Words from the (investment wise) for the week that was (May 18 – 24, 2009)

Sunday, May 24th, 2009

“Words from the Wise” this week comes to you a bit later than usual and in a shortened format as my “day-job” demands keep me from doing my customary commentary. However, a full dose of excerpts from interesting news items and quotes from market commentators is provided.

Stock markets kicked off the last week on a high note, but then the US parted ways with other markets as the remaining four days went downhill for American stocks. In contrast, global markets in general had only one down day on Thursday.

In addition to non-US equities, risky assets such as commodities, oil, gold, silver and platinum, and high-yielding currencies performed strongly amid fresh signs of “less bad” economic and financial conditions. However, safe-haven trades like the US dollar and government bonds got whacked, especially following Standard & Poor’s decision on Thursday to mark down its medium-term outlook for the UK’s AAA credit rating from “stable” to “negative”. This raised concerns that the US may face a similar fate.

Source: New York Post, May 23, 2009.

As the implications of surging government debt levels move to center stage, the US Debt Clock makes for sobering reading. Click here or on the image below for the live version.

Source: US Debt Clock, May 23, 2009.

David Rosenberg, Merrill Lynch’s former chief North American economist, who has just commenced duty with buy-side firm Gluskin Sheff & Associates, commented as follows: “While the UK government debt-to-GDP ratio is around 40%, the rating agencies are looking at 100% in coming years. The US government debt/GDP ratio right now is near 65%, but clearly heading higher. It seems as though 100%+ is the trigger point for downgrades …

“So the view out there that the US is about to receive a credit downgrade despite the dramatic expansion of the government balance sheet is a little premature. For now, it makes for nice cocktail conversation but as super-sized as the deficit is (13% of GDP), there is enough room in the debt ratio that the US would likely have to run three more years of this sort of fiscal policy to be seen as a candidate for a downgrade.”

The performance of the major asset classes is summarized by the chart below.

Source: StockCharts.com

Following the previous week’s bruising, the MSCI World Index last week gained 2.2% (YTD +2.3%) and the MSCI Emerging Markets Index 5.4% (YTD +31.6%).

Similarly, the major US indices reversed course, but in a much more subdued fashion, as seen from the fairly flat movements of the major indices: S&P 500 Index (+0.5%, YTD -1.8%), Dow Jones Industrial Index (+0.1%, YTD -5.7%), Nasdaq Composite Index (+0.7%, YTD +7.3%) and Russell 2000 Index (+0.4%, YTD -4.4%).

The Nasdaq remains the only major US index still in the black for the year to date, finding itself in the company of the majority of emerging and mature markets.

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

India’s BSE 30 Sensex Index (+14.1%) was the strongest market for the week, having rallied by 17.3% on Monday on unexpected election results. This was the biggest one-day gain in the 30-year history of the Index.

Elsewhere, returns ranged from top performers Sri Lanka (+12.5%), Cyprus (+12.3%), Luxembourg (+9.4%), Macedonia (+9.0%) and Nigeria (+8.8%), to Ghana (-8.9%), Malta (-1.2%), Palestine (-1.2%), Côte d’Ivoire (-1.1%) and Uganda (-1.1%), which experienced headwinds. Japan’s Nikkei 225 Average (-0,4%) put in the worst performance among the major markets. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, Indian ETFs such as WisdomTree India Earnings (EPI) (+22.7%) and PowerShares India (PIN) (+21.6%) were going great guns. Other top-performing sectors were concentrated among commodity funds, helped by investors becoming less risk averse. Strong performers included MarketVectors TR GoldMiners (GDX) (+10.6%), United States Oil (USO) (+4.1%), and iShares Silver Trust (SLV) (+4.6%).

Conversely, safe-haven-related ETFs - US dollar and government bonds - and regional banks reacted negatively, with iShares Dow Jones US Regional Banks Index (IAT) declining by -5.3%, iShares 20+ Year Treasury Bond (TLT) by -4.8%, and PowerShares DB US Dollar Index Bullish (UUP) by -2.9%.

On the credit front, I updated my regular “Credit Crisis Watch” last week and concluded as follows:

“In summary, the past few months have seen impressive progress on the credit front, with a number of spreads having declined substantially since their ‘panic peaks’. The TED spread (down to 0.48% from 4.65% on October 10), LIBOR-OIS spread (down to 0.45%% from 3.64% on October 10) and GSE mortgage spreads have all narrowed considerably since the record highs.

“In addition, corporate bonds have seen a strong improvement, although high-yield spreads remain at elevated levels. Credit derivative indices for companies in all the major geographical regions have also shown a marked tightening since the November highs.

“Most indications are that the credit market tide has turned on the back of the massive reflation efforts orchestrated by central banks worldwide and that the credit system has started thawing. However, although the convalescence process seems to be well on track, it still has a way to go before confidence in the world’s financial system returns to more ‘normal’ levels and liquidity starts to move freely again.”

The quote du jour relates to the monetization process and belongs to Bill King (The King Report): “The dollar collapsed and inflation accelerated with Bernanke’s Treasury monetization. More monetization will yield higher inflation and a dollar debacle. The Fed, Treasury, administration and solons are being checked by the dollar and commensurate inflation … You can reference Jimmy Carter, G. William Miller, stagflation, dollar flight, the Misery Index and public revolt if you don’t believe us.”

In other news, Treasury Secretary Timothy Geithner on Wednesday testified before the Senate Banking Committee, saying that “there are important indications that our financial system is starting to heal”, and that the Treasury would soon be introducing its plan to team up with private investors to buy toxic assets from the banks. Separately, President Barack Obama on Friday signed into law a bill to put new restrictions on the credit-card industry, compelling card issuers to spell out their terms in fewer words - in plain English - and treat customers more fairly.

Next, a quick textual analysis of my week’s reading. No surprises here, with the word “banks” dominating the media. Strikingly, “dollar” is increasingly prominent as the greenback hit a five-month low.

Back to the stock market. An analysis of the moving averages of the major US indices shows the spring rally having encountered resistance at the important 200-day line and/or the early January highs. The highs of May 8 are the most immediate target to the upside, whereas the levels from where the rally commenced on March 9 should hold in order for base formations to remain in force.

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

For more about key levels and the most likely short-term direction of the S&P 500, Adam Hewison of INO.com prepared another of his popular technical analyses. Click here to access the short presentation. (The analysis was done on Wednesday with the Index at 912, but is still as relevant as it was a few days ago.)

Jeffrey Saut (Raymond James) said: “… our sense is the equity markets are forming at least a near- to intermediate-term TOP and we are cautious. As Sy Harding writes, ‘Our Seasonal Timing Strategy is now in its unfavorable season. Our non-seasonal Market Timing Strategy is now on a new sell signal. We remain on the recent buy signal for gold and remain neutral on bonds.’

“Indeed, over the past few weeks technology, retail, housing, and cyclicals have broken their relative strength uptrends that have been intact since the March lows. Whether this turns out to be just another shallow correction, or something more enduring, will likely be determined by those groups whose relative strength still remains intact. Such groups include financials, agriculture, chemicals, oil drillers, and emerging markets.”

“Speaking of stocks, with the Averages backing off from their thrust at the May highs, it’s clear (at least to me) that the market is having second thoughts about the picture,” said Richard Russell, venerable writer of the Dow Theory Letters. “My guess is that those thoughts have to do with the sliding dollar, the sinking bonds with their higher yields - and last but not least - the surging price of gold. Dollar down, bonds down, gold up, it all fits together - trouble.”

For more discussion about the direction of stock markets, also see my recent posts “Gold bullion glitters brightly“, “Video-o-rama: Wall Street slumps on economic worries” and “Credit Crisis Watch: Thawing - noteworthy progress“. (Also, Donald Coxe’s webcast has been updated for May 22 and makes for good listening. This can be accessed from the sidebar of the Investment Postcards site.)

Economy
The Ifo World Economic Climate Indicator also rose in the second quarter of 2009 for the first time since autumn 2007. According to the Survey, “The rise in the indicator was the result of more favorable expectations for the coming six months; the assessment of the current economic situation, however, worsened again, falling to a new record low.”

Economic expectations have improved in all major regions, especially in North America and Asia. But the expectations for the coming six months for Western Europe, Central and Eastern Europe, Russia and Latin America are also clearly upwards.

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

May 22
• Road map for the near-term performance of the economy

May 21
• Index of Leading Indicators signals improving economic conditions
• Auto industry events will continue to distort jobless claims data

May 19
• Plunge in multi-family starts conceals small gain of single-family units

May 18
• Homebuilders Survey records improvement; will new home sales follow?
• Discount window borrowing continues to trend down

The chart below shows the Conference Board’s Leading Economic Indicator, which rose 1% month over month and is comparable to the increases seen at the end of the last recession.

Source: US Global Investors - Weekly Investor Alert, May 22, 2009.

According to Moody’s Economy.com, the minutes from the Federal Open Market Committee’s meeting late in April indicate that participants were more optimistic about the economy than they had been at their previous meeting in mid-March. While the economy remained in recession, there were numerous signs that the pace of contraction was slowing down.

“FOMC members agreed that the steps the committee had previously taken appeared to be providing an economic stimulus and that the Federal Reserve should continue with its previously announced policy actions, in particular ‘quantitative easing’, an expansion of the Fed’s balance sheet through the purchase of longer-term Treasuries, designed to bring down long-term interest rates,” said Moody’s Economy.com.

Gallup’s latest Consumer Mood poll, dealing with economic and market implications, shows that only 6% of Americans have a “positive” mood on the economy, but that the percentage of those that are ”negative” has dropped significantly since early March when the stock market advance started. Also, Americans whose mood is described as “mixed” have increased from the mid-teens to 36% as the negativity has subsided.

Source: Gallup Daily: Consumer Mood, May 22, 2009.

“This ‘mixed’ mood goes along with the ‘green shoots’ theory that some things are getting better and most things have stopped getting worse,” said Bespoke. “With Americans moving from ‘negative’ to ‘mixed’ before turning ‘positive’, does this imply that we’ll have a U-shaped recovery instead of a V?”

The last quote comes from Nouriel Roubini, via a Facebook status update: “The Green Shooters are starting to sweat and getting cold feet as evidence of pestilent yellow weeds is mushrooming.”

Week’s economic reports

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

Source: Yahoo Finance, May 22, 2009.

The US economic highlights for the week include the following:

Source: Northern Trust.

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

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

Source: Wall Street Journal Online, May 22, 2009.

Louis Pasteur said: “Chance favors the prepared mind.” Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers with the ongoing preparation that is required to manage your money wisely.

I hope you’re enjoying a great Memorial Day holiday weekend.

That’s the way it looks from Cape Town.

Source: Daryl Cagle, Slate.

CNBC: PIMCO’s El-Erian on this week’s selloff “Mohamed El-Erian, CEO and co-CIO of PIMCO, discusses this week’s market selloff and the possibility of the US losing its AAA credit rating.”

Source: CNBC, May 22, 2009.

The New York Times: Banks raised billions, Geithner says “The country’s biggest banks have made moves to bolster their balance sheets by about $56 billion since the government disclosed the results of its financial ’stress tests’ two weeks ago, Treasury Secretary Timothy Geithner said Wednesday.

“Testifying before the Senate Banking Committee, Mr. Geithner said that the financial system had begun to ‘heal’, and that the Treasury would soon be introducing the next phase of its financial rescue effort - the plan to team up with private investors to buy billions of dollars in toxic assets from banks.

“‘There are important indications that our financial system is starting to heal,’ Mr. Geithner told lawmakers, though he cautioned that it was still too early to talk about an ‘exit strategy’ for the government.

“But lawmakers in both parties complained that the $700 billion aid plan, known as the Troubled Asset Relief Program, or TARP, had yet to revive bank lending in many parts of the country.

“‘The frustration level is mounting on an hourly basis,’ said Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee.

“Senator Richard C. Shelby, Republican of Alabama who voted against the entire program last year, said the Treasury had ‘treated many sick banks’ but ‘certainly has not cured them’.

“In describing the banking system, Mr. Geithner, said that the country’s largest financial institutions had raised billions by issuing common stock and new debt, including $8 billion in bonds not guaranteed by the government.”

Source: Jack Healy and Edmund Andrews, The New York Times, May 20, 2009.

Financial Times: Smaller US banks need additional $24 billion “Small and medium-sized US banks must raise some $24 billion to meet the capital standards set by the government in its stress tests of large institutions, research for the Financial Times shows.

“News of the potential capital shortfall could increase pressure on many of the 7,900 US banks that form the backbone of the US financial system.

“As many as 500 more banks could close, according to investment bank Sandler O’Neill, which carried out the research.

“Since this month’s release of the tests for the 19 largest banks, regulators and investors have increased their focus on the next tier of lenders, amid concerns some of them might struggle to survive if the economy worsens.

“The government’s stress-case would result in capital shortfalls for 38% of the 200 banks below the 19 largest financial institutions, leading to a deficit of around $16.2 billion in common equity, according to Sandler O’Neill.

“Applying similar criteria to the remaining 7,700 banks in the US would result in a further $7.8 billion capital deficit.

“The banks have to repay a combined $27 billion in aid from the Troubled Asset Relief Programme (Tarp) but they could do that from internal resources rather than raising more funds.

“The US Treasury has said that it does not intend to extend the stress tests beyond the 19 top institutions it examined. But analysts say that the public release of the government’s test methodology and capital adequacy philosophy means that the tests’ standards will become a model for the rest of the US banking system.”

Source: Saskia Scholtes, Julie MacIntosh and Francesco Guerrera, Financial Times, May 17, 2009.

