News That Matters (August 31, 2011)

Wednesday, August 31st, 2011

FT.com
US and European stock markets managed to overcome the bleak results of two keenly watched surveys, which showed confidence slumping on both sides of the Atlantic, to eke out modest gains, the FT reports. http://ftalphaville.ft.com/thecut/2011/08/31/665386/stocks-eke-out-further-gains/

Europe’s top banking regulator is drawing up options to help banks in Europe struggling to tap credit markets for medium- and long-term funding, the FT reports. Among the policy proposals being considered by the European Banking Authority is a new guarantee scheme for bank bonds, http://ftalphaville.ft.com/thecut/2011/08/31/665361/europe-bank-regulator-plans-radical-funding-aid/

A dispute has erupted over control of Libya’s $65bn sovereign wealth fund, as the national transitional council attempts to maintain stability in the oil-rich nation, reports the FT. Several NTC members have contested the authority of Mahmoud Badi http://ftalphaville.ft.com/thecut/2011/08/31/665346/dispute-over-control-of-65bn-libya-fund/

Local councils plan to return to the capital markets en masse for the first time in decades as a result of George Osborne’s decision last autumn to raise sharply the rates on central government loans,http://ftalphaville.ft.com/thecut/2011/08/31/665336/councils-plan-return-to-capital-markets/

Chinese companies and investors are stepping up their purchases of industrial commodities such as copper, the FT reports. The wave of buying is providing support for metals and minerals prices after commodities prices fell this month at worries about a double-dip http://ftalphaville.ft.com/thecut/2011/08/30/665286/china-steps-up-copper-buying/

Temasek has emerged as a key player in the consortium that bought up half of Bank of America’s stake in China Construction Bank for $3.3bn, reports the WSJ. Singapore’s sovereign wealth fund had pared back its CCB shares earlier in the month in line with sales of holdings in Bank of China, http://ftalphaville.ft.com/thecut/2011/08/30/665266/temasek-moves-fast-in-buying-bofas-ccb-shares/

The United States is unlikely to embrace Yoshihiko Noda, Japan’s sixth prime minister in five years, as it shows its frustration at the ‘revolving door’ of Japanese politics, the FT says. Washington does not expect the head of the country’s 95th cabinet to last beyond 2013′s general election. http://ftalphaville.ft.com/thecut/2011/08/30/665241/noda-not-seen-as-long-term-bet-for-japan-pm/

Members of the Federal Reserve’s open markets committee wanted to make additional asset purchases “to provide more accommodation” in August’s meeting, before settling on committing to keep rates low until 2013, http://ftalphaville.ft.com/thecut/2011/08/30/665186/fed-considered-more-substantial-move-in-august/

Consumer confidence in the United States has fallen to its lowest since April 2009, in the depths of the previos recession, Reuters reports. An index of consumer attitudes fell to 44.5 from 59.2 a month before, http://ftalphaville.ft.com/thecut/2011/08/30/665221/us-consumer-confidence-lowest-since-2009/

Italy’s centre-right coalition is to revise radically a tax on high incomes introduced as part of the €45.5bn austerity package passed by the cabinet two weeks ago, in an attempt by Silvio Berlusconi, prime minister, to win back support for his ruling majority. The cancelling of the so-called “solidarity contribution” for everyone but national legislators is to be balanced with new fiscal measures to combat tax evasion and the reduction of tax breaks for co-operatives, said a statement issued after a long meeting between Mr Berlusconi, Giulio Tremonti, his finance minister, and Umberto Bossi, leader of the Northern League and a close government ally. http://www.ft.com/intl/cms/s/0/d5a93728-d2e4-11e0-9aae-00144feab49a.html#axzz1WOELnKbv

A leading Fed policymaker called for more monetary stimulus on Tuesday as it emerged that staff at the US central bank have permanently cut their growth forecasts. In an interview with CNBC, Charles Evans of the Chicago Fed said that he would “favour more accommodation” and became the first policymaker on the rate-setting Federal Open Market Committee to explicitly countenance letting inflation rise above the Fed’s target of 2 per cent in the short-term. http://www.ft.com/intl/cms/s/0/ac3a80c2-d31b-11e0-9ba8-00144feab49a.html#axzz1WOELnKbv

WSJ.com

Asian shares were mostly lower on Wednesday amid cautious trade, with exporters in Tokyo struggling to make headway amid weak global and domestic data. Japan’s Nikkei Stock Average fell 0.2%, Australia’s S&P/ASX 200 was flat, South Korea’s Kospi Composite tacked on 0.1% and New Zealand’s NZX-50 was off 0.5%. Dow Jones Industrial Average futures fell four points in screen trade.  The weak backdrop for equities kept the euro under pressure. The single currency was also weighed by Tuesday’s dour consumer confidence reading for the region and an underwhelming bond auction underscored the euro-zone’s debt travails. http://online.wsj.com/article/SB10001424053111904332804576541283537990112.html?mod=WSJASIA_hpp_LEFTTopWhatNews

Industrial production in Japan and South Korea fell short of expectations in July, the latest sign Asia’s manufacturing sector may be losing momentum due to softening U.S. and European demand. Japanese industrial output in July was up 0.6% from the previous month, a fourth straight month of expansion, the Ministry of Economy, Trade and Industry said Wednesday. But the median forecast of economists by Nikkei and Dow Jones Newswires was 1.5%. Japanese companies surveyed by the ministry said on average they expect to cut production by 2.4% in September after a 2.8% increase in August.http://online.wsj.com/article/SB10001424053111904332804576541322576535978.html?mod=WSJASIA_hpp_LEFTTopWhatNews

Federal Reserve officials are as deeply divided as they’ve been in decades about how to spur the flagging economy, records released Tuesday show, as they stake out positions on what, if any, action to take at their September meeting. Minutes of the Fed’s Aug. 9 meeting, released Tuesday after the normal three-week lag, offered new evidence that some officials wanted to immediately restart a controversial bond-buying program aimed at spurring the economy. Others felt that even the smaller steps the central bank instead chose were too aggressive.  Officials considered a range of actions—which included setting numerical targets for inflation and http://online.wsj.com/article/SB10001424053111904332804576540651581740740.html?mod=WSJEurope_hpp_LEFTTopStories

India’s economy grew 7.7% in the April-to-June period from a year earlier, its slowest pace in six quarters, confirming fears that a series of interest-rate increases, combined with the global slowdown and a lack of local reforms, have kept growth well below the government’s estimate. The growth data, however, don’t indicate a broad-based slowdown; the services sector, which accounts for 58% of India’s gross domestic product, grew 10% despite a muted 5.1% expansion in industries. India’s April-June expansion was only slightly lower than the 7.8% growth in the preceding quarter, though it lagged behind the 8.8% increase in the same period last year. http://online.wsj.com/article/SB10001424053111904332804576539643029290116.html?mod=WSJEUROPE_hpp_MIDDLETopNews

Iran’s steadfast support for Syria’s regime has rapidly eroded Tehran’s credibility among Arabs, leaving the country with a foreign-policy dilemma as popular uprisings mount across the region. Supporting President Bashar al-Assad will further diminish Tehran’s already troubled standing in the region, political analysts say. But abandoning him would crumble Iran’s platform in Syria.http://online.wsj.com/article/SB10001424053111904279004576526422995092978.html?mod=WSJEUROPE_hpp_MIDDLETopNews

The European Commission confirmed Tuesday that member states are in the process of completing an embargo on Syrian oil exports with the measures due to come into effect in coming days. John Clancy, an interim spokesman for High Representative for Foreign Affairs Catherine Ashton, said member states are now “dotting the I’s and crossing the T’s” on the sanctions. The focus “now is on getting these additional sanctions or measures in place … around the weekend.” European Union foreign ministers will hold an informal meeting at the weekend in Poland.http://online.wsj.com/article/SB10001424053111904332804576540033752414912.html?mod=WSJEUROPE_hpp_MIDDLETopNews

The first comprehensive soil survey from areas around the Fukushima Daiichi nuclear plant showed extensive ground contamination and another report warned of the continued threat to Japan’s food chain, underscoring the major challenges the country still faces in its radioactive cleanup efforts. http://online.wsj.com/article/SB10001424053111904332804576540131142824362.html?mod=WSJEUROPE_hpp_MIDDLETopNews

Sentiment among euro-zone companies and consumers plunged in August, the latest sign that steep declines in equity markets earlier in the month, public anger over the second bailout of Greece and signs of feeble growth in Germany are taking a severe toll on the economic outlook. The European Central Bank stepped into the fray again as the euro bloc’s primary crisis responder, buying Italian and Spanish bonds ahead of a key sale of longer-term Italian government debt. The Economic Sentiment Index fell for a sixth straight month, to 98.3 in August from 103.0 in July, the European Commission said, thehttp://online.wsj.com/article/SB10001424053111904332804576539791615608416.html?mod=WSJ_hp_LEFTWhatsNewsCollection

