the middle.
A number of factors point to a potential slowdown, including a slower rate of money supply, a slump in property sales, declines in commodity imports, a moderation in purchasing manager indexes, and the reduction of global growth estimates. Access to credit has tightened with reports that small businesses are having difficulty obtaining loans, banks are competing for deposits, interbank rates are increasing and some property developers are paying steep premiums in non-bank channels to access capital.
Regardless, economic growth in China is estimated by the Bloomberg survey of economists to remain above 9% for 2011. Prior periods of sub-8% growth, the range at which a hard landing is considered a risk, have coincided with global recession or major external shocks. We don’t see a hard landing in China’s economy as likely, as detailed in our China bears and bulls article.
However, it will likely take several months before markets get confidence on whether Chinese policymakers have been able to engineer slower inflation without overly threatening growth.
Do international issues matter to US investors?
US investors may wonder how much eurozone debt, the quake in Japan, or a slowdown in China matters. Indeed they do because the globe is more interconnected than ever before and events overseas could reduce global growth. If global growth is reduced, corporate earnings in the United States could also be reduced, although still post solid growth in 2011. Of S&P 500 Index companies reporting foreign sales, roughly 45% of revenues and 40% of net income is from international sources, predominately Europe.
In terms of broader implications, a slowdown in China is a risk to commodity prices. China’s slowdown will likely be concentrated in construction on infrastructure and housing, which constitutes nearly 50% of Chinese economic activity. China represents roughly 40% or more of global consumption of cement, iron ore, coal, steel, aluminum and copper.
China slowing, will commodities follow?
Source: FactSet, Shanghai Stock Exchange, Commodity Research Bureau. As May 24, 2011.
While Chinese shares may have discounted slower growth, and the Chinese market tends to be a leading indicator of global growth, commodity prices could ease. Read more in our article on the breakdown in commodities.
However, we believe a Chinese construction slowdown could be short in nature due to the Chinese government’s affordable housing program, which seeks to build 10 million new homes in 2011, and China, as well as many other emerging nations and Japan, have further infrastructure building plans.
Visit www.schwab.com/oninternational for more international perspective.
The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada. As of May 27, 2010, the MSCI EAFE Index consisted of the following 22 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
The MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of May 27, 2010, the MSCI Emerging Markets Index consisted of the following 21 emerging-market country indexes: Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.
The S&P 500® index is an index of widely traded stocks.
Indexes are unmanaged, do not incur fees or expenses and cannot be invested in directly.
Past performance is no guarantee of future results.
Investing in sectors may involve a greater degree of risk than investments with broader diversification.
International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security. Schwab does not assess the suitability or the potential value of any particular investment. All expressions of opinions are subject to change without notice.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
Tags: Asset Classes, Brazil, Brinkmanship, Canadian Market, Charles Schwab, Chief Investment Strategist, Debt Crisis, Downshift, Growth Expectations, Growth Phase, Headwinds, Infrastructure, Liz Ann, Market Analyst, Monetary Policy, Normalization, Sector Analysis, Senior Vice President, Slowdown, Stock Market, Time Horizon, Treasuries, Treasury Yields
Posted in Brazil, Canadian Market, Infrastructure, Markets | Comments Off
Monday, May 30th, 2011
May 27, 2011 (8 minutes)
This week’s online video features Cynthia Caskey, Vice President & Canadian Equity Portfolio Manager, TD Waterhouse in conversation with Patricia Lovett-Reid, discussing the Q2, 2011 trends in Canadian bank earnings and the prospects for dividend increases going forward. She provides her outlook for the sector and shares names of some stocks she likes.
In the video interview, Ms. Caskey addresses the following:
- Canadian Bank earnings: is this a buying opportunity?
- Impact of National Bank’s acquisition of Wellington West?
- What do you think of the dividend increases?
- Do International operations matter?
- Which metrics matter, which stocks do you like?
Click here, or on the image below to view:
Cynthia Caskey Bio
Cynthia Caskey is Vice President and Canadian Equity Portfolio Manager for TD Waterhouse Canada Inc. With over 23 years of experience, Cynthia’s broad spectrum of knowledge spans from private client investing to corporate finance. At TD Waterhouse, Cynthia plays a key role in the construction and maintenance of the Core Portfolios, which provide clients with a long-term, disciplined approach to investing. Additionally, Cynthia leads the TD Waterhouse Canadian Quantitative Research Portfolio, is a member of the Portfolio Management Review Committee. A chartered financial analyst, Cynthia also holds a Bachelor of Commerce from Carleton University.
Copyright © TD Waterhouse
Tags: Bachelor Of Commerce, Broad Spectrum, Canada Inc, Canadian, Canadian Equity, Canadian Market, Carleton University, Caskey, Chartered Financial Analyst, Corporate Finance, Dividend Increases, International Operations, Interview Ms, Patricia Lovett Reid, Portfolio Management, Portfolio Manager, Private Client, Quantitative Research, Research Portfolio, Td Waterhouse Canada, Video Interview, Wellington West
Posted in Canadian Market, Markets | Comments Off
Monday, May 30th, 2011
This week on Wealthtrack, Consuelo Mack talks to a financial thought leader who is challenging a bedrock principle of investing. Award-winning University of Chicago finance professor, Lubos Pastor explains why stocks are not necessarily best for the long run. Needless to say, his research conclusions are quite different from Jeremy Siegel’s classic study, classic study, “Stocks for the long run”.
Source: Wealthtrack, May 27, 2011.
Tags: Bedrock Principle, Consuelo Mack, Finance Professor, Jeremy Siegel, Lubos, Research Conclusions, Study Stocks, Thought Leader, University Of Chicago, Wealthtrack
Posted in Markets | Comments Off