Financial Times: US banks scramble to repay bail-out cash “US banks are scrambling to be in the first wave of lenders to repay Washington bail-out funds after the authorities told Wall Street executives they would allow five or six big financial groups to return taxpayers’ money before the rest of the industry.

“Bankers said they expected the Treasury and Federal Reserve - which doled out billions of dollars from the $700 billion troubled assets relief programme to lenders last year - to name the first repayers in the next few weeks.

“The authorities decided to allow a group of banks to return the funds, rather than approving individual applications, to avoid a ‘rush for the exit’ by lenders vying for bragging rights of being the first to repay, said people close to the matter.

“The timing of the repayment and the number and identity of the banks in the first wave is still under discussion.

“Goldman Sachs, JPMorgan Chase and American Express, which were found not to need additional equity in the recent stress tests, are almost certain to be in the first grouping.”

Source: Francesco Guerrera and Krishna Guha, Financial Times, May 18, 2009.

Bloomberg: Geithner says Treasury may move “quickly” to sell TARP warrants “Treasury Secretary Timothy Geithner said he’s inclined to ‘quickly’ sell warrants the government got when injecting capital into banks, offering prospects of a speedy exit to lenders seeking to retire government stakes.

“‘In general, our objective will be to sell these warrants as quickly as we can,’ Geithner told the Senate Banking Committee today. ‘What I’m reluctant to do is have the government be in a position where we hold these investments for a long period of time, longer than is desirable, in the hopes that we’re going to maximize value.’

“The Treasury received warrants with nearly every capital injection it made with its $700 billion bank-rescue fund, called the Troubled Asset Relief Program. As big banks begin to pay back the assistance years earlier than expected, the Treasury may use market bidding to break a logjam over how to value a key component of the government’s equity stakes.

“The total value of the government’s bank warrants is roughly $5 billion, according to Treasury calculations.

“If the Treasury can’t agree with banks about the value of the warrants, the government may try to sell them at auctions, a Treasury official said in an interview this week. That’s because investor offers may be the only way to put a clear value on warrants that can vary widely depending on the model used.”

Source: Rebecca Christie, Bloomberg, May 20, 2009.

Financial Times: US poised for finance regulation shake-up “Congress will next month start the biggest regulatory overhaul of the US financial system in decades, bringing into the open a frantic lobbying effort between banks, regulators and policymakers on what it contains and who pays for it.

“The House financial services committee, chaired by Democrat Barney Frank, will hold hearings early in June into reforms outlined by Timothy Geithner, Treasury secretary, say people familiar with the timetable.

“But the complexity, coupled with a crowded legislative agenda, means one key pillar - a resolution authority allowing a regulator to seize a failing bank holding company - is not likely to be put in place until year-end.

“The cost of the resolution authority and a proposed systemic risk regulator could be borne by both large banks and small, according to people involved, in spite of the entreaties from the hundreds of small US institutions that they should not pay a levy.

“Cam Fine, chief executive of the Independent Community Bankers of America, said the authority ’should be totally funded by those institutions that are regarded as systemically important or too big to fail’. He said he ‘felt pretty good about where we stand’ and was confident of Mr Geithner’s support.

“Other smaller institutions such as hedge funds are also expressing concern that they will suffer from severe ‘haircuts on contracts’ entered into as counterparties with the seized institution, according to one lobbyist.

“Sheila Bair, the chairman of the Federal Deposit Insurance Corporation, has been lobbying for early introduction of seizure powers that could be used to take over a large systemically important bank if it was severely weakened by another sudden downturn in the economy.

“Mr Geithner has said new powers would allow for an orderly winding up of a systemically important institution, avoiding a repeat of the messy fall-out from Lehman Brothers’ collapse last year or the expensive bail-out of AIG, the insurer.”

Source: Tom Braithwaite, Sarah O’Connor and Krishna Guha, Financial Times, May 17, 2009.

The New York Times: Senate passes bill to restrict credit card practices “The Senate voted overwhelmingly on Tuesday to put new restrictions on the credit card industry, passing a bill whose backers say will make card-issuers spell out their terms in fewer words, using plain English, and treat customers more fairly.

“The 90-to-5 vote, following a 357-to-70 vote in the House on April 30, made it likely that President Obama will have a measure on his desk before the Memorial Day recess. The differences between the House and Senate versions will have to be worked out, but given the political atmosphere it seems likely that the House-Senate negotiations will move quickly.

“The industry has asserted that the legislation may backfire, forcing banks to issue fewer credit cards at greater cost to the current cardholders and making credit harder to get at a time when many Americans need it.”

Source: David Stout, The New York Times, May 19, 2009.

Financial Times: UK looks towards sale of bank stakes “Britain has begun taking soundings with sovereign wealth funds and other investors about selling stakes in its part-nationalised banks as it seeks to tap into a revival of stock market confidence in the financial sector.

“UK Financial Investments, which manages the government’s 43.5% stake in Lloyds Banking Group and 70% stake in Royal Bank of Scotland, could start the process of selling tranches in both banks within a year, according to people briefed on the organisation’s plans.

“Lloyds on Monday launched an open offer to replace £4 billion of preference shares held by the government with new ordinary shares. The move followed the weekend announcement of the planned departure of Sir Victor Blank as Lloyds chairman amid investor unrest over his role in the bank’s much-criticised takeover of HBOS last year.

“UKFI has already had substantial contact with potential investors, including UK institutions and foreign organisations such as sovereign wealth funds, to gauge their interest.

“‘A lot of people around the world think once you get through the losses the earnings power of these banks will be formidable,’ said one person familiar with the situation.

“The organisation is likely to exit its stakes in tranches over a period of time although ‘these might be quite large dribs and drabs’, according to people close to the matter.”

Source: Jane Croft and Patrick Jenkins, Financial Times, May 18, 2009.

BCA Research: Euro area banks - stressful situation “The euro area’s attempt to stress-test the banking system is likely to prove fruitless.

“The Committee of European Banking Supervisors has designed a set of scenarios, which are currently being used by national regulators and central banks to evaluate the euro area banking system. However, the stress tests will not conclude until September, the assumptions used and the results will remain a secret, and the focus will not be on individual banks but rather the system as a whole.

“It is hard to argue that this process will help provide clarity regarding bank balance sheets or ease investor concerns over the potential for enormous losses. Up to the end of last year, European banks (excluding the UK) had only accounted for $224 billion in bad loans. The IMF estimates that another $875 billion will need to be written down by the end of 2010, compared with another $550 billion in the US banking system. Losses for the next two years are enough to wipe out all of the European banking system’s tangible capital, before considering earnings over the period.

“The IMF results are roughly consistent with our own calculations for the top 20 banks. It would take just over 2% in writedowns of assets to eliminate all tangible equity (US banks have roughly 3%). It is possible that banks’ access to private capital will improve and, together with future operating earnings, further asset writedowns will be easily absorbed. Still, the stress tests as currently envisioned will do little to bring clarity to the situation or restore investor trust.

“One positive development is that the German Cabinet has agreed to a ‘bad bank’ scheme to remove toxic assets from bank balance sheets. The proposal still needs parliamentary approval but would be helpful, at least for the German financial sector.”

Source: BCA Research, May 19, 2009.

The New York Times: GM draws another $4 billion from Treasury “General Motors, facing the almost certain prospect of a bankruptcy filing, said Friday that it had drawn another $4 billion from the Treasury Department, raising its total from the government to $19.4 billion.

“GM originally said that it would need an additional $2.6 billion from the government to operate through June 1, but added $1.4 billion to that amount.

“The company, in a regulatory filing, also increased - to $7.6 billion - the amount it said it would need from the Treasury after June 1, the deadline set by the Obama administration for a restructuring plan.

“GM gave the Treasury a note for $266.8 million as security against the additional money that it borrowed on Friday. The financing does not appear to be the last that GM will draw, according to the filing with the Securities and Exchange Commission.

“It says that by June 1, it expects to have borrowed a total of $21.4 billion from the Treasury. In its original request to Congress last fall, GM asked for $18 billion in loans to keep it afloat while it restructured. With its latest injection from Treasury, it has surpassed that request.

“Lawyers for GM and the government are preparing documents for a GM bankruptcy filing, which is expected to come around June 1.

“People briefed on GM’s finances said the automaker would require debtor-in-possession financing during its reorganization of $40 billion to $70 billion.

“If GM drew the full $70 billion while in bankruptcy, the government would have provided the company with more than $90 billion in total, including the money it has drawn to date.

“Also on Friday, the Canadian Auto Workers union said that it had reached a second cost-cutting agreement with General Motors of Canada, even as bondholders for the parent company stood firm in their decision to reject an offer to convert their debt into GM stock.

“The automaker has offered its bondholders 225 shares for each $1,000 worth of debt, which over all would give them a 10% stake in the company.

“The company has said that it needs 90% approval from its bondholders by Tuesday if it is to avoid a bankruptcy filing. But the committee of GM’s biggest bondholders, which represent 20% of the overall debt, said there was no support for the current offer. Bondholders have said that competing creditors, like the UAW, have received better treatment.”

Source: Bill Vlasic and Ian Austen, The New York Times, May 22, 2009.

ClipSyndicate: In-depth look at GM bankruptcy looming “Interview and discussion with White House Economic Adviser, Austan Goolsbee. He talks about President Obama’s plans for GM’s restructuring, the resignation of AIG CEO Edward Liddy and the impact of the credit-card bill that the President will sign this afternoon [Friday].”

Source: ClipSyndicate, May 22, 2009.

Financial Times: Declining Libor “As a barometer of the financial crisis, it’s been hard to beat Libor, the London interbank offered rate for borrowing short-term funds in the banking system.

“On Wednesday, dollar Libor for the benchmark three-month sector set at 0.71625 per cent, extending its run of declines for 36 straight days. A comparison of Libor with the Fed funds rate shows that the gap between these two rates is at its lowest level since February 2008. Traders forecast further improvement on Thursday. The mood is a world away from the stressful peaks of Bear Stearns’ rescue last March and the failure of Lehman Brothers in September when Libor took a rocket ship to the moon.

“Further evidence that the banking system is stabilising is seen by activity in financial commercial paper. Lending for three months is back above that of the one-month sector for the first time since late January when the Federal Reserve’s support temporarily boosted 90-day paper. Quantitative easing and the smooth completion of the stress tests for banks has eased tension. That has helped nurture the recovery in risky assets.

“For the banking system, however, there are still signs of dislocation. Swap spreads, the difference between government bond yields and money market rates and a measure of bank credit quality, remain some way from looking normal. Liquidity also remains questionable as banks seek stronger balance sheets and raise capital to pay back government support.

“The steady declines in three-month Libor have also reduced the Ted spread, which compares the bank lending rate with that of three-month Treasury bills. After surging to record levels, the much lower Ted spread is another good sign. But with bills only yielding 0.18 per cent, it’s clear there remains an aversion to lending money at the much higher unsecured rate of three-month Libor.”

Source: Michael Mackenzie, Financial Times, May 20, 2009.

Ifo: Ifo World Economic Climate brightens “The Ifo World Economic Climate Indicator rose in the second quarter of 2009 for the first time since autumn 2007. The rise in the indicator was the result of more favourable expectations for the coming six months; the assessment of the current economic situation, however, worsened again, falling to a new record low.

“The economic expectations improved in all major regions, especially in North America and Asia. But also in Western Europe, Central and Eastern Europe, Russia and Latin America the expectations for the coming six months have been clearly corrected upwards. In contrast, the current economic situation in all major regions is still assessed as markedly unfavourable, with the worst appraisals coming from North America and Western Europe.”

Source: Ifo, May 19, 2009.

Nouriel Roubini (Forbes): Don’t believe the optimists “Recent data suggest that the rate of economic contraction in the global economy is slowing down, and that we are closer than we were six months ago to the trough of the recent severe global recession.

“But while the rate of economic contraction is now lower than the free-fall and near-depression experienced by many economies in the fourth quarter of 2008 and the first of 2009, the recent optimism that ‘green shoots’ of recovery will lead to the recession to bottom out by the middle of this year - and that recovery to potential growth will rapidly occur in 2010 - appears grossly misplaced, for three noteworthy reasons.

“First, the current deep and protracted U-shaped recession in the US and other advanced economies will continue through all of 2009, rather than reach a trough in the middle of this year as expected by the optimists.

“Second, rather than a rapid V-shaped recovery, growth will remain sluggish and sub-par for at least two years into all of 2010 and 2011. A couple of quarters of more rapid growth cannot be ruled out as we get out of this recession toward the end of the year or early next year as firms rebuild inventories and the effects of the monetary and fiscal stimulus reach a delayed peak. But structural weaknesses of the US and the global economy will cause both a below-trend growth and even the risk of a reduction of potential growth itself.

“Third, we cannot rule out a double-dip W-shaped recession, with the wings of a tentative recovery of growth in 2010 at risk of being clipped toward the end of that year or in 2011. This will result from a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies, as concerns rise about medium-term fiscal sustainability and the risk that monetization of fiscal deficits will lead to inflationary pressures after two years of deflationary pressures.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, May 21, 2009.

Casey’s Charts: Recession hits the Treasury “The magnitude of the recession was underscored by the latest numbers from the US Treasury: last month’s individual income tax receipts dropped 44% and corporate tax revenue plunged 65% compared to April 2008. Alarming news, as April is historically the biggest collection month of the year and usually results in a sizable budget surplus for the month.

“As Casey Research Chief Economist Bud Conrad correctly predicted back in January, the initial $1.2 trillion deficit for 2009 was grossly underestimated. The Congressional Budget Office estimate is not only riddled with low-ball expenditure figures and accounting trickery, it also failed to anticipate a precipitous collapse in tax revenues.”

Source: Casey’s Charts, May 19, 2009.