U.S. home prices increased in the second quarter but fell compared with the same period last year, painting a mixed picture of the real-estate market amid plummeting consumer confidence. The S&P/Case-Shiller Home Price Index, released Tuesday, rose 3.6% for the quarter ended in June, but fell 5.9% annually, sending prices back to pre-boom 2003 levels. Consumer confidence, meanwhile, sank to its lowest level in two years, according to the Conference Board, a private research group.  Confidence fell to a reading of 44.5 in August from 59.2 in July. That is its lowest level since April 2009 and much worse than http://online.wsj.com/article/SB10001424053111904332804576540200549623660.html?mod=WSJ_hp_LEFTWhatsNewsCollection

Marketwatch.com
China’s consumer inflation may have tapered off, with consumer-price-index growth slowing in the remaining months of this year from a three-year high of 6.5% in July, said analysts. Mizuho Securities’ Greater China chief economist Shen Jianguang and Qiao Yongyuan at consultancy CEBM, expected CPI to grow 6.2% in August. The slowdown of the U.S. economy has to some extent subdued the rise of global oil prices, and thus alleviated China’s inflationary pressures, said Shen. Though food prices remain high, growth momentum eased in August from July, said Qiao. Industrial Securities chief economist Lu Zhengwei expected China’s full-year CPI growth to range from 5.4% to 5.6%, citing a peak in July. http://www.marketwatch.com/story/china-inflation-winding-down-analysts-2011-08-30

Though the Federal Reserve should not have pledged to keep rates at ultra-low levels through the middle of 2013, the central bank shouldn’t revisit that commitment made earlier this month, according to Narayana Kocherlakota, the Minneapolis Fed president, one of three who dissented on that decision. “I believe that undoing this commitment in the near term would undercut the ability of the Committee to offer similar conditional commitments in the future – and this ability has certainly proved very useful in the past three years,” he said on Tuesday. However, Kocherlakota made the case against further easing at its scheduled September meeting. http://www.marketwatch.com/story/fomc-dissenter-says-fed-should-stick-to-pledge-2011-08-30

If you’re not interested in 10 pages of two-column verbiage, here are the condensed minutes from the Federal Open Market Committee meeting of Aug. 9:  “The economy’s lousy. It’s not our fault. We can do more things but they probably won’t work, or at least not work well.” http://www.marketwatch.com/story/from-500-yards-out-fed-weighs-putter-or-wedge-2011-08-30

Reuters.com
Spot gold edged lower on Wednesday as investors waited for more clues to economic conditions and watched to see if the U.S. Federal Reserve would deploy more stimulus measures, but the metal is poised for its biggest monthly gain since November 2009. Spot gold inched down 0.2 percent to $1,833.29 an ounce by 0254 GMT, headed for a monthly rise of 13 percent, its strongest gain since November 2009. It has risen nearly 30 percent so far this year, close to the gain for all of 2010. U.S. gold gained 0.4 percent to $1,836.50 an ounce, also on course for a 13-percent rise from a month earlier.http://www.reuters.com/article/2011/08/31/us-markets-precious-idUSTRE7781Q420110831

Italy returned to bond markets on Tuesday with a 7.74 billion euro sale that met relatively weak demand despite the ECB buying Italian debt in recent weeks, sparking a nervous reaction among investors. Traders said the European Central Bank stepped in after the auction to buy significant amounts of 10-year debt, bringing yields back down. The launch of a new 10-year benchmark bond drew bids worth 1.27 times the 3.75 billion euros sold, below the year’s average bid-cover ratio of 1.4. The ECB began buying Italian debt on the secondary market earlier this month, bringing benchmark 10-year yields down from levels well above 6 percent, seen as unsustainable, to around 5 percent. http://www.reuters.com/article/2011/08/30/businesspro-us-italy-debt-auction-idUSTRE77T1L720110830

Bloomberg.com
Oil declined, heading for the biggest monthly drop since May, as investors speculated that increasing crude stockpiles in the U.S. indicate fuel demand is faltering in the world’s biggest consumer of the commodity. Crude for October delivery slid as much as 55 cents to $88.35 a barrel in electronic trading on the New York Mercantile Exchange and was at $88.53 at 2:48 p.m. Sydney time. The contract yesterday advanced $1.63 to $88.90. Prices are down 7.5 percent this month and 3 percent this year. Brent oil for October settlement was at $114.07, up 5 cents, on the London-based ICE Futures Europe exchange. The European benchmark contract was at a premium of $25.54 to U.S. West Texas Intermediate futures, compared with a record close of $26.21 on Aug. 19. Brent is down 2.3 percent this month. http://www.bloomberg.com/news/2011-08-30/crude-in-new-york-declines-after-api-report-signals-increasing-stockpiles.html

Masaaki Shirakawa may become the first Bank of Japan governor since the 1990s to finish his term without raising interest rates as entrenched deflation and the yen’s surge weaken the world’s third-biggest economy. The 18-month overnight-index swap rate, an indication of what derivative traders expect the Bank of Japan’s key interest rate will average during the period, sank to 0.05 percent on Aug. 23, the lowest since at least Dec. 2005, and compared with the BOJ’s target rate of zero to 0.1 percent, according to data compiled by Bloomberg. JPMorgan Chase & Co. and Mitsubishi UFJ Morgan Stanley Securities Co. have pushed back estimates for an increase in the overnight lending rate to 2014 at the earliest. http://www.bloomberg.com/news/2011-08-30/swap-rate-bets-signal-boj-s-shirakawa-will-never-raise-rates-japan-credit.html

South Korea’s industrial production expanded at the slowest pace in 10 months as weakness in global growth threatens the outlook for exports. Output rose 3.8 percent from a year earlier after gaining a revised 6.5 percent in June, Statistics Korea said today. The median estimate of 11 economists in a Bloomberg News survey was for a 6.2 percent gain. Production slid 0.4 percent from June, when it increased 0.9 percent. http://www.bloomberg.com/news/2011-08-30/south-korea-s-output-grows-less-than-forecast-3-8-as-global-demand-cools.html

The Philippine economy grew less than economists expected last quarter, adding to signs Asia’s expansion is easing as faltering global demand curbs exports. Gross domestic product increased 3.4 percent in the second quarter from a year earlier, compared with a revised 4.6 percent gain in the three months through March, the National Statistical Coordination Board said in Manila today. The median estimate of seven economists surveyed by Bloomberg News was for growth to slow to 4.1 percent. http://www.bloomberg.com/news/2011-08-31/philippine-economy-expanded-slower-than-estimated-3-4-in-second-quarter.html

The ideas President Barack Obama is considering for his new jobs agenda could put hundreds of thousands of people back to work, and still have a limited impact in an economy that remains 6.8 million jobs behind its pre-recession peak, economists said. Among the options Obama is considering is a version of a tax credit for new hires that could spur the creation of 900,000 additional jobs at a cost of $30 billion, according to an estimate by Michael Greenstone, an economics professor at the Massachusetts Institute of Technology and former chief economist for Obama’s Council of Economic Advisers.http://www.bloomberg.com/news/2011-08-30/obama-may-back-hiring-credit-infrastructure-spending-yet-fall-shy-on-jobs.html

CNBC.com
Pockets of the fixed income and money markets are starting to reflect concern that recent volatility will extend past August, and that growing risk aversion may again roil banks and funding markets. One sign of worry is the increasing reluctance of banks to use their balance sheets to facilitate trades, which has hit sectors from corporate bonds to the short-term repurchase market, where there is $1.6 trillion in triparty loans. http://www.cnbc.com/id/44335728

Bill Gross, manager of the world’s largest bond fund for Pimco, has admitted that it was a mistake to bet so heavily against the price of US government debt. Mr Gross emptied his $244 billion Total Return Fund of US government-related securities earlier this year in a high-profile call that has backfired as the bond market has rallied. As of Monday, Pimco’s flagship fund ranked 501th out of 589 bond funds in its category. http://www.cnbc.com/id/44323496

NYTimes.com
Exxon Mobil won a coveted prize in the global petroleum industry Tuesday with an agreement to explore for oil in a Russian portion of the Arctic Ocean that is being opened for drilling even as Alaskan waters remain mostly off limits. The agreement seemed to supersede a similar but failed deal that Russia’s state oil company, Rosneft, reached with the British oil giant BP this year — with a few striking differences. http://www.nytimes.com/2011/08/31/business/global/exxon-and-rosneft-partner-in-russian-oil-deal.html?_r=1&ref=global

Echoing a call by Warren E. Buffett, members of the European wealthy elite are urging their governments to raise their taxes or enact special levies to help reduce growing budget deficits. Maurice Lévy, chairman and chief executive of the French advertising firm Publicis, on Tuesday became the latest European business leader to ask for higher taxes on top earners, writing in The Financial Times that it was “only fair that the most privileged members of our society should take up a heavier share of this national burden.” http://www.nytimes.com/2011/08/31/business/global/as-austerity-bites-europes-rich-speak-up-to-be-taxed.html?ref=global

Dailyfinance.com
While much of Europe is struggling to pay its way out of the debt crisis, Norway has been awash with cash and is set to get more. Two major oil finds are revitalizing the country’s aging energy sector and promise to buoy it through the downturn looming over the global economy. Although headlines this summer have been predicting economic gloom — a flare-up in Europé ‘s debt problems, falling bank stocks, another recession in the U.S. — Norway has weathered the bad news. In fact, one of its main financial concerns is how to keep all its money from overheating the economy. “In Norway, we live in a big bubble, independent of what happens in the rest of the world,” said Beniamin Johansen, a personnel consultant in Oslo. http://srph.it/o9PQr2

Foxbusiness.com
The head of Poland’s central bank said Tuesday that the longer the euro-zone countries take to resolve the sovereign debt crisis, the more likely it is that the bloc will have to issue eurobonds, or bonds backed collectively by all the members of the single currency union. “The longer it takes to resolve the situation in Greece, the more inevitable a eurobond becomes,” National Bank of Poland Governor Marek Belka told MarketWatch in an interview. http://www.foxbusiness.com/2011/08/30/eurobond-becoming-more-likely-polands-belka/#ixzz1Wa2Ozrkz

The chief of Poland’s central bank said Tuesday that he expected inflation in the country to keep easing in the months ahead, but that it was still too soon to rule out future interest rate increases. “We expect inflation to keep receding. But it’s far above our target, 2.5%. In that sense, it’s too early to announce a change in our general stance of policy,” Marek Belka told MarketWatch in an interview at the Haas School of Business at the University of California, Berkeley. http://www.foxbusiness.com/2011/08/30/polish-central-banker-sees-inflation-receding/#ixzz1Wa2YWpoZ

BBC.co.uk
Credit ratings agency Fitch has warned that it may cut China’s yuan debt rating on concerns of rising defaults. Fitch’s current rating for China’s yuan-denominated debt stands at AA-. The warning comes after Fitch revised its outlook on China’s local currency debt from “stable” to “negative” in April this year. There have been growing concerns of bad loans in China after the nation’s banks lent record sums of money in the last two years.  Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch Ratings was quoted by news agency AFP as saying that there was a “better than even chance” of a downgrade.http://www.bbc.co.uk/news/business-14726926

Spanish politicians have overwhelmingly backed holding a vote on introducing a constitutional cap on budget deficits. The move all but guarantees that the change will be adopted. Members of the lower house of Spain’s parliament voted 319 in favour and only 17 against holding the debate and vote later this week. The reform would then go to the upper house next week. To change Spain’s constitution requires three-fifths support in both houses. http://www.bbc.co.uk/news/business-14721843

European politicians must not ignore markets, according to Sharon Bowles, chair of the European Parliament’s economic and monetary committee. Ms Bowles chaired the session on Monday about the eurozone debt crisis. “Jean-Charles Juncker, the president of the Eurogroup… said, ‘We shouldn’t believe the markets,’ and he got big applause,” she told BBC News. She added that the big problem was that politicians thought the markets would do nothing while they went on holiday. http://www.bbc.co.uk/news/business-14713678

Telegraph.co.uk
The Western world is at mounting risk of a double-dip recession after key measures of confidence collapsed in both the United States and Europe, with Germany suffering the steepest one-month fall since records began in the 1970s.  The fund has slashed its growth forecast for America and Europe, according to a leaked draft of its World Economic Outlook. It has called on both the US Federal Reserve and the European Central Bank to stand ready for “further easing of monetary policy” – implying a fresh blast of quantitative easing (QE) by the Fed. http://www.telegraph.co.uk/finance/financialcrisis/8731894/Double-dip-fears-across-the-West-as-confidence-crumbles.html

Mortgage approvals rose to a 14-month peak in July, the Bank of England reported, with economists attributing the pick-up to some better deals for buyers. The number of mortgage loans approved by lenders rose to 49,239, in line with the consensus forecast of 49,000 and up from 48,500 the previous month. That represented the highest figure since May 2010, albeit still well below pre-crisis levels. “The latest rise in mortgage lending may be a response to the increasingly competitive mortgage interest rates available to some borrowers in recent months,” said analysts at Capital Economics.http://www.telegraph.co.uk/finance/economics/8730730/Mortgage-approvals-highest-in-14-months.html

Britain’s debt burden has surged past the point at which it harms growth in every area of the nation’s borrowing, the Bank for International Settlements (BIS) warned. Just two other advanced economies analysed by the financial watchdog are into the danger territory where “debt is bad for growth” for all three types of non-financial sector borrowing: government, household and corporate debt, said BIS economists. http://www.telegraph.co.uk/finance/economics/8731819/UK-debt-levels-damaging-growth-warns-BIS.html

Pensioners retiring this year on a fixed income could see almost £10,000 wiped off the value of their pension pot in real terms over the next two decades, the report claimed. To beat inflation and maintain a decent standard of living, pensioners would need a retirement income worth more than double what they had set aside for the next 20 years, the analysis by Prudential said.http://www.telegraph.co.uk/finance/personalfinance/pensions/8731674/Inflation-to-cut-pensioner-spending-power-by-60pc.html

Guardian.co.uk
The housing market is in crisis as home ownership tumbles and house prices soar, a study has warned. Home ownership in England will slump to just 63.8% over the next decade – the lowest level since the mid-1980s, the National Housing Federation’s forecast, published on Tuesday, said. Huge deposits, combined with high house prices and strict lending criteria, have sent home ownership into decline, the federation said. http://www.guardian.co.uk/business/2011/aug/30/home-ownership-fall-mid-80s-levels

Smh.com.au

National house prices accelerated their falls in July amid uncertainty about the global economy and the direction of interest rates, with prices in Melbourne leading the drop but Sydney edging up. Capital city home prices sank 0.6 per cent during the month, seasonally adjusted, from a 0.3 per cent fall in June, said property research group RP Data-Rismark. Capital city home prices fell 3.4 per cent in the first seven months of the year, leaving the median capital city dwelling price at $455,000. http://www.smh.com.au/business/house-prices-extend-falls-in-july-20110831-1jkvh.html#ixzz1Wa73laeA

Straitstimes.com
US President Barack Obama on Tuesday said that the US economy had suffered a ‘heart attack’ and survived but is not recuperating quickly enough, as he geared up to unveil a major jobs plan. Mr Obama appeared on the Tom Joyner Morning Show in what also appeared to be an effort to reach out to black voters following criticism by African American leaders that he has not sufficient courted their community. http://www.straitstimes.com/BreakingNews/Money/Story/STIStory_707861.html

Xinhuanet.com
Net profit growth of Chinese listed companies slowed in the first half of this year amid soaring inflation at home and economic uncertainty abroad, according to their half-year reports. Data from the Shanghai and Shenzhen stock exchanges shows that the profits of 2,272 listed firms totaled 998.94 billion yuan (156.4 billion U.S. dollars) in the first half of 2011, up 22.35 percent from a year earlier. Last year, China’s listed companies registered year-on-year net profit increases of more than 37.32 percent on average. Of the companies, ICBC, China’s largest bank, was the most profitable firm with 109.48 billion yuan of profit, or about 11 percent of the total. http://news.xinhuanet.com/english2010/china/2011-08/31/c_131086332.htm

Spurred by favorable performance of the gaming sector, Macao’s Gross Domestic Product (GDP) for the second quarter of 2011 grew 24 percent year-on-year, according to the figures released on Tuesday by Macao’s Statistics and Census Service (DSEC). Analyzed by major components, exports of gaming services and investment soared by 39 percent and 23.1 percent respectively in the period when total visitor spending, excluding gaming expenses, increased by 5.9 percent, the figures indicated. http://news.xinhuanet.com/english2010/china/2011-08/30/c_131084973.htm

Russia’s budget surplus in the first half of 2011 exceeded 1.74 trillion rubles (over 62 billion U.S. dollars), the Russian statistics agency Rosstat said on Tuesday. This is a 6.4-time growth compared with the same period of 2010, said Rosstat. According to Moscow’s Vedomosti business daily, the revenue growth happened largely due to the raising domestic demands for durable goods and good harvest.http://news.xinhuanet.com/english2010/world/2011-08/31/c_131085074.htm

Overseas interests could own up to 15 percent of New Zealand state-owned enterprises in a partial privatization set to go ahead next year, the government announced Wednesday. The government was expecting strong demand from a large and growing pool of New Zealand investment funds for stakes in four energy companies and the national carrier Air New Zealand, Finance Minister Bill English said in a statement. http://news.xinhuanet.com/english2010/business/2011-08/31/c_131085125.htm

Thehindu.com
Union Finance Minister Pranab Mukherjee said: “… It [lower GDP growth] is no doubt disappointing. There is no room for complacency. We shall have to work very hard — the government and the industry— and I am confident that our workers and farmers would make their contribution in ensuring growth with inclusion … When the final figures for year will be available, there may be a recovery … Of course [I am] not going to just now make any projections what would be the final figures for the year”. http://www.thehindu.com/business/Economy/article2411818.ece