Asha Bangalore (Northern Trust): Index of Leading Indicators signals improving economic conditions “The Conference Board’s Index of Leading Economic Indicators (LEI) moved up 1.0% after a string of monthly declines between October 2008 and March 2009. The increase of the index in April reflects a widespread improvement as seen in the 70% diffusion index for April.

“On a year-to-year basis, the LEI fell 3.0% in April, after a 4.0% drop in the November-December months of 2008. The year-to-year change in LEI on a quarterly basis dropped 3.6% in the second quarter (based on April data). It is the second consecutive decline which is smaller than the 3.9% drop of the fourth quarter of 2008.

“The chart below illustrates that the year-to-year change in LEI bottoms out well ahead of the end of a recession. The table lists the details related to this observation. Based on the history of the LEI, the 3.9% drop in the fourth quarter could be the bottom for the current cycle; we will need additional monthly data to confirm this assessment.

“At the present time, we can temporarily conclude that the worst of the decline in economic activity is part of history. The number of quarters, deduced from the history of the LEI, before recovery commences after the year-to-year change of the LEI has recorded a bottom for the cycle varies between one and four quarters.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, May 21, 2009.

Asha Bangalore (Northern Trust): Auto industry events will continue to distort jobless claims data “Initial jobless claims fell 12,000 to 631,000 during the week ended May 16. The prior week’s reading of initial jobless claims was raised to 643,000 from the earlier estimate of 631,000.

“The large movements of initial jobless claims in the past two weeks from 605,000 in the week ended May 2 is largely due to auto industry events. The four-week moving average of initial jobless claims is 628,500 and it appears to have peaked in the first week of April at 658,750. The Chrysler and GM plant shutdowns and reopening in the next few months are most likely to distort jobless claims data.

“The tentative conclusion is that initial jobless claims are trending down, albeit holding at a high level.

“The 1990-91 and 2001 recessions were both jobless recoveries with jobless claims posting significant declines only well after the recovery was underway. There is a strong likelihood the current recession may also be followed by a jobless recovery. We will need to see significant and consecutive weekly declines in jobless claims to declare that the worst is behind us.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, May 21, 2009.

Asha Bangalore (Northern Trust): Homebuilders survey records improvement, will new home sales follow? “The Housing Market Index (HMI) of the National Association of Home Builders rose to 16 in May from 14 in April. The HMI has advanced in three out of the four months ended May. Sales of new single-family homes rose 8.2% in February and edged down 0.6% in March. The sales tally for new single-family homes during April will be published on May 28. There is a strong positive correlation with the HMI and actual sales of new homes.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, May 18, 2009.

Asha Bangalore (Northern Trust): Plunge in multi-family starts conceals small gain of single-family units “Housing starts fell 12.8% to an annual rate of 458,000, a new record low. Total housing starts have fallen 80% from the peak in January 2006.

“In April, multi-family starts plunged 46.1% and single-family starts advanced 2.8%. Single-family starts held steady in February and rose 0.3% in March. Starts of new single-family homes have declined each month during July 2007-January 2009, with the exception of a small increase in May 2008. The recent movements suggest that single-family starts appear to be establishing a bottom.

“At the same time, the elevated level of unsold new single-family homes (10.7-month supply in March, down from peak of 12.5-month supply in January) is a drag on new construction. The good news is that inventories of new unsold single-family homes appear to have peaked in January 2009.

“Pulling together the different pieces of news from the housing market, the housing starts report for April leans on the side of optimism because the pace of decline could have accelerated further. Instead, it appears that there is a moderating trend in place with support from other reports. The key to a complete recovery is, of course, a turnaround in employment conditions.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, May 19, 2009.

Bespoke: Country returns “With global equity markets still in rally mode, below we highlight the year to date performance of the major indices for 83 countries around the world. After nearly every country was down earlier in the year, 62 out of the 83 are now up in 2009.

“Peru is up the most at 72.92%, while Costa Rica is down the most at -39.94%. And the BRIC (Brazil, Russia, India, China) countries are significantly outperforming the developed G-7 countries. Russia, India, and China rank 2nd, 3rd, and 4th in terms of year to date performance, and Brazil isn’t far behind in 10th place.

“Canada has been the best performing G-7 country with a gain of 12.62% in 2009, but it ranks 35th out of 83. The rest of the G-7 countries are bunched up in the 0%-5% range, which is closer to the bottom of the list than the top. And the US is the worst of the seven with gains of less than 1%. While the markets here in the US have rallied nicely off of their March lows, most other countries have bounced back even more 2009.”

Source: Bespoke, May 19, 2009.

Bespoke: Recent performance of key ETFs “For those interested in a quick snapshot of how various ETFs across all asset classes have performed recently, below we highlight their 1-day, 5-day, and 1-month performance. As far as equities go, there was lots of red today [Thursday], but there’s still lots of green over the last month.”

Source: Bespoke, May 21, 2009.

Bespoke: Strategists keep 2009 S&P 500 price target at 949 “The Wall Street strategists that Bloomberg polls each week haven’t changed their year-end S&P 500 price targets since mid-March. But by doing nothing, they’re collective price target has gotten much closer to the actual level of the index since the market has rallied so much.

“At the start of the year, strategists as a whole were looking for a year-end S&P 500 price of 1,049, which would have meant a gain of 16.2% for the year. When the market was down more than 20% in early March, this bullish price target was pretty bad. As the market fell, strategists cut their year-end target, which is now 100 points lower at 949. But as the market has risen, they haven’t increased their expectations yet, so they are now just looking for another 4.19% gain through the end of the year.

“UBS and JP Morgan remain the most bullish of the bunch with a target of 1,100. And four strategists have price targets below the current level of the S&P 500, with Barclays the most bearish at 757. At the start of the year, Barclays was looking for 874.”

Source: Bespoke, May 19, 2009.

Jeffrey Saut (Raymond James): A stoopers’ market ” … our sense is the equity markets are forming at least a near- to intermediate-term TOP and we are cautious. As Sy Harding writes, ‘Our Seasonal Timing Strategy is now in its unfavorable season. Our non-seasonal Market Timing Strategy is now on a new sell signal (as of the close on May 13). We remain on the recent buy signal for gold; and, remain neutral on bonds.’

“Indeed, over the past few weeks technology, retail, housing, and cyclicals have broken their relative strength uptrends that have been intact since the March lows. Whether this turns out to be just another shallow correction, or something more enduring, will likely be determined by those groups whose relative strength still remains intact. Such groups include financials, agriculture, chemicals, oil drillers, and emerging markets.

“We continue to favor emerging/frontier markets and as ISI’s Francois Trahan notes, ‘If you are bullish on US equities, global stock markets have become more correlated over the past decade. And, generally when the S&P 500 has risen it has underperformed the global equity complex.’ Obviously, we agree …”

Source: Jeffrey Saut, Raymond James, May 21, 2008.

David Fuller (Fullermoney): Substantiating bullish bias for equities “I have described conditions as being more bullish than bearish for a number of months. However such claims need to be substantiated by technical (market) evidence, which is best monitored every day.

“I will review the process, discussed at length in Fullermoney, in what can be a template for subscribers, not only for today’s environment but also the transition from every other bear to bull market in future:

“Climactic capitulation - Bear markets usually end in climactic fashion, which is the phase of greatest capitulation and despondency. This is what happened late last October and also in November.

“Base building - The most persistent capitulation stage marks the beginning of the end for the bear market, which by definition, must also be the beginning of the new bull market, although all one may see for some months will be ranging, including some new lows by indices for less fundamentally attractive markets, but also rising lows by indices for the next bull market’s leaders.

“Reversion to the mean - If the bear really is ending or over, you will see the evidence accumulate in several ways, which are different from the redistribution bear market rallies which occur on the way down. Mean reversion (we use the 200-day moving average to measure this because it is a widely followed medium to somewhat longer-term trend smoothing device) will become evident due to a combination of different developments.

“Uptrends are established - Indices will be breaking up out of their ranging bases, with the best performers establishing step sequence uptrends, one above the other. These will eventually break above the 200-day MAs, which will eventually turn upwards sometime later. The rising MA becomes a potential support level during minor mean reversions throughout the duration of the new uptrend.

“Summary - Perspective is gained by monitoring many indices, as there will inevitably be leaders and laggards. This is Fullermoney’s commonality approach. For instance, if stock market indices are mostly ranging but downward breaks are no longer being maintained, in contrast to some rallies which are being extended, one does not need to be a genius to deduce that demand (buying pressure) is beginning to exceed supply (selling pressure).

“The performance of upside leaders when looking for evidence of market bottoms and recovery potential is much more important than focussing on laggards, because we are looking for a transition from bear, which includes all stock market indices in its latter stages, to bull in which case markets will break away from the prior downtrend one by one over time.”

Source: David Fuller, Fullermoney, May 18, 2009.

SmartMoney: Why Jeremy Grantham changed his mind “If people had paid attention to veteran investor Jeremy Grantham over the past two years, their investment portfolios would be looking much better than they likely are. While many investors were caught up in bull-market euphoria in 2007, Grantham, who oversees $85 billion for Boston-based institutional money-management firm GMO, told anyone who would listen there was a global bubble: ‘It’s everywhere, in everything’. Then, in early March of this year, when the market looked its worst, he wrote that people needed to get over their fears and invest, because US stocks were cheap and foreign stocks even cheaper.”

Click here for the full article.

Source: Russell Pearlman and Jonathan Dahl, SmartMoney, May 21, 2009.

John Hussman (Hussman Funds): Stock market advance - “leadership by losers” “As of last week, the market climate for stocks remained characterized by mixed valuations - modestly overvalued on the basis of most fundamental measures except those that assume a sustained return to the record profit margins of 2007, and slightly undervalued if one assumes that a return to those profit margins is a given.

“Market action was also mixed - volume continues to show fairly tepid sponsorship relative to durable market advances. Meanwhile, price action has been very favorable on the basis of breadth, but with the strongest leadership from industry groups with the least favorable balance sheets and financial stability. It is not typical for the industries that suffer worst in a bear market to be the ones that lead the subsequent bull market. That sort of ‘leadership by losers’ however, is very characteristic of bear market rallies.

“That’s not to say that we can immediately conclude that stocks are in a bear market advance as opposed to a new bull market, but as usual, we don’t spend much of our energy making assumptions about things that aren’t observable. At present, the observable evidence is that stocks are priced to deliver modestly sub-par long-term returns, but still in the range of about 8% annually over the coming decade …”

Source: John Hussman, Hussman Funds, May 18, 2009.

Richard Russell (Dow Theory Letters): Characteristics of secondary reactions “The most difficult and puzzling study of the stock market is that which deals with secondary reactions against the primary trend. Because we’re in a bear market, I’m going to limit the following discussion to (upward) reactions in bear markets.

“Over the weekend I pulled out my volume of Robert Rhea’s ‘The Dow Theory’. I went over some of Rhea’s comments on secondary reaction in bear market.

“‘For the purpose of this discussion, a secondary reaction is considered to be an important advance in a bear market, usually lasting three weeks to as many months, during which interval the price movement generally retraces from 33% to 66% of the primary price change since the last preceding secondary reaction.

“‘Those who try to place exact limits on secondary reactions are doomed to failure, just as surely as would be the weather man who forecasted a snowfall of exactly three and one half inches within a specified time.

“‘In a bear market steady liquidation of securities by those who prefer or need cash reduces quotations day after day, with professionals, realizing there is more room on the bottom than on the top, hastening the decline with short sales. Eventually, the market is forced to a lower level than is warranted by conditions. The short interest is perhaps too extended, with wise traders sensing the fact the liquidation has, for the time, at least, run its course.

“‘Quiet, weak spots in bear markets are generally good ones to short, as they generally develop into serious declines.

“‘In a primary bear market the rallies are apt to be violent and erratic, and always occupy less time than the decline, which they partially recovery. Often the primary movement of several weeks is retracted in a few days.

“‘Rallies in a bear market are sharp, but experienced traders wisely put out their shorts again when the market becomes dull after a recovery.

“‘In bear markets, primary movement has an average duration of 95.6 days, whereas the secondary movement averages 66.5 days or 69.6% of the time consumed in the preceding primary movements.’

“All the above pertains to the price action during rallies in bear markets. But what about business conditions during bear market rallies? My studies show that bear market rallies are technical phenomenons which do not necessarily reflect on business. I’m looking at a chart of the great 1929 to 1930 rally which occurred after the 1929 crash. The Federal Reserve Index turned down in late-1929, and despite the great bear market rally, the Fed Index continued lower into early 1932.”

Source: Richard Russell, Dow Theory Letters, May 18, 2009.

Bloomberg: Birinyi says S&P 500 may reach 1,700 within three years “Laszlo Birinyi, president of research and money-management firm Birinyi Associates Inc., talks with Bloomberg’s Matt Miller about the outlook for US stocks. Birinyi also discusses his investment strategy and the outlook for the US economy.”

Source: Bloomberg, May 20, 2009.

Barry Ritholtz (The Big Picture): Normalizing earnings during profit freefalls “I am becoming terribly enamored of the charts Ron Griess highlights each week form The Chart Store. Now that earnings season is all but over, Ron looks at a few charts that are revealing of the extent of the damage done to corporate profitability. It is, in a word, breathtaking.”

How cheap are stocks?

How much have profits fallen?

Source: Barry Ritholtz, The Big Picture, May 18, 2009.

Randall Forsyth (Barron’s): Gain from the greenback’s pain “The dollar continues to be yin to the stock market’s yang.

“As the perception that the worst of the economic and financial crisis has passed bolsters equities, the greenback is giving back its gains.

“The dollar’s declines are being blamed by the sado-monetarists (to steal once again a terrific turn of phrase from John Liscio, our late friend and colleague at Barron’s) on the aggressive expansion of liquidity by the Federal Reserve.