Economictimes.com
The output of eight infrastructure industries rose at its fastest pace in 15 months in July, raising hopes of a robust industrial performance during the month.  The index for eight core sector industries – crude oil, petroleum refinery products, coal, electricity, cement, steel, fertilizers and natural gas – rose 7.8% compared to 5.7% in July last year, industry ministry data released on Tuesday showed. July’s core industries performance has been led by steel, electricity and cement, with the three growing at 10% plus. http://economictimes.indiatimes.com/news/economy/infrastructure/core-sector-industries-grow-fastest-in-15-months-at-7-8-per-cent/articleshow/9803320.cms

The central government’s fiscal deficit surged more than 2 fold to Rs 2.2 lakh crore during the first four months of the current fiscal, on account of low revenue realisation and higher expenditure.  The deficit was Rs 90,915 crore in April-July period of 2010. Fiscal deficit, the gap between overall expenditure and receipts, in the first four months of the financial year is almost 55 per cent of the Budget estimate of Rs 4.12 lakh crore for 2011-12, as per the latest data of the Controller General of Accounts (CGA). http://economictimes.indiatimes.com/news/economy/finance/fiscal-deficit-surges-over-two-fold-in-april-july-to-rs2-2-lac-cr/articleshow/9800510.cms

Yonhapnews.co.kr
South Korean individuals and corporations held a combined 11.48 trillion won (US$10.7 billion) worth of wealth in overseas accounts last year, the nation’s tax agency said Wednesday. Individuals held a total of 975.6 billion won in 768 accounts and corporate entities held 10.51 trillion won in 4,463 accounts, according to the National Tax Service (NTS). The figures were based on a voluntary report last June by people who owned 1 billion won or more in deposits, stocks and other forms in overseas accounts for at least one day last year.http://english.yonhapnews.co.kr/business/2011/08/31/89/0502000000AEN20110831005300320F.HTML

South Korean banks’ lending rates climbed to the highest level in 18 months in July, due to effects from the central bank’s rate hike in June, the Bank of Korea (BOK) said Wednesday. The average rate for new loans extended to households and companies stood at 5.86 percent in July, up 0.06 percentage point from the previous month, according to the BOK. The June rate marked the second straight monthly gain. The July reading marked the highest level since 5.94 percent tallied in January 2010. http://english.yonhapnews.co.kr/business/2011/08/31/33/0503000000AEN20110831004100320F.HTML

Themoscowtimes.com
Belarussian President Alexander Lukashenko said Tuesday that the country would allow a free float of its currency sometime between Sept. 12 and 15.  The government devalued the ruble by some 50 percent this year, causing panic buying of staples and huge lines at foreign exchange offices.  Foreign currency has been hard to come by since March, boosting the black market where foreign cash can cost nearly twice as much as the official rate. http://www.themoscowtimes.com/business/article/belarus-lets-ruble-float/442929.html

Fin24.com
South Africa’s economy grew at its slowest pace in almost two years in the second quarter as the manufacturing and mining sectors slumped after strikes, boosting the case for interest rate cuts while denting the government’s job-creation hopes.  The slowdown will make it even harder for the legions of the country’s unemployed – more than a million have lost their jobs since 2009 – to find work, likely keeping the unemployment rate above 25%. http://www.fin24.com/Economy/Slower-growth-boosts-case-for-rate-cut-20110830

South Africa’s debate on the question of nationalising mines is discouraging investment, but the policy will be clear by mid-2012, an adviser to mines minister Susan Shabangu told reporters on the sidelines of a mining conference on Wednesday. “The matter will be put to bed by July next year when the ruling party holds its policy conference whereupon the issue will be debated, discussed and perhaps will be adopted or not,” adviser Sandile Nogxina said. http://www.fin24.com/Companies/Mining/Nationalisation-debate-to-end-in-2012-20110831

Tags: Bank Of America, Bank Of China, Bank Regulator, Bonds, China Construction Bank, China Steps, Chinese Companies, Commodities, Commodities Prices, Credit Markets, Crude Oil, Double Dip, European Banking, European Stock Markets, Ft Reports, George Osborne, Gold, Government Loans, Guarantee Scheme, India, Industrial Commodities, Infrastructure, Last Autumn, National Transitional Council, Outlook, Policy Proposals, Rich Nation
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Emerging Markets Less Attractive Today (Greig)

Wednesday, August 31st, 2011

Emerging Markets Less Attractive Today
August 29, 2011

Monetary tightening, inflation, and full valuations make emerging-markets stocks look like a poor deal compared with developed-world equities, says Willaim Blair’s George Greig.

Transcript:

Christine Benz: You have long had a sizable position in emerging-markets names, certainly relative to large-cap growth foreign-stock funds. Are you more inclined at this point to own developed-markets stocks straight up or to gain emerging-markets exposure via broadly diversified blue-chip multinationals that have made great inroads into those markets?

George Greig: Well, we’ve been a little bit underweight in emerging markets for most of this year really based on the monetary tightening and inflation pressure that we’re seeing in a lot of emerging markets, sort of a classic overheating cycle that’s affected India, Brazil, Turkey, and China, of course. And at the same time, we have also been influenced by relative valuation in that emerging markets are not as attractive relative to developed markets as they typically have been during the last five to 10 years.

Benz: Are you feeling that commodity prices are pretty well in check currently, and that should keep them from impeding growth in emerging markets?

Greig: I think, yeah, this is going to be an interesting question as we look forward. If we have a slowdown in developed markets and that results in a correction in commodity prices, ultimately that will have a stimulative effect on both developed and emerging markets, and we could expect to sort of get a growth dividend out of that. But there is a lag involved, and I think we might not kind of see that benefit until sometime next year.

Benz: How about the question of a property-markets bubble in China? Is that a concern of yours?

Greig: Yeah, that’s a big concern. I think we are, just like everyone else, struggling to get data and information on this to understand how much excess supply there is in the market and how much price risk there is in terms of price trends relative to income trends and so on.

I think that real estate and construction in China is part of a theme of the economy being too reliant on capital investment, fixed-asset investment in general. And it’s a big issue for us and for the markets to try to understand what the magnitude and timing of that cycle playing out will be. Does it have two years to go, three years to go, or two quarters to go? Remember, there were people starting to warn about excesses in the U.S. mortgage and housing markets as early as 2005, and the bubble didn’t really burst for two or three years after that. In China, it’s the same sort of situation except the information is much more opaque, so it’s even harder to call the timing.

Benz: Now, has that thinking affected how you want to position the portfolio as it relates to your China exposure, either direct or indirect?

Greig: I’d say that it’s made us a little more conservative about direct exposure in the financial- and housing-related sectors. So, in some cases, where we see this risk building, even though the fundamentals still look good now, we’ll have smaller positions or no positions in some of these companies just because we’re a little bit uncertain about the sustainability of that fundamental performance in the face of this kind of cycle.

Source: Morningstar, Inc.

Tags: Blair, Brazil, Cap Growth, Christine Benz, Commodity Prices, Dividend, Emerging Markets, Excess Supply, India, Inflation Pressure, Inroads, Little Bit, Multinationals, Property Markets, Relative Valuation, Slowdown, Stock Funds, Stocks, Underweight, Valuations, World Equities
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‘All or Nothing Days’ Approaching Record Highs

Wednesday, August 31st, 2011

We consider ‘all or nothing’ days in the market to be days where the net daily A/D reading in the S&P 500 exceeds plus or minus 400.  Including today’s reading of 491, there have now been 12 all or nothing days in the last four weeks (20 trading days).  Going back to 1990, there has only been one other period where the frequency of all or nothing days over a four week period was at or above the current level and that occurred in the Fall of 2008.

So far this year, there have now been 32 ‘all or nothing’ days for the S&P 500.  On an annualized basis, this puts 2011 on pace to see 48 ‘all or nothing’ days for the entire year, which would tie it with last year (2010) to be the second highest annual total since at least 1990.

While the volatility of the credit crisis has certainly contributed to the uptick in ‘all or nothing’ days over the last few years, an even larger contributor has been the ETF industry.  It is not a coincidence that the increase in ‘all or nothing’ days has risen right in tandem with the explosion in volume of ETFs like SPY.

Tags: Stocks
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Indian Economy Begins to Slow – Q2 GDP 7.7%

Wednesday, August 31st, 2011

by Trader Mark, Fund My Mutual Fund

It’s been a very rough year for Indian stocks, and indeed much of the emerging market space as central banks are fighting the easy money coming from the West (and Japan), by raising rates.  Inflationary pressures are still a concern in many of these countries, but it does appear the brakes are starting to work.  Of course the issue is not to break too hard.

India just reported a 7.7% GDP – while rip roaring in relation to Western developed economies, its significantly lower than we’ve seen the past few years.  (Last year I believe there was a print in the mid 9%s)  Looks like the construction sector has been hit the hardest from higher rates.

Via BBC:

• India’s economy grew 7.7% in the three months from April to June, compared with the same period of 2010.  It was India’sweakest growth for six quarters, but still better than had been expected.
• The slowdown is expected to continue as India’s central bank continues to raise interest rates to control inflation. “The latest growth number reinforces the view that although growth is slowing down, it is not collapsing as feared by some,” said Ashutosh Datar, economist at IIFL in Mumbai.
• Indian Finance Minister Pranab Mukherjee said he had been expecting a higher growth rate, but that given the muted recovery in the US and Europe, the figures were “not that much disappointing”.
• The Reserve Bank of India (RBI) has raised interest rates 11 times since March 2010. The next rate-setting meeting is on 16 September, when many economists expect rates will rise again, to 8.25%.
• Inflation in July was 9.22%, which was well above the RBI’s target rate of 4% to 4.5%. “India has raised rates much faster than any other major country, but inflation is also a bigger problem than in any other major economy,” said DK Joshi, chief economist at Indian ratings agency Crisil. Construction problems
• The sector breakdown showed that the construction sector had been one of the worst-performing parts of the economy.  Construction grew at an annual rate of 1.2% in the second quarter, down from 8.2% in the previous quarter, as rising interest rates and delays in planning approvals held up building projects.
• The manufacturing sector grew 7.2%, an improvement from the previous quarter, but well below the 10.6% in the second quarter of 2010.
• While 7% is extraordinarily high by the standards of European countries that are struggling to achieve 2%, there have been warnings from economists that it would be inadequate to fund the government’s attempts to deal with India’s endemic poverty.
• On Monday, a survey by the Indian Chambers of Commerce found that business confidence was at a two-year low.  It found that businesses had “growing apprehensions about the world economy entering into another recession“, while also worrying about how rising interest rates were hitting domestic demand.

Copyright © Trader Mark, Fund My Mutual Fund

Tags: Bank Of India, Central Banks, Chief Economist, Construction Problems, Construction Sector, Easy Money, Emerging Market, India, Indian Economy, Indian Finance Minister, Indian Stocks, Inflationary Pressures, Joshi, Market Space, Perf, Pranab Mukherjee, Reserve Bank Of India, S Central, Sector Breakdown, Target Rate
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PIMCO’s Bill Gross Admits He was Wrong on U.S. Treasuries – and by Definition Jeffrey Gundlach was Correct

Wednesday, August 31st, 2011

by Trader Mark, Fund My Mutual Fund

Two of the most well known bond gurus – PIMCO’s Bill Gross and Doubeline’s Jeffrey Gundlach had polar opposite opinions on what U.S. debt would do once QE2 ended.  [Apr 14, 2011: [Video] Bond Guru Bets Against PIMCO’s Bill Gross (and Conventional Wisdom) on What Happens After QE2 Ends]  Gross was with the consensus (yields would rise) while Gundlach was with the minority – Gundlach was proven correct.

Now to give credit where credit is due, Gross is out today admitting his views were incorrect – which is a rarity in the investment community.

Via FT.com:

• Bill Gross, manager of the world’s largest bond fund for Pimco, has admitted that it was a mistake to bet so heavily against the price of US government debt. Mr Gross emptied his $244 billion Total Return Fund of US government-related securities earlier this year in a high-profile call that has backfired as the bond market has rallied. As of Monday, Pimco’s flagship fund ranked 501th out of 589 bond funds in its category.
• “Do I wish I had more Treasurys? Yeah, that’s pretty obvious,” Mr Gross told the Financial Times last week, adding: “I get that it was my/our mistake in thinking that the US economy can chug along at 2 percent real growth rates. It doesn’t look like it can.”
• When the yield on the 10-year Treasury was 3.5 percent in January, Mr Gross warned that the risk of rising inflation made government debt a poor investment. Bond prices move in the opposite direction to bond yields, which he forecast would rise as Ben Bernanke, chairman of the Federal Reserve , brought the second program of bond buying, known as quantitative easing, to an end in June.
• Mr Gross, one of the most influential voices in the bond market, reiterated his warning to avoid treasurys in June, and in the July dispatch of his widely read Investment Outlook, warned that promises to America’s ageing population made them “debt men walking”.
• However, this month, as turmoil in equity markets caused investors to rush to the safety of government bonds, the 10-year Treasury yield dipped below 2 per cent, a 61-year low.
• The move has forced Mr Gross to reassess his bearish position on US debt in recent weeks. “We’ve moderated based on the outlook for the US economy, based on what Bernanke has done at the Fed in the last month. Freezing rates for two years, that was a pretty significant statement in terms of the vulnerability of Treasurys to go down in price and up in yield,” he said.  “It’s not necessarily a flip flop, as we don’t own tons of Treasurys, but its a recognition that the US and developed economies are near the recessionary dividing point,” he said.
• Mr Gross still argues that on a long-term basis, governments are likely to use financial repression, where the rate of inflation is higher than bond yields, to erode the value of sovereign debt over time.
• But he also suggested that the “new normal” — Pimco’s view of the global economic outlook in which growth rates for developed countries are slower than in the past — may have to be revised downwards to a “new normal minus”.
• Mr Gross started to buy government debt, as well as related securities and derivatives, in recent months. However, he faces a challenge to catch up to the benchmark, which has returned 4.55 percent for the year so far, versus the Total Return Fund’s 3.29 percent, according to Lipper, a research group. “When you’re underperforming the index, you go home at night and cry in your beer,” he said, adding: “It’s not fun, but who said this business should be fun. We’re too well paid to hang our heads and say boo hoo.”

Copyright © Trader Mark, Fund My Mutual Fund

Tags: 10 Year Treasury, Ben Bernanke, Bill Gross, Bond Fund, Bond Funds, Bond Market, Bond Prices, Bond Yields, Bonds, Chairman Of The Federal Reserve, Conventional Wisdom, Financial Times, Government Debt, Gundlach, Investment Bond, Investment Community, Investment Outlook, Outlook, PIMCO, Poor Investment, Treasuries, Treasurys
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Bill Gross: Investment Outlook (August 30, 2011)

Tuesday, August 30th, 2011

New-Fangled Love Songs

by Bill Gross, co-Chief, PIMCO

August 30, 2011

• Liquidity concerns may affect all European peripheral bond markets unless the European Central Bank counters the rush for the exits with an enlarged daily checkbook.
• In the U.S., discord between rich and poor has led to lower, not higher, Treasury yields as approaching recessionary winds force the Fed and private investors to favor bonds.
• We prefer investing in the “cleaner” dirty shirt countries of Canada, Australia, Mexico and Brazil, along with non-dollar currencies that have strong trade ties with the Asian continent.

​Just an old-fashioned love song
Comin’ down in three-part harmony.
Three Dog Night

In many ways the global economic crisis is like a marriage gone bad. As the Three Dog Night sang years ago, global economies have functioned harmoniously for many years, but suddenly the love songs have become strident and cacophonous, the policy coordination morphing into a war of the roses as opposed to a giving of them. Instead of three-part harmony we are now experiencing, at a minimum, tri-party disharmony, teetering on the brink of “divorce,” which in economic parlance means a possible “developed economy” recession – a downturn from which reconciliation may be difficult due to a lack of policy options and cooperation. But I get ahead of myself. Let’s first ring the wedding bells, then take you through an explanation of three separate global marriages and how each of the partners have grown apart.

Europe Unites!
Oh those feisty Europeans! Always fighting like a dating couple and then finally resolving their differences by saying “I do” sometime in the 1950s with the creation of the Common Market and the European Economic Community (EEC). In doing so, France and Germany said “never again,” and even though they didn’t like each other (read “hate”) they decided to make economic lurv in the hopes that they wouldn’t destroy the continent again. It later turned into a formal union, a European Community (EC), where they invited lots of witnesses to the ceremony and created instant family members, if that’s metaphorically possible. Twenty-seven of them, including Italy, Spain and the U.K. were now relatives despite some liking pasta and others preferring horrid cuisines featuring Shepherd’s Pie or fish and chips. The marriage progressed to the point of a smaller monetary union sometime in 1999, but critically, without a common budget.

Husband and Wife – Germany and Greece – decided to have a joint bank account, but with separate allowances and no oversight. Greece could issue bonds at nearly the same yield as could its Northern hard-working neighbors, but were free to spend it any way they chose. This was an economic version of an open marriage where one party gets to have all the fun and the other worked nine-to-five and came home too exhausted for whoopee. Well sometime last year, global lenders said enough is enough and soon the whole cheating European Union (EU) was at each other’s throats, hiring lawyers and threatening to break up. Calmer heads prevailed when the ECB decided to make nice and use its checkbook. Last week Angela Merkel and France’s Sarkozy sort of got engaged for at least the second time, nixing expanded funding for their Southern neighbors and placing the burden even more on the ECB. Who knows where it goes now, but let’s put it this way – Germany and France are sleeping in a king-size bed while the rest of its EU family are sleeping in separate bedrooms. As a result Euroland faces economic contraction.