“And, indeed, the US Dollar Index, which measures the greenback’s value against a basket of America’s major trading partners, broke below its 200-day moving a couple of weeks ago. The further drop in the US Dollar Index to below 82 essentially puts it back to where it started the year.

“The dollar’s reversal actually represents a relief of sorts. In the global scramble for scarce dollar liquidity, the dollar’s price was bid up. Borrowers of dollars - nearly the whole world in the global credit crunch - had to pay them back. That made for a classic short-covering rally for the greenback.

“Make no mistake: the fundamentals for the dollar are negative, given the huge US current-account deficit (though it’s shrinking, courtesy of the recession that’s curbed imports) and America’s debtor-nation status. But deflating the economy in a credit crisis to maintain the exchange rate is worse. It was tried in the 1930s; it was one of the things that made the Great Depression ‘great’.

“So we’ve picked our poison, and it is a cheaper currency. For investors, the question is how best to react.

“ISI Group’s Portfolio Strategy Group, led by Francois Trahan, suggests that if you like US equities, you should be buying the big, global companies that may be domiciled outside the US but compete in the same markets as American companies around the world.

“Even though this is supposed to be a global world, there remain many portfolio managers who are restricted to buying “US companies,” an archaic notion.

“… if you’re bullish on US stocks that will benefit from an economic recovery and reflation, why not buy foreign stocks, which should get the added benefit of currency gains from the dollar’s decline?

“You can wring your hands and bewail the demise of the dollar. Or you can take advantage by investing abroad. Never has it been so easy for Americans to do so.”

Source: Randall Forsyth, Barron’s, May 21, 2009.

Bespoke: India has biggest one-day change ever “India’s Sensex rallied 17.34% today on unexpected election results for its biggest one-day gain ever in its 30 year history. The next biggest one-day gain came in March 1992 when the index rallied 13.14%. From its peak in January 2008 to its recent low, the Sensex dropped 60.91%. From its low, however, the index has now rallied 75.04% in just over two months. Even after this 75% gain, India needs to rally another 46.13% to reach its old highs.”

Source: Bespoke, May 18, 2009.

Richard Russell (Dow Theory Letters): US dollar cracking down “On the edge - below, a weekly chart of the Dollar Index. The 10-week blue moving average is about to drop below the red 40-week moving average in what technicians call ‘the death cross’. As I write the dollar is flirting with a serious break to new lows. The bearish target is 80, below which the dollar could swoon. Is it any wonder that international holders of dollar-denominated securities are white-knuckled?

“The status of the dollar is now so extremely important that I’ve decided to include a daily chart as well. What you see on the daily chart is an enormous head-and-shoulders top with the dollar right on the edge of support. A break below support (the blue line) would be ominous, and would probably send the dollar down to test its December low at 81.41.”

Source: Richard Russell, Dow Theory Letters, May 20, 2009.

Barron’s: New dilemma for the UD dollar “China isn’t just talking about supplanting the dollar as the center of the international monetary system. It is taking concrete steps away from the greenback for both finance and trade.

“The Financial Times reports China and Brazil have discussed using their own currencies for trade, a marked shift away from the use of dollars, the norm for the conduct of international trade.

“There have been proposals over the years to use currencies other than the dollar for trade, most notably by the Organization of Petroleum Exporting Countries. OPEC has made noises about pricing its oil in a basket of currencies or perhaps the euro to offset the cartel’s currency losses when the greenback would take one of its periodic headers.

“But nothing ever has come of those threats. And even with the introduction of the euro as the first, real potential rival, world trade continues to be conducted overwhelmingly in dollars.

“The global use of dollars has been an enormous advantage to the US, affording the nation the ability to spend and borrow nearly without limit. As long as the rest of the world wanted and needed dollars for trade in goods and financial transactions, America could effectively just reel off greenbacks to pay its bills.

“As noted here previously, the rest of the world quite simply is getting its fill of dollars. The head of the People’s Bank of China, that nation’s central bank, has called for a ’super sovereign’ international currency that would take the place of the dollar. More recently, a Japanese official called on the US to issue Treasury bonds denominated in yen, which couldn’t simply be repaid by the printing of dollars.

“Now, talks between China and Brazil on setting up bilateral trade in their own currencies moves the possible supplanting of the dollar out of the financial realm.

“It is no coincidence that the US has been replaced by China as Brazil’s biggest trading partner. As such those two nations see less of a need to use dollars for their bilateral trade. Moreover, China and Argentina last year entered an agreement to transact trade in their respective currencies, cutting out the dollar as an intermediary.”

Source: Randall Forsyth, Barron’s May 19, 2009.

Eoin Treacy (Fullermoney): Outlook for British pound “The pound was one of the world’s worst performing currencies from late-2007 through to the end of the 2008. As a major European economy, outside the Eurozone, with a burst housing bubble and a heavy reliance of the City’s financial sector, the UK is more exposed to the effects of the credit crisis than many others.

“The UK took no action to support the currency as it declined, since it helped to make UK exporters more competitive. As short-sellers focused on sterling as a vehicle for taking advantage of the credit crisis, the pound’s fall outpaced that of its trading partners and on a trade weighted basis, it fell over 30% between mid-2007 and late 2008.

“The Deutsche Bank British Pound Trade Weighted Index ranged from 2001 to the middle of 2007. However, it broke emphatically below 95 in December 2007 and fell to 90 where it distributed for four months. It broke downwards again in August and began to accelerate lower from October. The Index found support in December and has posted a succession of higher lows since.

“This action is in contrast to the bearish sentiment towards the UK economy and the pound generally. The fundamental economic condition of the country is still deeply troubling but we should not forget that currency trading is a relative value endeavour. It could be argued that the pound became undervalued relative to its main trading partners too quickly and that rather than the pound being strong, other currencies are now getting weaker.

“If we accept the proposition that the pound is bottoming, then foreign investors looking at potentially making relatively long-term investments in Europe could justifiably start looking at the UK as a preferred destination.”

Source: Eoin Treacy, Fullermoney, May 18, 2009.

Joe Weisenthal (Clusterstock): John Paulson’s big bet on inflation “Earlier this week we mentioned that hedge fund manager John Paulson, who made his fortune betting against the housing market, is moving forward with plans to pounce on cheap real estate.

“Prior to that Paulson was betting on gold, taking sizable stakes in some gold miners.

“The Pragmatic Capitalist smartly connects the dots: Stringing together the recent SEC filings of John Paulson, the billionaire hedge fund manager, makes one thing clear: he is betting big on the reflation trade. Paulson’s latest 13-F filing shows large positions in Anglogold, Kinross gold, Gold Fields, market vectors gold ETF and the S&P gold ETF.

“More interesting is a recent filing by Paulson to start raising money for a hundred million dollar “real estate recovery” fund.

“At first, the news of large gold purchases early last month were seen as potential Armageddon plays based on Paulson’s big bets on the collapse of the economy last year, but it’s now clear that Paulson is betting big on inflation in the coming years.”

Source: Joe Weisenthal, Clusterstock, May 21, 2009.

Business Intelligence: Gold will ultimately hit US$1,300 on inflation hedging, says JPMorgan Chase “Jan Loeys, the global head of market strategy at JPMorgan Chase & Co said commodities are going to move higher as investors start to get concerned about inflation.

“Speaking on Bloomberg Television from Hong Kong, Loeys said: “The global recession and the US recession probably is over this month, maybe next month. Commodities, materials in particular, are going to be benefiting right now as investors start to get a bit worried about future inflation.”

“‘Over the next year or so, we think we are going to be crossing US$1,000, probably go ultimately to US$1,200, US$1,300 just for inflation hedging and lack of supply,’ Loeys said.

“Clients ‘are very worried about inflation in two, three years time,’ Loeys said in the interview. ‘The buying we are seeing now in commodities is really hedging, hedging off the potential risk that we will see a spike in inflation.’

“Loeys said crude-oil prices may rise faster than gold in the next few months as energy demand picks up.”

Source: Business Intelligence, May 17, 2009.

Bespoke: Gold breaks downtrend and dollar breaks down “Gold is up another $12.40 today to $939/ounce. Ever since the metal hit support at its 200-day moving average in April, gold has been rallying nicely. And based on technicals, gold has quite a bit of room to run on the upside before it starts to hit resistance again. As shown below, when the metal broke its multi-month downtrend at the start of May, it turned the technicals from negative to positive.

“Gold’s gain has coincided with the dollar’s demise. The dollar tried to mount a comeback after taking a big hit in March, but it didn’t get close to a retest of its 52-week highs. Once it tested and failed at support levels a couple of weeks ago, the trend turned from neutral to negative. The next area of support for the dollar doesn’t come into play until it gets down to its December lows. For now, investors should play the stocks with high international revenues as a play on the decreasing dollar.”

Source: Bespoke, May 20, 2009.

Bespoke: Oil seasonality “With gas prices steadily rising in recent weeks, drivers are nervously watching movements in crude oil and hoping that last week’s sell-off is the beginning of a trend rather than a just a quick pullback. Unfortunately, if crude oil’s seasonal pattern over the last 25 years is any indication, we shouldn’t expect any relief until September. The chart below shows the average YTD percent change in the price of crude oil over various time periods. For each period, we also show the date the high was reached. As shown, over the last twenty-five (9/30), ten (9/19), and five (9/22) years, the price of crude oil has typically peaked in mid to late September.”

Source: Bespoke, May 18, 2009.

BCA Research: Oil breaks out - is it sustainable? “The rally in oil from the low $30s is technically impressive against the weak global demand backdrop and elevated inventories.

“Oil prices reached $62/bbl this week, despite lofty US oil inventories (notwithstanding this week’s inventory decline) and the fact that Americans are driving much less than last year. The higher price of oil reflects in part the upturn in Chinese oil imports and car sales at a time when oil production is lagging. Russia continues to have difficulty boosting output and oil production has been flat for most OPEC countries. Saudi Arabia has cut production sharply.

“As with other commodities, oil should benefit from both a weaker US dollar and a shift in investor portfolio preference toward real assets as a hedge against inflation. The upturn in our global leading economic indicators is another positive sign for the commodity complex. Bottom line: Our strategists have upgraded commodities to overweight recently, with energy at the top of the buy list. Investors should consider playing the oil bull market by buying North American exploration and production stocks, or by going long the Norwegian krone and the Canadian dollar.”

Source: BCA Research, May 22, 2009.

Financial Times: S&P warns UK over high debt level “Britain on Thursday became the first big economy to be warned in the financial crisis that it might lose its top-notch credit rating, in a move that raised fears of possible downgrades for other large industrialised nations.

“Standard and Poor’s lowered its medium-term outlook on the triple A rating for the UK’s debt to ‘negative’ from ’stable’ for the first time since the credit ratings agency started analysing the country’s public finances in 1978.

“Though the agency lowered its outlook, it affirmed Britain’s AAA long-term and A-1+ short-term sovereign credit ratings.

“S&P based its warning on a forecast that net government debt risked approaching 100% of national income and staying at that level. ‘A government debt burden of that level, if sustained, would in Standard & Poor’s view be incompatible with a AAA rating,’ the agency said.

“A loss of the top credit rating could raise the cost of financing the national debt, putting further strain on public finances and adding to pressure on Gordon Brown to bring down borrowing faster than the Treasury has planned.

“The agency’s warning sets a precedent for other big economies with triple A ratings whose debt burdens are also approaching 100% of national income. The UK debt burden is forecast over coming years to be similar to that of the US, France and Germany, all of which may now be vulnerable to an S&P downgrade.

“Investors worried that the US - which is also running record government deficits - might be in line for a similar warning. Yields on long-term US government debt rose sharply, the dollar fell to a new low for the year, while gold rallied 1.7% in New York towards $955 an ounce.”

Source: Chris Giles and Dave Shellock, Financial Times, May 21, 2009.

Bespoke: S&P cuts UK’s credit outlook to negative … we’re shaking in our boots “The fact that the major credit ratings agencies still make news is one of the more peculiar financial topics of the 21st century. After being worthless during the credit crisis and then being labeled worthless after the fact by the media, somehow S&P’s cut of the UK’s credit outlook to negative is reverberating through global markets today. And now investors are wondering if the US is next.

“Without laying out a thousand more reasons why no one in the world should pay attention to this, below we highlight a chart of the credit default swap (CDS) price per year to insure $10,000 of UK sovereign debt for 5 years. Since default risk peaked in late February, the cost to insure UK debt is down 50%! The S&P outlook cut today moved the CDS price from 72 bps to 82 bps. This move barely shows up on the chart and highlights that the bond market surely doesn’t care about S&P’s call. And where the heck was S&P prior to and during the 900% (yes 900%!) rise in UK default risk in 2008 and early 2009?”

Source: Bespoke, May 21, 2009.

Gabriel Stein (Lombard Street Research): Russian stimulus is not working “Russia’s central bank could once again face a choice between allowing the rouble to weaken and taking steps to support the economy, says Gabriel Stein, chief economist at Lombard Street Research.

“‘According to estimates, Russian GDP shrank by 9.5% in the first quarter from a year earlier,’ he says. ‘There are some ‘green shoots’ of recovery - but even President Medvedev has acknowledged stimulus measures to boost the economy have so far not worked.’

“Mr Stein says Russia is paying the price for its double exposure to the ‘most serious hazards of the modern world - energy and exports to continental Europe.’ The former, he says, is the result of Moscow’s single-minded pursuit of energy control, regardless of the damage to Russia’s business climate.

“The rouble has strengthened this year, partly on optimism about emerging markets, partly due to - but also a cause of - Russian stock market gains and partly on high interest rates.

“‘Rates were cut to 12% last week, but remain attractive - and should provide a barrier to the rouble collapse that the state of the economy seems to call for.