California Dreamin’
This impending divorce in America is not about sex or sleeping around, but more about romancing the now stone-cold notion that anyone could be a millionaire in the good old U.S. of A. if only they worked hard enough. Our Statue of Liberty proclaimed “give us your tired, your poor…” and sent many of them West to build a little house on the prairie or strike it rich in the goldfields of Sacramento, California or Skagway, Alaska. Many of them did and a century later, the option-laden fields of Silicon Valley provided modern-day examples of rags to riches fairytales come true. But this odd couple marriage of rich (and poor hoping to be rich), now seems on rather shaky ground. Instead of boundless opportunity, the nursery rhyme describing Jack Sprat – who could eat no fat – and his wife – who could eat no lean – appears to be the starker of the two realities. There are the poor and there are the very rich, with the shrinking middle class resembling Mr. Sprat rather than his wife.

During this country’s recent economic “recovery,” real corporate profits increased by four times the amount of working wages in dollar terms, and, as the chart below shows, are 50% higher than at the turn of the century while wages remain relatively unchanged, something that has not occurred since this country’s nuptials were concluded over three centuries ago. Is it any wonder that preliminary battlefield skirmishes in Wisconsin and Ohio between labor and capital promise to spread across every state of this land? (Not Texas!) Is it any wonder that Republican orthodoxies favoring tax cuts for the rich and Democratic orthodoxies promoting entitlements for the poor threaten to hamstring any constructive efforts to reduce unemployment over the foreseeable future? We are witnessing romantic love turning into a spiteful, bitter clash between partners in name only.

The Asian Miracle
Confucius say, “Can there be a love which does not make demands on its object?” While not a marriage, there has definitely been a love affair between Western consumers and their Chinese producer “objects” for several decades now. We loved them because they made cheap goods, but somehow they seemed to love us more as they slowly but surely put their people to work while ours were hitting the unemployment lines. Imperceptibly, the developed world’s manufacturing base was gradually eroding and being replaced by securitized finance that destroyed itself and nearly its economies in 2008.

China, meanwhile, calmly played its cards with a decades-long plan centered around capitalistic mercantilism, a game the United States claimed to play best but somehow forgot most of the rules. Even when holding the trump card of a reserve currency, mercantilistic domination depends on making something the rest of the world wants. We don’t and they do. The Chinese “object” has turned into an object lesson for developed economies that debt-financed consumerism is reaching an end. This affair then, which has sustained global growth during much of the 21st century, is vulnerable. Both parties still play kissy face and say “luv ya” (weak form for “I love you”) but there is tension there. China questions our credit quality and the yields on their trillion dollars of Treasury bonds. The U.S. questions their exchange rate and claims currency manipulation behind closed doors. This couple claims to still be dating, but “hooking up” may be more like it. Even then, no one stays the night, claiming they left their toothbrush at home.

Judge Judy’s Verdict
What to do when a love affair goes bad? How should you invest when Euroland is at each other’s throat, when a thinly disguised battle between labor and capital freezes policy action in the United States, when a mercantilistic partnership between developed and developing nations produces more questions than answers, more losers than winners? Increase the odds for a divorce, we’d suggest, which in investment markets means focusing on the return of your capital as opposed to the return on your capital. Of the three rocky relationships, Euroland has the most immediacy. Mohamed El-Erian is increasingly of the persuasion that one or more of the outer periphery (Greece, Ireland and Portugal) may be forced to vacate the premises. If so, technically destabilizing liquidity concerns may affect all peripheral bond markets unless the ECB counters the rush for the exits with an enlarged daily checkbook.

In the U.S., strangely enough, matrimonial discord between rich and poor has led to lower, not higher, Treasury yields as approaching recessionary winds force the Fed and private investors to favor bonds. There are limits, however. Ten-year Treasuries at 2.25% are discounting a heap of trouble (none of it strangely enough due to its own credit standing), and neither investor nor borrower may emerge from this brouhaha unscathed. We prefer the “cleaner” dirty shirt countries of Canada, Australia, Mexico and Brazil, where higher yields and more pristine balance sheets prevail.

And what of China and its fling as mercantile dominatrix? Here to stay – get used to it, PIMCO would say, but at the same time a substantial currency revaluation would assist its image and economy in its new role as the global economy’s economic locomotive. Consider investing, therefore, in non-dollar currencies that have strong trade ties with the Asian continent. Global equities? They’re cheap – dividend yields are higher than bonds in many cases – yet if growth falters there may be more downside to come.

A good relationship, as any adult knows, takes hard work and even then true love never runs smooth. We are into the “bumpy journey” phase of our New Normal where fear, lack of policy options and loss of control can dominate relationships. At a minimum, investors need to prepare for disharmony even with the hope of eventual reconciliation. Those old-fashioned love songs have become new-fangled freshly entangled ones from which an escape may be hard to envision.

William H. Gross
Managing Director

Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio.

This article contains the current opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Tags: Asian Continent, Bill Gross, Bonds, Brazil, Canadian Market, Dating Couple, Dirty Shirt, Economy Recession, European Economic Community, European Economic Community Eec, Global Economic Crisis, Global Economies, Gold, Gross Co, Gross Investment, Investment Outlook, Old Fashioned Love Song, Outlook, Policy Coordination, Private Investors, Three Dog Night, Trade Ties, Treasury Yields, War Of The Roses, Wedding Bells
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The Summer Wind (Saut)

Tuesday, August 30th, 2011

The Summer Wind

August 29, 2011

by Jeffrey Saut, Chief Investment Strategist, Raymond James

“The summer wind came blowin’ in from across the sea. It lingered there to touch your hair and walk with me”

… Frank Sinatra, lyrics by Johnny Mercer

Irene “came blowin’ in” over the weekend for the first hurricane to hit the East Coast in years. In fact, New England has not experienced a hurricane since “Bob” attacked in 1991. For over a year I have been commenting about the weird weather that was surely coming. Since then we have experienced the anticipated extremely cold wet winter, tornados in the Midwest of historic proportions, floods around the world, hurricanes, and droughts. Indeed, in Russia droughts destroyed 40% of the grain crop, sparking an attendant rise in grain prices. The same drought caused 30 foot deep “cracks” to appear in the farmlands north of China’s Inner Mongolia Autonomous Region, keeping farmers out of the fields. Meanwhile, other parts of China have been experiencing floods and mudslides. In this country certain regions have seen 100-year floods, while places like Texas have had 100+ degree temperatures for months with no rain. I could go on, but you get the idea — the weather has turned undeniably weird.

To be sure, I have commented that while to some degree the environmentalists are right about the climate change being attributable to “man,” undeniably the weather is also being compounded by a La Niña weather pattern coupled with more volcanic ash in the atmosphere than anyone can remember. That combination has allowed the Tropics to expand as the Tropic of Cancer and the Tropic of Capricorn have moved toward the Poles. Well, that’s not factually correct because the Tropics can’t really expand since they are defined as being 23° 16’ 16” above and below the equator. What has expanded is the “reach” of the Hadley cell winds, which have moved closer to the North and South Poles. Recall the Hadley cell winds dominate the Tropics carrying hot equatorial air up into the troposphere where atmospheric circulation carries that air north and south. The air eventually sinks back to Earth. Where the air rises, the atmospheric pressure is low, causing heavy rains and storms. Where it sinks, it produces high pressure areas characterized by deserts like the Australian Outback. The shift in the Hadley cell winds has played havoc with the trade winds, producing droughts in otherwise moist parts of the world and monsoons in previously dry locals. Said “shift” has allowed tropical zones, and deserts, to expand. This is not an unimportant event because the changed weather patterns have major implications for agriculture and the world’s soil bank.

To wit, much of the world’s topsoil is eroding and therefore declining in nutrient quality. According to wiseGEEK:

“Topsoil is the upper surface of the Earth’s crust, and usually is no deeper than approximately eight inches. The Earth’s topsoil mixes rich humus with minerals and composted material, resulting in a nutritious substrate for plants and trees. It is one of the Earth’s most vital resources.”

Unfortunately, topsoil erosion is occurring much faster than nature can replace it. In addition to the weather, modern agriculture techniques have hastened the erosion, as has row crop planting (corn, soybeans, cotton, tobacco, etc.) since row crops erode soil much faster than sod crops. Regrettably, once soil is gone, you can’t get it back! Plainly, this has grave implications because as I have stated for years, “When per capita incomes rise, the first thing people want is clean water, the second is a better diet.” With per capita incomes rising rapidly in emerging countries, the burgeoning food demand has left global grain consumption exceeding production; and over the next few decades the situation is likely to get worse because food production needs to expand by some 50% just to meet the estimated demand. Ladies and gentlemen, this means an additional ~6 billion acres of land is needed to meet the upcoming food demand, but only ~2 billion acres of good land is available. Thus, farmland should be a good investment and there are select public companies that play to this theme. Also of interest are ag-centric “technology” companies that hopefully can ameliorate some of the upcoming food shortfall.

I revisit the weather, water, and agriculture themes today not only because they have been three of my long-standing themes, but to emphasize why they should continue to be viable investments going forward. Importantly, water is by far the most undervalued asset I know of, yet it is difficult to find water-centric investments. Not so with agriculture.

As for the stock market, recently the most ubiquitous question has been, “Was that the bottom?” My response has been, “I think so.” Verily, if one has been using the October 1978 and 1979 bottoming patterns as a template, the correlation, at least so far, has been pretty remarkable. If that R² continues, it suggests the “selling climax” lows occurring on August 8 and 9 should prove to be the lows. However, that does not mean we can’t spend a few more weeks in “bottoming mode.” As stated, the October 1978 bottoming sequence took 6 – 7 weeks, while the 1979 sequence encompassed only 4 – 5 weeks. The ideal chart pattern would be what a technical analyst terms a “wedge” formation (see chart below). According to StockCharts.com:

“Wedge: A reversal chart pattern characterized by two converging trendlines that connect at an apex. The wedge is slanted either downwards or upwards demonstrating bullish or bearish behavior respectively.”

While a “wedge” bottoming formation should take a few more weeks to complete, many stocks have likely already bottomed. In past missives we have used some of the names our fundamental analysts believe have bottomed. Names like: EV Energy Partners (EVEP/$65.85/Strong Buy), LINN Energy (LINE/$36.97/Strong Buy), Health Care REIT (HCN/$48.62/Outperform), Campus Crest (CCG/$11.35/Strong Buy), Abbott Labs (ABT/$50.15/Outperform), and CenturyLink (CTL/$34.44/Strong Buy) to name a few. Last week, however, our energy team upgraded Chevron (CVX/96.85) to a Strong Buy and it is therefore worth your consideration. For further information on any of these, please see our analysts’ comments.

The call for this week: Just like the surfer interviewed over the weekend who grabbed a board and leapt into the Irene-induced waves, investors need to “grab a board” and catch a wave if they want to achieve investment success. But to do that, first you need to get into the water! The time to stand on-shore was months ago, not after a ~20% decline in the S&P 500 (SPX/1176.80) from its intraday high on May 2 to its intraday low on August 9. While we have been pretty conservative in our stock recommendations over the past three weeks, we would become more aggressive if the SPX can break out above the recent rally-high of ~1208. And while the odds of a recession have clearly increased (to 30%), my hunch remains we will avoid it. Accordingly, I will leave you with this quip from our restaurant analyst, “Every casual dining company that has spoken to Wall Street has said they have seen no evidence of behavior change despite all the scary headlines of the past six weeks or so. If we have a recession, this would be the first one in my 25 years as an analyst that was not foreshadowed with weakness at full service (the most discretionary) restaurants.”

Click here to enlarge

Copyright © Raymond James

Tags: Chief Investment Strategist, Climate Change, Degree Temperatures, Frank Sinatra, Frank Sinatra Lyrics, Grain Crop, Grain prices, Hadley Cell, Inner Mongolia Autonomous Region, jeffrey saut, Johnny Mercer, South Poles, Summer Wind, Tornados In The Midwest, Tropic Of Cancer, Tropic Of Capricorn, Volcanic Ash, Weather Pattern, Weird Weather, Wet Winter
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James Paulsen: Investment Outlook (August 29, 2011)

Tuesday, August 30th, 2011

A Crisis Phobic Investment Culture?!?

by James Paulsen, Wells Capital

One of the legacies of the Great 2008 Crisis is it produced a widespread post-traumatic stress disorder we have referred to as “Armageddon hypochondria.” Simply, FEAR has dominated this recovery. Despite one of the strongest two-year advances in stock market history, throughout this period, investors have chronically and obsessively feared yet another overwhelming crisis. The current summer drama represents yet another panic surrounding a list of persistent and seemingly ever-increasing worries.

As would any hypochondriac, since the 2008 crisis the financial markets have often extrapolated a disappointing report (a symptom) instantly to “economic death” (i.e., a double-dip recession or depression). Since all recoveries ebb and flow, the contemporary economic patient has of course exhibited many troubling symptoms along the way—none yet, however, which have ended the recovery.

The current situation is no exception. Just like last year, the economy is in the midst of another soft patch. It could prove to be the start of a recession, or like last year, prove just a temporary but scary pause in an ongoing economic recovery. There have been some “recession-like” reports of late (e.g., the Philly Fed Business Outlook Survey and the recent reported collapse in consumer confidence) and the recent decline in the financial markets seem to suggest something horrible is coming. While a recession may indeed loom on the immediate horizon, we caution investors on the efficacy of signals provided by “survey reports” and by emotional financial market action against the backdrop of a culture which is suffering from Armageddon hypochondria.

Quantifying the Phobia?

The following charts provide a quantification of the ongoing “crisis mentality” evident within the stock market during the last several years. Chart 1 is the crisis index. It gauges the degree of stress within the overall financial markets. Movements below zero represent periods of elevated financial market stress or a rising potential for a “crisis.” In a rough sense, this index portrays the financial markets’ assessment of the probability of a crisis (i.e., the likelihood of crisis rises as this index declines).

Chart 2 examines the rolling one-year regression coefficient between the daily percent changes in the U.S. stock market and the daily changes in the crisis index. Until 1997, the regression coefficient hovered around zero, suggesting movements in the crisis index had virtually no impact on the stock market. Crisis mentalities were not pronounced and the stock market seemingly was driven more by fundamentals (e.g., earnings and valuations). However, the back-to-back Asian and Russian crises of 1997 and 1998 significantly heightened investor crisis sensitivities. As illustrated in Chart 2, after the Asian/Russian debacles, the regression coefficient hovered about 5 percent implying that the stock market tended to fall (rise) by about 5 percent for every 1 point decline (increase) in the crisis index. Ever since, investor mentalities surrounding potential crisis risk have remained elevated! Indeed, the dot-com meltdown in 2000 led to an additional doubling in the stock market sensitivity coefficient to changes in the crisis index (i.e., the regression coefficient spiked to more than 10 percent at its peak in early-2003). Even though the regression coefficient did decline steadily during the last economic recovery (falling to only about 2 percent in 2007), it spiked again above 10 percent during the 2008 crisis and has only declined to about 8 percent so far in the current recovery.

Perhaps the watershed shift in the last decade toward an intense focus on “crisis” is best illustrated by Chart 3. It records the R-squared of one-year rolling regressions or the proportion of the total variability of the stock market which is “explained” by changes in the crisis index. That is, the proportion of market action explained by “crisis fears.” Prior to 1997, movements in the crisis index explained virtually none of the variability in stock prices. There was not a very strong crisis mentality. By contrast, during the last year, changes in the crisis index have explained almost 80 percent of the daily movements in the stock market!

The lost decade since the late 1990s has altered the focus from fundamentals to fear and has produced an investment class which is “crisis phobic”! What are the implications of such an investment culture?

Reflections on a Crisis Phobic Investment Culture?

1. More emotional market episodes?

What has produced the increased frequency of stock market swoons in recent years (e.g., the run on U.S. bank stocks in March 2009, the contemporary European bank stock run, a VIX reading above 80 in 2008 and twice in excess of 40 during this recovery, an unprecedented “flash crash” during the 2010 soft patch, and a record-setting number of days of 4 percent daily stock market moves a couple weeks ago during the current soft patch)? Is it because of high frequency trading, hedge fund actions, the increased popularity of quantitative trading approaches, the introduction of new “leveraged” trading instruments, insufficient margin requirements, issues surrounding the uptick shorting rule, or illiquid markets? Perhaps, but probably not. Rather, the increased tendency of the financial markets toward emotional tantrums more likely reflects the birth and maturation (over 10 years in the making) of a crisis phobic investment culture.

Throughout most of the post-war era, the U.S. stock market was driven primarily by underlying economic and company fundamentals and only infrequently would price action significantly diverge because of some overwhelming cultural panic. However, the crisis phobic culture evident today has produced a stock market seemingly driven mostly by “fears” which are occasionally suppressed by solid fundamentals. As long as the culture remains crisis-centric, the financial markets will likely be characterized by more frequent emotional and volatile market episodes. Investors, however, are probably best served by staying focused, not on the “rolling popularized crises,” but rather on the underlying fundamentals and relative valuations.

2. Are market signals and surveys reliable indicators in a crisis-phobic culture?

Financial markets (e.g., stock, bond, and commodity price movements and high yield, swap, or LIBOR yield spreads) have traditionally represented good leading indicators of economic fundamentals. However, we think investors need to question whether these historic relationships remain accurate and useful when the culture is so crisis-phobic? When financial market prices becomes so divorced from underlying fundamentals because of a widespread and intense panic, do they still offer the same forecasting content they typically do in calmer environments? For example, is the recent collapse in the 10-year bond yield to 2 percent suggesting a period of upcoming weak economic growth, a near-term deflationary surge, a Japan-style depression, simply an investor run to a safe haven asset, or does it just reflect the recent Fed announcement that interest rates will remain low until at least 2013? Who knows? And, if the 10-year yield is distorted or disconnected from underlying economic fundamentals, the efficacy of other yield spreads must also be questioned.