“‘If maintaining the value of the rouble remains the goal, it will be very difficult to ease monetary policy further. Better to act now to moderate a devaluation which represents the loss of income implied by the collapse of energy prices.’”

Source: Gabriel Stein, Lombard Street Research (via Financial Times), May 18, 2009.

Peter Attard Montalto (Nomura): Fears over South African sovereign risk “Investor fears of heightened sovereign risk in South Africa have been crystalized by the events of the weekend when a Pretoria court threw out a case by the telecoms regulator and unions objecting to the listing of Vodacom, says Peter Attard Montalto, economist at Nomura.

“‘Investors are particularly concerned at the increase in influence of the unions in government now they hold several key seats in the new cabinet,’ he says. ‘Regulatory flip-flopping is embarrassing and adds to investor uncertainty but we are cautiously constructive on the bigger issue of sovereign risk.’

“Mr Attard Montalto believes having Cosatu, the umbrella union organisation, as well as the SACP (communist party) in government with the ANC will be a noisy affair for investors as each jockeys to have its agenda heard.

“‘We put the events of the weekend down to such noise,’ he says. ‘Investors need to look beyond this to the fact the government will find itself heavily constrained in policy terms by the need to maintain investor sentiment in order to raise the funds needed to push forward its social agenda. This is especially true given South Africa already runs a substantial current account deficit.

“‘This is only the first hurdle for President Zuma. To keep investors onside, he must publicly stamp on any cabinet disagreement on the Vodacom issue and assert a continuation of investor-friendly policy in both what he says and prudent policy action.’”

Source: Peter Attard Montalto, Nomura (via Financial Times), May 19, 2009.

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Wall Street slumps on economic fears

Sunday, May 24th, 2009

Stock markets came under pressure over the past few days as skepticism crept in that economic green shoots could be withering. On top of that, fears that the the US could be facing a credit rating downgrade (are the rating agencies now relevant again?) also caused losses for the US dollar and bonds.

These issues, together with another dose of discussion about the repayment of TARP funds, featured prominently in this week’s video clips. Commentators included in the selection below include James Galbraith, Jim Bianco, Robert Shiller, Sam Stovall, Bill Gross, David Rosenberg, Jim Rogers and Steve Leuthold.

The compilation kicks off with a top-quality interview with James Galbraith, saying that the banks can hardly lose but the rest of us aren’t so lucky, and concludes with the “American Casino” movie trailer.

Yahoo Finance, Tech Ticker: Galbraith - banks can hardly lose
“Big banks have raised billions since the stress tests and policymakers are now turning their bailout affections to life insurers and automakers. Is the government trying to tell us the crisis in the financial sector (proper) is over?

“While it’s too soon to say they’re out of the woods, ‘the government has set up a situation where the banks can hardly lose’, says James Galbraith, economist, professor and author of ‘The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too’.

“Beyond the TARP funds - which Galbraith calls an ‘unproductive use of Federal borrowing’ - banks are benefiting from lending programs that effectively allow them to borrow at zero and reinvest in Treasuries at around 3%. ‘A bank doesn’t have to do anything to make money,’ he says. ‘The banks’ return on equity is going to be very good. They’re going to be able to restore their finances.’

“While this is good for banks and a justification for the sector’s recent rally, the problem is the government’s ‘free money’ program means banks have little or no incentive to do any actual lending. Combined with rising unemployment and the ongoing housing crisis, this means any recovery is likely to be muted, at best, Galbraith says. Furthermore, anyone hoping for a return anytime soon to the salad days of the mid-2000s is delusional.”

Source: Yahoo Finance, Tech Ticker, May 21, 2009.

CNBC: Geithner - banking hearing
“Treasury Secretary Timothy Geithner gives his testimony before the Senate Banking Committee on TARP.”

Source: CNBC, May 20, 2009.

CNBC: Implications of repaying TARP
“Repaying TARP and what that means, with Bob Jones, Old National Bancorp; Lou Brien, DRW Trading Group strategist; and Jim Bianco, Bianco Research president.”

Source: CNBC, May 19, 2009.

CNBC: Credit card overhaul
“The Senate voted overwhelmingly on Tuesday to rein in rate increases and excessive fees, and the House could pass this legislation tomorrow [Thursday]. CNBC’s Bertha Coombs has the details.”

Source: CNBC, May 20, 2009.

Business Week: The Fed is in no rush to raise rates
“Tame inflation means Bernanke has time. With so much idle labor and production capacity, the economy would have to grow beyond the most opimistic forecast for three years before wages and prices felt any notable upward pressure.”

Source: Business Week, May 20, 2009.

Financial Times: Robert Shiller on the outlook for house prices
“Robert Shiller of Yale University talks to Martin Sandbu about the outlook for housing and equity markets, the value of sovereign debt, and the government response to the economic slowdown.”

Source: Financial Times, May 19, 2009.

Fox Business: S&P’s Sam Stovall - recovery by 3Q

Source: Fox Business, May 19, 2009.

Political Math: The national debt road trip
“How do the Obama deficits compare with past presidents? And how did the national debt get so big anyway. This video tries to answer those questions by looking at the debt as a road trip and seeing how fast different administrations have been traveling.”

Source: Political Math (via YouTube), May 15, 2009.

CNBC: US could lose AAA rating
“Investors are concerned the US will follow the UK and lose its AAA rating, according to Bill Gross, Pimco, and that could be driving today’s drop in the dollar.”

Source: CNBC, May 21, 2009.

The Wall Street Journal: Market focus on dollar weakness
“The US dollar could be on the brink of a major drop in value as investors and central bank reserve managers start to question their appetite for Treasurys and the greenback’s safe-haven status wears off, prominent currency watchers warn. The euro and even embattled sterling have shot higher against the US currency in recent days despite a lack of meaningfully positive economic news.

“Now some heavyweight strategists think the euro could sweep up to 9% higher against the dollar in a matter of weeks, in a move that could prompt a new era of official intervention in the currency markets.”

Source: The Wall Street Journal, May 21, 2009.

John Authers (Financial Times): Low volatility
“When volatility is down it means investors are getting calmer. But equity volatility currently seems to have a stronger impact on currencies.”

Click here for the article.

Source: Financial Times, May 21, 2009.

Bloomberg: David Rosenberg says US stocks may retest March lows
“David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, talks with Bloomberg’s Erik Schatzker about the outlook for the US stock market. Rosenberg, former chief North American economist at Bank of America-Merrill Lynch, also discusses the state of the global economy, consumer spending and the currency market.”

Source: Bloomberg, May 21, 2009.

CNBC: Rogers - markets yet to bottom
“Markets have yet to see the bottom, warns Jim Rogers, chairman of Rogers Holdings. He tells Michael Yoshikami, president & chief investment strategist of YCMNET Advisors, CNBC’s Martin Soong & Amanda Drury why. He also reveals what he is buying.”

Source: CNBC, May 20, 2009.

Bloomberg: Leuthold says he may boost stock holdings to 70%
“Steve Leuthold, chairman of Leuthold Weeden Capital Management, talks with Bloomberg’s Betty Liu about the outlook for the US stock market. Leuthold, whose Grizzly Short Fund returned 74% last year, also discusses his expectations for the economy, attempts by banks to repay funds from TARP and investments in gold and silver.”

Source: Bloomberg, May 20, 2009.

Financial Times: Indian Congress victory welcomed by business
“James Lamont, FT South Asia bureau chief, on the reasons for the Congress Party’s unexpected victory in the Indian elections and the key role of party leader, Sonia Gandhi.”

Source: Financial Times, May 18, 2009.

CNBC: Rogers - choose silver over gold
“Although Jim Rogers owns gold, he sees better returns in agricultural commodities and silver. Rogers & Michael Yoshikami, president & chief investment strategist, YCMNet Advisors talk strategies with CNBC’s Martin Soong, Amanda Drury & Sri Jegarajah.”

Source: CNBC, May 20, 2009.

CNBC: OPEC wary of rising oil prices
“‘Certainly OPEC’s members are happy, but in the back of their minds they’re looking at the oil price rally coming against a background of rising oil inventories and contracting economic indicators,’ Harry Tchilinguirian of BNP Paribas told CNBC Tuesday.”

Source: CNBC, May 19, 2009.

CNBC: America’s big money bet on Africa
“Insight on why the American investor loves Africa, with Quintin Primo, Capri Capital Partners.”

Source: CNBC, May 21, 2009.

Vimeo: American Casino movie trailer

American Casino movie trailer from Leslie and Andrew Cockburn on Vimeo.

Source: Leslie and Andrew Cockburn, Vimeo, March 2009.

Tags: Affections, American Casino, Automakers, Bailout, Bill Gross, David Rosenberg, Emerging Markets, Financial Sector, India, James Galbraith, Jim Bianco, Jim Rogers, Life Insurers, Money Program, Return On Equity, Robert Shiller, Sam Stovall, Slumps, Steve Leuthold, Stock Markets, Stress Tests, Treasuries
Posted in Commodities, Credit Markets, Economy, Emerging Markets, Gold, India, Markets, Oil and Gas, Outlook | No Comments »

Gloomy economic reports rein in investors’ optimism

Friday, May 15th, 2009

A batch of gloomy economic reports during the past few days suggested that recent optimism about a global recovery might have been premature. This caused Doug Kass to warn that “stock prices have moved ahead of fundamentals” and Kenneth Langone to caution that “investors seem to be getting ahead of themselves”, although he maintained that the long-term outlook on the market was positive.

Big banks across the US announced large common stock offerings and plans to repay the government, and the US administration attempted to bring transparency to the credit derivatives markets and also crack down on the credit card industry.

In addition to Kass and Langone, commentators featured on camera in this post include Elizabeth Warren, Meredith Whitney, Alan Greenspan, Peter Boockvar, Giles Keating, Jim Rogers, Barry Ritholtz, Dennis Gartman, Abby Cohen, Peter Eliades and Laszlo Birinyi.

The selection kicks off with a discussion on why the bubble burst, and concludes with a clip on Jacob Zuma being sworn in as South Africa’s (my home country) new president.

John Authers (Financial Times): Why the bubble burst
“Why did the bubble burst last year? Was it due to overconfidence, too much reliance on the efficient markets model, or an explosive mixture of human nature and the free market? Or all of the above? John Authers, FT investment editor, summarizes the views of leading market experts he spoke to at a conference in Orlando, Florida, including Michael Mauboussin of Legg Mason, Richard Thaler of Chicago University and Russell Napier, author of Anatomy of the bear.”

Source: John Authers, Financial Times, May 8, 2009.

Charlie Rose: A conversation with Elizabeth Warren
“A conversation with Elizabeth Warren, chair of the Congressional Oversight Panel created to oversee the US banking bailout.”

Source: Charlie Rose, May 11, 2009.

CNN Video: Bailout - banks had no choice
“CNN business correspondent Christine Romans reports on the pressure the Treasury Department put on the banks.”

Source: CNN Video, May 14, 2009.

CNBC: Whitney’s wisdom
“CNBC’s Maria Bartiromo discusses big banks’ plans to sell common shares in order to repay TARP funds, with Meredith Whitney, Meredith Whitney Advisory Group founder & CEO.”

Source: CNBC, May 11, 2009.

Bloomberg: Ken Lewis says he’s focused on bank, not job security
“Kenneth Lewis, chief executive officer of Bank of America Corp., talks with Bloomberg’s Margaret Popper about his focus on the bank’s operations after US regulators demanded the lender raise more capital after it failed a bank stress test.

“Regulators told Bank of America that it needs to raise $33.9 billion in order to survive a prolonged recession. Lewis, who was stripped of his chairman’s role after last month’s annual shareholders meeting, also discusses the results of the stress test, capital needs and the bank’s acquisition of Merrill Lynch & Co. They speak from Bank of America’s headquarters in Charlotte, North Carolina.”

Source: Bloomberg, May 8, 2009.

The Wall Street Journal: Pay dirt - the rogues gallery
“A look back at some of the biggest and most egregious pay packages.”

Source: The Wall Street Journal, May 12, 2009.

CNBC: Regulating derivatives
“Insight on the new derivatives rules, with Bart Chilton, CFTC commissioner and CNBC’s Larry Kudlow.”

Source: CNBC, May 14, 2009.

CNBC: Credit card crackdown
“President Obama wants to sign the Credit Card Bill of Rights into law by Memorial Day, and Jared Bernstein, chief economist for Vice President Biden, discusses the legislation.”

Source: CNBC, May 14, 2009.

Bloomberg: Roubini says bank stress tests “not stressful enough”
“Nouriel Roubini, the New York University economics professor who predicted the current financial crisis, and Joseph McAlinden, a fund manager at Catalpa Capital, talk with Bloomberg’s Pimm Fox about the government’s stress tests of the 19 largest US banks. Roubini and McAlinden also discuss their expectations for the US economy, government regulation of banks and the outlook for the European and Chinese economies.”

Source: Bloomberg, May 12, 2009.

MSNBC: Show me the stimulus money
“Since President Barack Obama signed the stimulus bill three months ago, only $46 billion of the $787 billion has been given out. Jared Bernstein, chief economist for Vice President Joe Biden, discusses.”

Source: MSNBC, May 13, 2009.

McAlvany: An interview with economics professor Walter Block - The 1930’s Depression versus today

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

Source: McAlvany, May 13, 2009.

Clip Sindicate: Green shoots of inflation?
“Analysis and Discussion with Peter Boockvar of Miller Tabak.”

Source: Clip Syndicate, May 14, 2009.

Giles Keating (Credit Suisse): Top 10 investment themes for 2009
“Most countries were in recession at the beginning of 2009. Analysts foresee that the slowdown will continue for at least another year. Giles Keating, head of the Credit Suisse Global Economics and Strategy Group, lists the top 10 investment themes that offer opportunities during the course of the year.”

Click here for the article

Source: Giles Keating, Credit Suisse, May 12, 2009.

Bloomberg: Jim Rogers - dollar rally will end; may short stocks

Click here for the article.

Source: Chen Shiyin and Haslinda Amin, Bloomberg, May 12 2009.

John Authers (Financial Times): Stock valuations do nor represent a bargain

Click here for the article.

Source: John Authers, Financial Times, May 14, 2009.

Yahoo Finance, Tech Ticker: Barry Ritholtz - rally “guilty until proven innocent”

Click here for the article.

Source: Yahoo Finance, Tech Ticker, May 14, 2009.

CNBC: Bull market or B.S.?
“Insight on the markets, with Dennis Gartman, author of The Gartman Letter, and the Fast Money crew.”

Source: CNBC, May 14, 2009.

CNBC: Stocks are ahead of fundamentals
“Hedge fund manager Doug Kass of Seabreeze Partners Management (the man who called a generational low in the stock market back on March 10) says stock prices have moved ahead of fundamentals. Kass calls it the ‘Miley Cyrus’ stock market recovery where a premium is being paid for less-than-stellar value.”

Source: CNBC, May 13, 2009.

CNBC: Cohen on the current market bounce
“Discussing concerns over whether the bulls will be caught in a sucker’s rally, with Abby Joseph Cohen, Goldman Sachs senior investment strategist.”

Source: CNBC, May 12, 2009.

MarketWatch: Dow 4,000 still in the cards
“Peter Eliades of Stockmarket Cycles says the Dow still could retreat to 4,000. He tells MarketWatch’s Stacey Delo that the current range at the 8,400 level is an important benchmark to watch.”

Source: MarketWatch, May 11, 2009.

Bloomberg: Birinyi on the outlook for stocks
“Laszlo Birinyi, president of Birinyi Associates Inc., talks with Bloomberg’s Betty Liu and Julie Hyman about equity investment strategy. Birinyi, speaking from Westport, Connecticut, also discusses the outlook for the US stock market, the banking industry and corporate earnings.”

Source: Bloomberg, May 12, 2009.

CNBC: Kenneth Langone - investors getting ahead of themselves
“Investors seem to be getting ahead of themselves right now but the long term outlook on the market is positive, says Kenneth Langone, Invemed Associates chairman/president & Home Depot founder.”

Source: CNBC, May 12, 2009.

Financial Times: Intel fined €1 billion
“If the example of Microsoft is anything to go by, the record €1 billion fine slapped on Intel will not have much of an impact on the company, says FT’s Dan McCrum.”

Source: Financial Times, May 13, 2009.

The Wall Street Journal: The cream of the hedge fund crop
“Barron’s David Schutt and Jack Willoughby speak about the release of this year’s best 100 Hedge Funds.”

Source: The Wall Street Journal, May 9, 2009.

CNBC: China’s dual economy
“China is unlikely to grow 8% in 2009 as Jan Friederich, senior economist for global forecasting at the Economist Intelligence Unit has noted two different economies operating there. He shares his observations with CNBC’s Martin Soong.”

Source: CNBC, May 11, 2009.

CNBC: Jim Rogers - teach your kids Mandarin
“Commodities king and Quantum Fund co-founder Jim Rogers explains to CNBC’s Larry Kudlow why he remains bullish on Asia and commodities, his skepticism about the recent stock market rally, and why he left the United States to raise his daughters abroad.”

Source: CNBC, May 11, 2009.

CNBC: RICS - UK housing slump easing
“According to a recent survey, the UK housing price slump softened in April, and new buyer enquiries rose at their fastest pace in a decade. Simon Rubinsohn from RICS has more.”

Source: CNBC, May 12, 2009.

Financial Times: Zuma sworn in as SA president
“Nelson Mandela, a symbol of the country’s anti-apartheid struggle, and thousands of supporters and heads of state came to watch South Africa’s fourth democratic leader being sworn in.”

Source: Financial Times, May 10, 2009.

Tags: Abby Cohen, Alan Greenspan, Barry Ritholtz, Bubble Burst, Cnn Business, Congressional Oversight, Credit Derivatives, Dennis Gartman, Derivatives Markets, Doug Kass, Explosive Mixture, Jacob Zuma, Laszlo Birinyi, Mason Richard, Meredith Whitney, Michael Mauboussin, Oversight Panel, Peter Eliades, Richard Thaler, Stock Offerings
Posted in Commodities, Credit Markets, Economy, Emerging Markets, Gold, Markets, Oil and Gas, Outlook | No Comments »

MarketWatch: “Goldman Conspiracy” - Bogle’s “pathological mutation?”

Monday, May 11th, 2009

Marketwatch.com’s Paul Farrell contributes the following commentary on John Bogle’s (retired Founder, CEO, Vanguard) description that today’s Wall Street is the ‘Happy Conspiracy,’ and Hank Paulson, the ‘Dillinger’ of the era leading the conspiracy to rob 300-million Americans, all in his new book, The Battle for the Soul of Capitalism.

“No, it’ll be a blockbuster because we get a chance to cheer for a new dark antihero, the infamous Depression era gangster, machine-gun-toting John Dillinger: Cheer because this new Dillinger is doing what we all secretly want to do - rip off our corrupt banking system, turn the tables on the guys who have been ripping us off for too long.

“Dillinger must be the guy former SEC Chairman Arthur Levitt had in mind when he told Fortune: ‘America’s investors have been ripped off as massively as a bank being held up by a guy with a gun and a mask.’ That was the last recession. Today, it’s a heck of a lot worse in the ‘Great Recession’: Bad banks, financial weapons of mass destruction, AK-47 derivatives.

“Yes, this time the banks are the gangsters. They’re robbing Main Street’s Treasury. And it’s an inside job. Hank Paulson, the ‘Goldman Conspiracy’s’ Trojan Horse, plays a ‘Dillinger’, leading a much bigger conspiracy, the ‘Happy Conspiracy’, that robbed America’s 300 million citizens and taxpayers. They made off with trillions, while our ‘guards’, a clueless Congress, laid down their guns and surrendered the keys to the vault.

“The ‘Happy Conspiracy?’ Yes, that’s what Vanguard founder Jack Bogle calls Wall Street in his bestseller, ‘The Battle for the Soul of Capitalism’. He sees Wall Street as a ‘pathological mutation’ of capitalism. Adam Smith’s ‘invisible hand’ no longer drives ‘capitalism in a healthy, positive direction’. Instead, Bogle sees the invisible hands of this elite ‘Happy Conspiracy’ running capitalism to serve its own selfish, greedy agenda.

“‘Over the past century, a gradual move from owners’ capitalism - providing the lion’s share of the rewards of investment to those who put up the money and risk their own capital - has culminated in an extreme version of managers’ capitalism - providing vastly disproportionate rewards to those whom we have trusted to manage our enterprises in the interest of their owners.’

“Today, the ‘Goldman Conspiracy’ is the visible hand of Bogle’s invisible ‘Happy Conspiracy’ that’s ‘ripping us off as massively as a bank being held up by a guy with a gun and a mask’. Except today: No masks, no guns. Congress just writes blank checks.

“The plot’s so hot we read all 1,243 comments, emails and links to related Web sites, such as goldman666.com, that were posted on our earlier discussion of this topic.

“What emerged has the makings of what may be the next mega-successful long-running television series.”

Click here for the full article.

Source: Paul Farrell, MarketWatch, May 4, 2009 - Hat tip: Investment Postcards

Tags: 300 Million Americans, Antihero, Arthur Levitt, Banking System, Blockbuster, Chairman Arthur Levitt, Commentary On John, Hank Paulson, Invisible Hand, Invisible Hands, Jack Bogle, John Bogle, John Dillinger, Paul Farrell, Positive Direction, S 300, S Paul, Sec Chairman Arthur, Trojan Horse, Weapons Of Mass Destruction
Posted in Credit Markets, Gold, Markets | No Comments »

Words from the (investment) wise for the week that was (May 4 – 10, 2009)

Sunday, May 10th, 2009

One of the definitions of “stress” offered by the Merriam-Webster dictionary is “bodily or mental tension resulting from factors that tend to alter an existent equilibrium”. Well, any bodily or mental tension investors might have been suffering from as a result of financial factors were shrugged off on Thursday with the announcement by US regulators that ten of the nation’s largest banks had to add a total of “only” $74.6 billion in equity following the completion of stress tests. However, whether this will indeed restore the equilibrium remains to be seen.

Source: Walt Handelsman

The diagram below, courtesy of the Financial Times, summarizes the stress test results in a nutshell. Click here or on the image below for a larger graphic.

Source: Financial Times

As investors welcomed the less-than-feared stress-test results and their hopes for an early economic recovery mounted, they drove up the prices of risky assets such as equities, oil and commodities, precious metals, emerging-market bonds and currencies, and high-yielding corporate bonds. On the other hand, traditional safe havens like developed-market government bonds and the US dollar experienced selling pressure.

With investors’ confidence being buoyed up, the CBOE Volatility Index (VIX) declined by 9.2% during the week to 32.1 - a far cry from more than 80 in October and a sign that markets are returning to more normal behavior.

The performance of the major asset classes is summarized by the chart below.

Source: StockCharts.com

Marking nine straight weeks of gains, the MSCI World Index surged by 6.4% (YTD +3.6%) on the week, the MSCI Emerging Markets Index by 9.4% (YTD +27.9%) and the S&P 500 Index by 5.9% (YTD +2.9%). Serving as a reminder of the severity of the bear market, these indices are still down by 43.3%, 45.8% and 40.6% respectively since the October 2007 bull market highs.

With the exception of the Dow Jones Industrial Average and the UK FTSE 100 Index, most major global stock markets have now moved into positive territory for the year to date.

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

Returns around the world ranged from top performers Ukraine (+20.5%), Serbia (+20.0%), Kazakhstan (+19.4%), Peru (+17.9%) and Singapore (+16.6%) to Barbados (-4.1%), Slovakia (-2.3%), Bangladesh (-2.0%), Pakistan (-1.0%) and Tunisia (-0.9%) which experienced headwinds. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

With only a handful of US companies still to report first-quarter earnings, 62% of the companies that have reported have beaten analysts’ earnings expectations. According to Bespoke, this earnings season will be the first quarter-over-quarter increase in the “beat rate” since the third quarter of 2006. “When the ‘beat rate’ started to decline in 2007, it was definitely a warning signal for the market, and this quarter’s increase is hopefully the start of a new positive trend. As long as analysts remain behind the curve, and companies exceed expectations, stocks will have a solid foundation to build on,” said Bespoke.

Source: Bespoke

As far as leadership since the start of the nine-week-old rally is concerned, the surging Financial SPDR (XLF) is by far the top performer among the economic sector exchange-traded funds (ETFs). Interestingly, cyclical sectors such as the Industrial SPDR (XLI), Consumer Discretionary SPDR (XLY) and Materials SPDR (XLB) all outperformed the S&P 500, whereas the traditional defensive sectors like Consumer Staples SPDR (XLP), Health Care SPDR (XLV) and Utilities SPDR (XLU) all lagged the broader market. This is the type of pattern one would expect typically to emerge during a market base formation development.

Source: StockCharts.com

John Nyaradi (Wall Street Sector Selector) reports that the strongest ETFs on the week were KBW Bank (KBE) (+34.8%), PowerShares FTSE RAFI Financial (PRFF) (+30.6%) and Rydex S&P Equal Weight Financial (RYF) (+26.5%). On the other end of the performance scale ProShares Short Financial (SEF) (-15.9%), iShares Goldman Sachs Semiconductor (IGW) (‑4.0%) and Vanguard Extended Duration Treasury (EDV) (-3.3%) were underwater.

On the credit front, the TED spread (i.e. three-month dollar LIBOR less three-month Treasury Bills - a measure of perceived credit risk in the economy) narrowed by 10 basis points during the past week. Since the TED spread’s peak of 4.65% on October 10 the measure has eased to an 11-month low of 0.76% - still well above the 38-point spread it averaged in the 12 months prior to the start of the crisis, but nevertheless a strong move in the right direction.

Source: Fullermoney

Also, the cost of buying credit insurance for US and European companies eased sharply during last week’s trading, as shown by the narrower spreads for both the CDX (North American, investment-grade) Index (down from 163 to 143) and the Markit iTraxx Europe Index (down from 139 to 124).

CDX (North America, investment-grade) Index

Source: Markit

Two important trend reversals deserve mention, namely US 10-year Treasury Notes having breached their key 200-day moving average, and likewise the US dollar. Treasuries fell out of favor as a result of a poorly received $14 billion auction of 30-year bonds on Thursday, with 10-year Notes and 30-year Bonds rising to 3.29% (+17 bps) and 4.27% (+23 bps) respectively on the week. As massive issuance overhangs the sovereign bond market, investors speculated about the Fed’s pain threshold for long-term rates. According to Reuters, PIMCO’s Bill Gross said: “In order to maintain a 4% agency mortgage rate, the Fed will likely have to step up its daily purchases of Treasuries and focus on the longer end of the curve.”

Source: StockCharts.com

As far as the greenback is concerned, Richard Russell (Dow Theory Letters) said: “I don’t think most people understand the importance of the whole dollar, bond, interest rate syndrome. First, the US is creating and spending fiat dollars in the trillions. This wild creation of dollars is putting pressure on the dollar - after all, too much of anything will dilute its value. Dollar down = bonds down.”