Finally, are “survey data” (e.g., consumer or business confidence reports) in such an emotionally charged, crisis-phobic, 24-7 media world providing the same economic signals they have in times past? Perhaps market signals and survey data remain accurate windows to the future but until the culture returns to one which is less crisis-phobic, we think investor caution in interpreting these signals is warranted.

3. Crisis-culture will diminish if recovery continues!

As illustrated in Chart 3, the U.S. has only had a single full economic recovery (i.e., the 2002 to 2007 recovery) since the investment culture first tended toward a crisis focus beginning in the late 1990s. As suggested by the rolling R-squared history, the crisis culture will likely decay as the economic recovery matures. During the Asian and Russian debacles in 1997 and 1998, the R-squared surged to about 60 percent, but a continued economic recovery eventually caused the sensitivity of the stock market to “crisis” (the R-squared) to decline back to only about a 20 percent R-squared by 2000. Similarly, at the start of the last recovery in 2002, the trailing one-year R-squared to the crisis index was about 70 percent, but by 2006 this had also declined to below 20 percent.

Despite the current widespread focus on U.S. government debt woes and on the European sovereign debt crisis, the contemporary crisis-phobia will likely fade in the next few years if the economic recovery continues. Our belief, as suggested by Charts 2 and 3 in the last recovery, is investors who can stay focused on the fundamentals and avoid having their investment strategy derailed by ongoing crisis concerns will fare the best.

4. Is crisis focus a good indicator of stock market risk?

As suggested by Chart 3, since crisis became a sustained focus in the late 1990s, the biggest risk for stock investors has usually been when the trailing R-squared was low—that is, when the cultural mindset was not as focused on the potential for a crisis. At the top of the 2000 stock market, the R-squared was only about 20 percent (i.e., in the previous year, few feared a crisis). Similarly, the 2007-2008 stock market collapse began when the R-squared was only about 30 percent.

By contrast, some of the best buying opportunities in the stock market since the late 1990s have occurred when the R-squared (or cultural focus on the potential for a crisis) was high. The 1998 stock market low during the Russian debacle occurred at an R-squared above 60 percent, the dot-com stock market collapse bottomed in late 2002 as the R-squared approached 70 percent, the 2009 stock market bottom was reached when the R-squared was around 50 percent, and the 2010 soft patch stock market bottomed as the R-squared surged toward 70 percent. Like a spike in the VIX volatility index, today, with the crisis index R-squared near 80 percent (suggesting an intense and widespread crisis focus), Chart 3 suggests it may be a good time to buy.

5. What is the near-term potential for stocks should the contemporary crisis fear ease?

As shown in Chart 1, the crisis index has declined by about 2 points since this mini-panic began earlier this summer. So what is the short-run potential for stocks should crisis fears fade (as they did after last year’s soft patch panic) and the crisis index returns to the level it was prior to this panic? Chart 2 shows the stock market currently exhibits about 8 percent sensitivity to every single point move in the crisis index. If the crisis index returned to its level earlier this summer, it would rise by about 2 points. Therefore, the stock market could rise by about 16 percent should this mini-crisis end. From its current level of about 1175, a 16 percent advance suggests the S&P 500 would return to its recovery cycle high near 1365 achieved earlier this year.

6. What is the long-term potential for stocks should crises fears ease?

Looking once again at Chart 3, what is the potential for the stock market should the R-squared to crisis diminish in the next several years as it did during the last recovery? Currently, almost 80 percent of the movements in the stock market during the last year are due to cultural crisis fears. This intense crisis focus leaves little room for investors to base stock valuations on fundamentals. Moreover, it probably explains why the S&P 500 currently sells at only about 12 times year-end estimated earnings per share while the 10-year Treasury yield is only about 2.2 percent, and while in the latest quarter, U.S. corporate profits rose at the robust annual rate of 12.8 percent!

If cultural mentalities were less crisis-phobic today, what would the PE multiple be on the stock market coming off a 12.8 percent profit quarter with a 2.2 percent Treasury yield and only about a 1.6 percent core consumer price inflation rate? Certainly, much higher than 12 times earnings! 16 times earnings? 17 times? This simply illustrates just how much the crisis-centric mindset is depressing investment potential and it also suggest how much opportunity there is to increase stock valuations just by improving the cultural mindset. Long term, the real investment opportunity is not a dramatic improvement in economic or profit growth (although either or both could occur), but rather is just a slow but steady decay in “crisis-fears” similar to what we experienced during the last recovery. What will the PE multiple on the stock market be if the Rsquared in Chart 3 declines again at some point to only about 20 percent? Summary

The crisis-phobic culture evident since the late 1990s will not likely disappear anytime soon. This means investors will just have to expect periodic intense panics characterized by extreme stock market volatility. However, those who can stay focused on the longer-term fundamentals and attractive valuations and not be spooked away from equities during emotional panics will likely be rewarded in the long-run. The current intensity of crisis fears will likely diminish in the next several years. As the culture slowly turns away from an imminent expectation of crisis and focuses again more on fundamentals, the valuations applied to the stock market should rise substantially as greed slowly replaces fear.

Copyright © Wells Capital

Tags: Business Outlook Survey, Capital One, Consumer Confidence, Crisis Mentality, Double Dip Recession, Economic Recovery, Hypochondria, Hypochondriac, Investment Outlook, Last Several Years, Legacies, Outlook, Overwhelming Crisis, Phobia, Post Traumatic Stress, Post Traumatic Stress Disorder, Quantification, Stock Market History, Summer Drama, Survey Reports, Traumatic Stress Disorder
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Warren Buffett’s Philosophy On Investing In Banks

Tuesday, August 30th, 2011

In light of last week’s surprise announcement of Buffett’s bailout redux of Bank of America (the first one being Goldman back in 2008), and following today’s even more surprising objection by the FDIC which threatens to scuttle the Bank of America settlement and force Bank of Countrywide Lynch to raise far more capital, pushing Warren to double down on his investment throwin more good money after bad, especially if the legal case moves from an Article 77-friendly NY state court to Federal, here are the philosophical thoughts from the Berkshire’s oracles contained, in his “Collected Writings”, on his desire to put money into banks.

And we quote:

The banking business is no favorite of ours. When assets are twenty times equity-a common ratio in this industry-mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the “institutional imperative:” the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-Ieader with lemming-like zeal; now they are experiencing a lemming-like fate.

Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly-managed bank at a “cheap” price. Instead, our only interest is in buying into well-managed banks at fair prices.

Perhaps a better title for this post would “Buffett on lemmings”…

Full humorous musings:

Buffett collected writings

Tags: Article 77, Bailout, Bank Of America, Berkshire, Case Moves, Fdic, Gold, Goldman, Humorous Musings, Legal Case, Lemmings, Objection, Oracles, Philosophical Thoughts, Redux, Small Portion, Strengths And Weaknesses, Surprise Announcement, Twenty Times, Warren Buffett, Zeal
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ECRI’s Achuthan Sticking to Script that Slowdown is not Transitory

Tuesday, August 30th, 2011

via Trader Mark, Fund My Mutual Fund

The ECRI has been nailing the larger macro moves quite well the past few years, so I continue to monitor whatever they say.   There longer leading indicators started to take a quite neutral to bearish view this spring, which at the time was clearly out of the consensus.  At that time the herd said whatever slowdown we might have, would be temporary and many were still looking for 3-4% GDP growth for the second half.

Some earlier videos here:
[Jun 14, 2011: Video - ECRI's Achuthan - Prolonged U.S. Slowdown Underway]
[Jul 7, 2011: Video - ECRI's Achuthan Sticking to Script that Slowdown is not Transitory]

The latest update would show no imminent change to that outlook per Yahoo Daily Ticker.  However they do not yet think we are in recession, nor are ready to declare we will be headed into one.

• Last spring, when most economists were talking about a second-half recovery, Economic Cycle Research Institute co-founder Lakshman Achuthan came on The Daily Ticker and declared a global summer slowdown was coming.
• Now that Wall Street consensus has turned extremely bearish on the economy, we figured it was time to check back with Achuthan to get his current view.  “We’ve got more weakness in front of us,” he says. “We don’t see any upturn yet.“
• Still, ECRI is not ready to declare a new recession is imminent, much less already started as many others contend. “The jury is still out,” Achuthan says. “Our indicators have not gone to the point where we can definitely say ‘boom it’s a recession.’ Problem is they haven’t turned up either, it’s a very persistent decline in these indicators.”
• As for the myriad other economists now putting odds on a recession, Achuthan believes they are playing a “dangerous” game. “It’s the illusion of precision,” he says. “If you take a look at whoever’s making those calls [and] look at their track record of calling recessions I think you’ll be unimpressed.”

Copyright © Fund My Mutual Fund

Tags: Co Founder, Current View, Dangerous Game, Economic Cycle Research Institute, Economists, Ecri, GDP Growth, Herd, Imminent Change, Lakshman, Lakshman Achuthan, Last Spring, Leading Indicators, Mutual Fund, Outlook, Persistent Decline, Recession, Recessions, Slowdown, Upturn, Wall Street Consensus
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