Source: StockCharts.com

The quote du jour relates to whether the stress tests were “stressful” enough and belongs to Barry Ritholtz (The Big Picture), who remarked: “… the 25-to-1 leverage [Tier 1 capital equal to 4% of risk-weighted assets] is absurd, as is the worst case scenario of 9.5% unemployment. Odd, in my opinion, to show such largesse to those very same reckless banks that caused the entire financial mess.”

“Far be it for me to call the stress tests a charade, a dupe, a con game or an exercise in manipulation - I’ll leave that to others, like the Wall Street Journal, which noted this morning that the banks managed to browbeat the Fed into accepting much lower capital needs than the tests should have required. [For example, a decrease in required capital of 48.3% was negotiated by Bank of America, Wells Fargo, Fifth Third Bancorp and Citigroup when added together.] The entire exercise is turning out to be one giant joke - and the laugh is on the taxpayers.”

Next, a quick textual analysis of my week’s reading. No surprises here, with the word “banks” dominating the media. Strikingly, “bonds” is increasingly prominent as investors are becoming more concerned about the rise in government bond yields. (And after only one week, notice how “swine flu” shines in its absence.)

Back to the stock market. As shown in the table below, the major US indices have moved to within spitting distance of the important 200-day moving averages and the early January highs. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to remain intact.

The Bullish Percent Index, showing the percentage of S&P 500 constituents that are currently in bullish mode as a result of point-and-figure buy signals, has increased from 1.6% in October to 12.8% in March to the current figure of 74.8% - a positive, albeit short-term overbought, figure.

The number of S&P 500 stocks trading above their respective 200-day moving averages has increased to 47.8% from almost zero in October. This is a lagging indicator, but for a primary uptrend to be confirmed the bulk of the index constituents need to trade above their 200-day averages. (The 50-day reading is now 91.0% - the highest since October 2006 and calling for at least some consolidation of the recent gains.)

Adam Hewison of INO.com prepared a short technical analysis of the S&P 500’s most likely direction and important chart levels. Click here to access the video presentation.

On the question of whether this is a suckers’ rally or the real deal, Société Générale’s co-chief strategist James Montier weighed in on the subject in his latest investment newsletter (as discussed by FT Alphaville). He said he didn’t have a clue and was therefore buying insurance to protect on the downside. “Two methods of insurance stand out. Either I could buy index puts (relatively cheap at the moment) or I could construct individual short positions,” added Montier.

“Be careful about jumping into the stock market with both feet after this monumental rally. Consider whether or not it would be more appropriate to take advantage of the run-up to reduce equity exposure,” Merrill Lynch’s chief North American economist, David Rosenberg, wrote in his final missive (as reported by Barron’s) ahead of his previously announced departure from the firm.

Jeremy Grantham’s (GMO) take on the stock market outlook is summarized in his recent quarterly newsletter, in which he says: “The current stimulus is so extensive globally that surely it will kick up the economies of at least some of the larger countries, including the US and China, by late this year or early next year. (This seems about 80% probable to me, anyway.) Anticipating this, we should expect a stock market recovery - which normally leads economic recovery by six months, plus or minus two - sometime between two months ago and, say, August, which the astute reader will realize implies that this rally may already be it.”

In my assessment, and as written in a post last week, the thawing of credit markets and the return of confidence augur well for the outlook for equities and provide further evidence that US stock markets are mapping out a base development formation. The early-January highs and 200-day moving averages are the next important targets and a break above these levels would signal the completion of the base formation and a secular bottom (as has already been seen in leading markets such as China and Brazil). Only then will the corpse of the bear be put to rest.

Meanwhile, the speed and sheer magnitude of the rally argue for markets to either consolidate or retrace some of the past nine weeks’ gains prior to moving higher.

For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Stress tests ad nauseum“, “Gold bullion: Regaining its shine?“, “Jeremy Grantham: The last hurrah and seven lean years“, “Parting thoughts from David Rosenberg“, “Technical talk: Stellar market internals” and “Picture du Jour: Stock markets - it’s all about confidence“. (And also make a point of listening to Donald Coxe’s webcast of May 8, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
“Global business confidence has taken on a brighter hue in recent weeks. Sentiment notably improved in the US last week to its best level since early November. Expectations regarding the outlook six months from now - a good leading indicator - have risen meaningfully since hitting a record low at the very end of last year,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com.

Source: Moody’s Economy.com

Further to the official Chinese Purchasing Managers Index (PMI) reported on last week, the CLSA China Manufacturing PMI also increased strongly to 50.1 in April from 44.8 in March - any reading over 50 indicates that the manufacturing sector is growing. “China’s government has been extremely successful in stimulating investment and, combined with a sharp improvement in export orders, this has pushed the PMI back into positive territory,” wrote CLSA’s head of economic research, Eric Fishwick.

Source: EconomPic Data

Rebecca Wilder (News N Economics) summarized the global economic picture as follows: “The signs of hope remain mostly in the soft data - US and China Purchasing Managers surveys posting consecutive monthly growth - while the hard data - export growth, inflation, and unemployment - continue to deteriorate. Going forward, the story that ‘economies are declining less quickly’ is gaining some momentum. And for some, a turning point may be on the horizon.”

In an article entitled “Green shots or dandelion weeds”, John Mauldin (Thoughts from the Frontline) said: “So many bullish analysts talk about the second derivative of growth, by which they mean that we are slowing our descent into recession. But it is not the second derivative that is important. What is important is that the first derivative, actual growth, return. Until that time, unemployment will continue to rise, which is going to put pressure on incomes and consumer spending, and thus corporate profits.”

Testimony that the coast is not yet clear came from the European Central Bank (ECB), cutting its main interest rate by 25 basis points to a record low of 1%, and announcing plans to buy €60 billion of covered bonds (backed by mortgage or public sector loans.) Across the Channel, the Bank of England (BoE) kept rates at 0.5% and said it would pump a further £50 billion into the UK economy by means of “quantitative easing”.

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

May 08, 2009
• April employment report - details point to positive developments

May 07, 2009
• Initial Jobless Claims - leading indicator!
• Productivity - gains in Q1

May 06, 2009
• Challenger Report and ISM Employment Index - more encouraging news about employment conditions

May 05, 2009
• Bernanke mentions positive factors with caveats
• ISM Non-Manufacturing Survey sends an upbeat signal

May 04, 2009
• Senior Loan Officer Opinion Survey - credit conditions have improved
• Pending Home Sales Index posts second consecutive monthly advance
• Public Sector and Non-residential Construction Outlays lift overall construction spending

Also, almost 21.8% of US homeowners owed more than their properties were worth as of March 31, Zillow.com said in a report (via Bloomberg). At the end of the fourth quarter 17.6% of homeowners were underwater, while 14.3% had negative equity three months earlier.

In his testimony before the Joint Economic Committee in Washington on Tuesday, Fed Chairman Ben Bernanke noted that “the pace of contraction may be slowing … some tentative signs that final demand, especially demand by households, may be stabilizing”. Although he expected the economic cycle to bottom out later in 2009, he also added that “a number of factors are likely to continue to weigh on consumer spending, among them weak a labor market and the declines in equity and housing wealth that households have experienced over the past two years”.

Jeremy Grantham is not assured of an enduring recovery and reasoned as follows: “Although the economy is likely to kick up in the next 12 months (although far from a near certainty), I believe it is likely that the longer-term health of the economy will be exaggerated. In time - perhaps a year into the recovery - the economy will slow once again and stay disappointingly below the standards to which we have become accustomed over the last several decades.

“… what I’m proposing could be known as a VL recovery (or very long), in which the stimulus causes a fairly quick but superficial recovery, followed by a second decline, followed in turn by a long, drawn-out period of sub-normal growth as the basic underlying economic and financial problems are corrected.”

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

Source: Yahoo Finance, May 8, 2009.

In addition to a speech on the financial crisis by Fed Chairman Bernanke (Tuesday, 12 May), the US economic highlights for the week include the following: Retail Sales (Wednesday, 13 May), PPI (Thursday, 14 May) and CPI, Industrial Production and Michigan Consumer Confidence (Friday, 15 May).

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

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

Source: Wall Street Journal Online, May 8, 2009.

“The best investors are like socialites. They always know where the next party is going to be held. They arrive early and make sure that they depart well before the end, leaving the mob to swill the last tasteless dregs. Good money managers understand that. Investment is all about change and anticipating it,” said The Economist in 1986 (hat tip: Charles Kirk). Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers in staying abreast of change in the investment markets.

On Mother’s Day, wishing all the mothers a day that’s just as special as you are.

That’s the way it looks from Cape Town (where we are enjoying balmy autumn days).

Source: Tom Toles

Financial Times: Stress tests show $75 billion buffer needed
“US regulators on Thursday ordered 10 of the nation’s largest banks to add a total of $74.6 billion in equity following the completion of stress tests, triggering a frenzy of activity as banks lined up to announce capital-raising plans.

“‘These tests will help ensure that banks have a sufficient capital cushion to continue lending in a more adverse economic scenario,’ Tim Geithner, US Treasury secretary, said.

“The US authorities said that the tests projected that losses at the top 19 banks over 2009 and 2010 would reach $599 billion if the adverse scenario set out in the stress test materialised.

“They said that bank operating earnings would absorb $363 billion of these losses under the stress scenario. They estimated that 10 of the 19 top banks would need a further $74.6 billion in equity to be sufficiently well capitalised at the end of 2010 to cope with potential losses beyond that period.

“The regulators put the additional equity need at a much higher $185 billion at the end of 2008, but said that actions taken by the banks subsequently had reduced that amount by $110 billion.

“The long-awaited publication of the test results, which came after days of tense discussions between regulators and the banks, prompted a flurry of activity among lenders with Bank of America, which was found to have the biggest capital shortfall at $33.9 billion, announcing plans to raise $17 billion in equity. BofA said that it would add equity through a share sale and the conversion of preferred shares held by non-government investors. It also plans to raise the money through earnings and the possible sale of assets, including asset manager Columbia Management and First Republic Bank.

“Wells Fargo, which needs to plug a gap of $13.7 billion, launched a $6 billion equity issuance, while Morgan Stanley said that it would sell $2 billion in shares and $3 billion in non-government-backed debt to fill its $1.8 billion capital requirement. Citigroup, which needs $5.5 billion in additional equity, said that it would expand an existing offer to convert preferred shares.

“The stress tests could force the government to gain a large stake in a number of regional banks such as SunTrust, KeyCorp and Regions which might have to ask the government to convert its preferred shares into common stock unless they manage to sell enough shares to investors to meet the tests’ requirements.”

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

Source: Krishna Guha, Francesco Guerrera and Alan Rappeport, Financial Times, May 8, 2009.

CNBC: Ken Lewis speaks about stress tests
“The government’s assessment is aggressive but Bank of America will raise the equity needed, says Kenneth Lewis, Bank of America CEO.”

Source: CNBC, May 8, 2009.

CNBC: Is the US doing the right thing with banks?
“A decade ago, Asia was told to tighten their belts and not to bailout their banks. Nouriel Roubini, co-founder and chairman at RGE Monitor, also known as Dr. Doom, tells CNBC’s Martin Soong, that now, the US is doing the complete opposite.”

Source: CNBC, May 7, 2009.

MarketWatch: “Goldman Conspiracy” - Bogle’s “pathological mutation?”
“No, it’ll be a blockbuster because we get a chance to cheer for a new dark antihero, the infamous Depression era gangster, machine-gun-toting John Dillinger: Cheer because this new Dillinger is doing what we all secretly want to do - rip off our corrupt banking system, turn the tables on the guys who have been ripping us off for too long.

“Dillinger must be the guy former SEC Chairman Arthur Levitt had in mind when he told Fortune: ‘America’s investors have been ripped off as massively as a bank being held up by a guy with a gun and a mask.’ That was the last recession. Today, it’s a heck of a lot worse in the ‘Great Recession’: Bad banks, financial weapons of mass destruction, AK-47 derivatives.

“Yes, this time the banks are the gangsters. They’re robbing Main Street’s Treasury. And it’s an inside job. Hank Paulson, the ‘Goldman Conspiracy’s’ Trojan Horse, plays a ‘Dillinger’, leading a much bigger conspiracy, the ‘Happy Conspiracy’, that robbed America’s 300 million citizens and taxpayers. They made off with trillions, while our ‘guards’, a clueless Congress, laid down their guns and surrendered the keys to the vault.

“The ‘Happy Conspiracy?’ Yes, that’s what Vanguard founder Jack Bogle calls Wall Street in his bestseller, ‘The Battle for the Soul of Capitalism’. He sees Wall Street as a ‘pathological mutation’ of capitalism. Adam Smith’s ‘invisible hand’ no longer drives ‘capitalism in a healthy, positive direction’. Instead, Bogle sees the invisible hands of this elite ‘Happy Conspiracy’ running capitalism to serve its own selfish, greedy agenda.

“‘Over the past century, a gradual move from owners’ capitalism - providing the lion’s share of the rewards of investment to those who put up the money and risk their own capital - has culminated in an extreme version of managers’ capitalism - providing vastly disproportionate rewards to those whom we have trusted to manage our enterprises in the interest of their owners.’

“Today, the ‘Goldman Conspiracy’ is the visible hand of Bogle’s invisible ‘Happy Conspiracy’ that’s ‘ripping us off as massively as a bank being held up by a guy with a gun and a mask’. Except today: No masks, no guns. Congress just writes blank checks.

“The plot’s so hot we read all 1,243 comments, emails and links to related Web sites, such as goldman666.com, that were posted on our earlier discussion of this topic.

“What emerged has the makings of what may be the next mega-successful long-running television series.”

Click here for the full article.

Source: Paul Farrell, MarketWatch, May 4, 2009.

Charlie Rose: A conversation with Robert Zoellick, President of the World Bank

Source: Charlie Rose, May 5, 2009.

Dominic Konstam (Credit Suisse): Is inflation inevitable?
“There is a growing belief in financial markets that uncontrollable inflation is inevitable, but that view is wrong, argues Dominic Konstam, interest rate strategist at Credit Suisse.

“Nor are we heading towards a prolonged depression and deflation, he believes.

“‘A more plausible scenario is a mildly deflationary middle way with positive nominal growth. We can think of this as Grandma Goldilocks,’ he says.

“This is a reference to the late 1990s, when market conditions were deemed just right - not too hot and not too cold - because real growth was high, but inflation low. ‘A decade later, Goldilocks may not be quite dead but just a lot older,’ he says.

“Mr Konstam believes growth is likely to be relatively subdued in the next few years, driven by fiscal stimulus, while real interest rates will remain high. He believes consumers will be spending less and saving more, exerting significant downside pressure on inflation. There will be plenty of excess capacity in the economy. ‘The output gap is very large and forewarns of downward pressure on prices to come,’ he says.

“What does this mean for financial markets? ‘If we’re right, [10-year Treasury] bond yields aren’t going to zero, but they’re going to stay low for a while. We’re not going to 4% anytime soon. Stocks may not make new lows and they will surely be capped to the upside.’”

Source: Dominic Konstam, Credit Suisse (via Financial Times), April 2009.

Business Week: A conversation with Nouriel Roubini
“One of the most prominent voices of the financial crisis has been Nouriel Roubini, the New York University economist and chairman of economic consulting firm RGE Monitor. Credited with predicting the housing and financial crisis that crescendoed last fall, his outlook has remained consistently bleaker than those of many other economists, but so far he has often been borne out. As he is fond of pointing out lately, the International Monetary Fund recently revised its estimate of global and US bank losses upward to figures similar to his own.

“I sat down with him (and the Washington Post’s national economy correspondent, Neil Irwin) on Sunday afternoon, to talk about securitization, the Federal Reserve and the big banks.

“The economy:

“Roubini says he doesn’t see much in the way of ‘glimmers of hope’ other economists have noted. Unemployment, capital investment, and exports are all worsening, and while there are a few signs of stability in housing, it’s not much. Overall, he figures, the odds of a prolonged ‘L-shaped’ depression have fallen to less than 20%, from about 30%, thanks largely to the efforts of this administration … He expects global contraction of 2% this year, and expansion of about 0.5% next year, ‘so small it’s going to feel like a recession still’.

“Still, he adds: ‘I don’t worry as much as six months ago about a near depression.’ From the man who has been called Dr. Doom - or, as he prefers, Dr. Realistic - that’s practically cheery.

“On securitization and the TALF:

“While lending has improved somewhat, Roubini doesn’t credit the Federal Reserve’s Term Asset-Backed Loan Facility. A ‘reasonable idea’ in principle, he says, the funds it has lent to subsidize the purchase of securitized consumer credit ‘is too small to make a difference’. Moreover, demand from securitizers has proven lower than some expected, either because of the fear of complications from after-the-fact congressional meddling, or because there’s simply too little demand for new lending.

“He does see securitization returning in time, likening the metastasized securitization state of the pre-crisis market to the junk-bond market’s go-go days. ‘I don’t think we’ll go back to what it was,’ he says. But ‘now we’ve gone from too much to zero’.

“On Ben Bernanke’s Federal Reserve:

“After underestimating the depth and impact of the housing slump, mistaking the subprime crisis as a niche problem, and failing to seek legislation to dismantle failing banks after Bear Stearns’ collapse last spring, the Fed ‘has done a lot right,’ Roubini says. ‘Now that the stuff has hit the fan, they have become much more aggressive about doing the right thing.’

“Still, he’s not pleased with the Fed’s role as a back-door financier for the rescue effort. It’s understandable that the government has turned to the Fed, since early missteps led the public to see the effort as a bail-out of Wall Street bankers, which in turn has left Congress unwilling to open the purse strings. Still, using the Fed is ‘a way of bypassing Congress’, Roubini says. ‘I don’t think it’s a proper process. In a democracy, if you have a fiscal cost, you should do it the right way.’”

Click here for the full article.

Source: Business Week, April 27, 2009.

Financial Times: Bernanke expects gradual recovery
“Fed chairman says economy is on track for a recovery later this year, but the pickup is likely to be sluggish and the jobless rate is likely to rise further.”

Source: Financial Times, May 6, 2009.

Asha Bangalore (Northern Trust): Bernanke mentions positive factors with caveats
“Chairman Bernanke’s testimony at the Joint Economic Committee noted that ‘the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing’. This is good news, but he also added that ‘a number of factors are likely to continue to weigh on consumer spending, among them weak labor market and the declines in equity and housing wealth that households have experienced over the past two years’.

“In his opinion, the housing market indicators are suggesting that a trough has been established. The news from the business sector is less encouraging compared with the housing market and household sector. The latest data point to severely weak capital spending and a massive liquidation of inventories. However, the latest factory surveys indicate that although activity is still declining, the pace had moderated noticeably in April compared with the past seven months.

“Bernanke also noted that the Fed expects economic activity to bottom out later in the year, assuming that financial conditions continue to mend. In this context, the Chairman remarked that ‘a relapse in financial conditions would be a drag on economic activity and could cause the incipient recovery to stall’. Supportive of Bernanke’s optimism, the 3-month Libor has edged below 1.00% as of this writing.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, May 5, 2009.

Asha Bangalore (Northern Trust): Initial jobless claims - leading indicator
“Initial jobless claims fell 34,000 to 601,000 for the week ended May 2, the fourth weekly decline in the past five weeks. The peak for initial claims appears to have occurred during the week ended March 28 (674,000). The four-week moving average is down 35,250 to 623,500 from the peak on April 4, 2009. These are noteworthy numbers because initial jobless claims are part of the Index of Leading Economic Indicators which forewarn about economic conditions.

“Continuing claims, which lag initial claims by one week, moved up 56,000 to 6.351 million, a new record high; and the insured unemployment rate rose to 4.8% from 4.7% in the prior week. The mixed news from initial jobless claims and continuing claims is typical at turning points of a business cycle because initial jobless claims have peaked well ahead of continuing claims.

“We will be tracking jobless claims data closely in the weeks ahead as there is strong signal that the turning point of the business cycle is around the corner.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, May 7, 2009.

Asha Bangalore (Northern Trust): Employment details point to positive developments
“The Civilian Unemployment Rate: 8.9% in April versus 8.5% in March, cycle low is 4.4% in March 2007.

“Payroll Employment: -539,000 in April versus -699,000 in March, net loss of 66,000 jobs after revisions of payroll estimates for February and March.

“Hourly earnings: +1 cents to $18.51, 3.18% yoy change versus 3.4% yoy change in March, cycle high is 4.28% yoy change in Dec. 2006.

“The civilian unemployment rate rose to 8.9% in April, the highest since September of 1983. The participation rate increased to 65.8% from 65.5%. The sharp increase in unemployment rate is troubling and it is projected to shoot up to 10% by year-end.

“Nonfarm payrolls fell 539,000 in April, following a 699,000 drop in March. Since December 2007, the date of the official onset of the current recession, 5.7 million payroll jobs have been lost. The headline number in April was more muted compared with March partly due to increase in federal government employment (+related to Census 2010). Private sector employment fell 611,000 in April versus a loss of 693,000 private sector jobs in March. As shown in the chart, the pace of decline in non-farm employment was significantly smaller in April compared with the prior five-month period.

“… the underlying details strongly support the view that hiring is stabilizing gradually. The Fed is on hold for the rest of the year given the nature of underlying weakness in economic conditions.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, May 8, 2009.

CNBC: Bond king on banks and jobs
“Weighing in on what the bank stress tests and the jobs numbers indicate for the economy and markets, with Bill Gross, Pimco founder/co-chief investment officer.”

Source: CNBC, May 8, 2009.

Casey’s Charts: Are the green shoots for real? Watch part-time workers
“Since the fall of 2007, the number of employees forced to work part-time due to the economic slowdown has doubled to over nine million people - that’s two million more than at any time in 54 years of collecting the data. You can see the spike in the chart above.

“You can also see a close correlation between the start of a recession and a sharp shift to using part-time workers. And, conversely, that when an economy recovers, the use of part-time workers falls off quickly.

“Lesson of the day? This is one of the few reliable indicators of an economic turnaround … watch it closely. Until you see a distinct reversal in the indicator, ignore the government’s happy talk of green shoots and continue to rig for stormy economic weather.”

Source: Casey’s Charts, May 6, 2009.

Asha Bangalore (Northern Trust): ISM Non-Manufacturing Survey sends an upbeat signal
“The ISM non-manufacturing survey report for April contained several noteworthy aspects. First, the composite index (average of new orders, business activity, employment, and supplier deliveries indexes) moved up to 43.7 in April from 40.8 in March, which is the highest level since October 2008. Second, the index tracking new orders rose 8.2 points to 47.0, the highest since September 2008. Third, with exception of supplier deliveries, all the sub-indexes advanced in April.

“Effectively, the ISM surveys of the factory and service sectors send a message of improving activity. Readings above 50.0, denoting an expansion of activity, are probably not too far away.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, May 5, 2009.

Asha Bangalore (Northern Trust): Pending Home Sales Index post second consecutive monthly advance
“The Pending Home Sales Index (PHSI) of the National Association of Realtors increased to 84.6 in March from 82.0 in February, marking the third monthly increase in the last four months. According to National Association of Realtors, the PHSI leads sales of existing homes by 1-2 months. Sales of existing homes declined slightly in March. However, based on the latest readings of the PHSI, it should not be surprising to see a rebound in sales of homes in April and May, particularly given the downward trend of mortgage rates in recent weeks.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, May 4, 2009.

Eoin Treacy (Fullermoney): Mortgage resets already discounted in house prices?
“The schedule of resets for Option ARM mortgages is looming and is being viewed by pundits as a massive overhang which will continue to put downward pressure on the market until well into 2011. However, what if this is already in the market?

“No one paid much attention to the subprime reset schedule until it became apparent that subprime was indeed infecting the prime market and foreclosures were rising across the board. The Option ARM schedule has been well publicized and those under pressure from mortgages they cannot afford are already being included in foreclosure figures.

“In a no-recourse mortgage market, unique to the USA as far as I know, one would expect the pace of house price declines to be swift because large numbers of homeowners can opt to give back the keys and walk away. Sentiment is understandably abysmal and as in other markets this is bound to be affecting decisions about when to sell.

“If a significant portion of the Option-ARM and Alt-A overhang is already in the price, then the housing market has the potential to bottom earlier than many expect. This does not mean that prices are set to rebound to levels seen in 2006 and 2007, but it does suggest that base formation could get underway sooner. Since affordability is now at such a high level and such vast sums are being pumped into almost every economy in the world, the potential for house prices to stop falling has risen considerably.

“House data comes out with a substantial lag so whenever a bottom does begin to develop it will not be apparent for a number of months in housing indices. Anecdotal evidence is more likely to give a lead indicator than published data.”

Source: Eoin Treacy, Fullermoney, May 8, 2009.

Bloomberg: Almost one quarter of US homeowners underwater as values sink
“A growing number of US homeowners owe more than their properties are worth after prices extended their two-year decline in the first quarter, Zillow.com said.

“Almost 21.8% of all owners were underwater as of March 31, the Seattle-based real estate data service said in a report today. At the end of the fourth quarter, 17.6% of homeowners owed more than their original mortgage, while 14.3% had negative equity three months earlier.

“Property values dropped 14% from a year earlier in the first quarter, reducing the median value of all US single-family homes, condominiums and cooperatives to $182,378, Zillow said. The gain in underwater homeowners will lead to more bank repossessions, the company said.

“Many owners ‘would be more willing to bear the financial consequences of bankruptcy or foreclosure,’ Stan Humphries, Zillow’s vice president of data and analytics, said in an interview. ‘You are going to continue to see home prices fall for the rest of this year and some portion of next year.’”

Source: Daniel Taub, Bloomberg, May 6, 2009.

Zillow: Mortgage rates continue to fall across the board
“The weekly average rate borrowers were quoted on Zillow Mortgage Marketplace for thirty-year mortgages remained relatively steady last week. Last week’s rate was 5.05%, down slightly from 5.07% the week prior, according to the Zillow Mortgage Rate Monitor, compiled by real estate Web site Zillow.com®. Meanwhile, rates for 15-year fixed mortgages fell to 4.70%, down from 4.72% and 5-1 adjustable rate mortgages decreased significantly, down to 4.30% from 4.38% the week prior.”

Source: Zillow, May 5, 2009.

The Wall Street Journal: Banks get tougher on credit line provisions
“Banks are shortening the terms on lines of credit that have long been used by companies to avoid cash crunches - a sign that while lending is reviving, businesses are facing new hurdles to obtaining credit.

“These revolving lines of credit typically ran for three or five years and let companies borrow at low interest rates, in part because they were rarely drawn upon before the credit crunch. Companies could use the money if they were cut off from other sources of cash such as the commercial-paper market.

“Now, lenders are cutting the length of many commitments to less than a year. They are charging higher fees for the lines of credit, known as revolvers. And instead of promising an interest rate determined mainly by the company’s credit rating, banks will now charge more if the cost of insuring the company’s debt against default is higher.

“The trend, unfolding for months, mirrors what’s going on in the rest of the credit markets: Lending is occurring again following last year’s freeze. But many borrowers are facing tougher terms. As the economy slows, companies are more likely to need extra cash to keep their businesses running. At the same time, rising loan defaults are making banks more cautious. Even the strongest companies must pay more for revolving credit lines, regardless of their plans to use them.

“The changes mean that corporations will have to renegotiate their credit lines more frequently. And if their financial condition deteriorates, such funding could become a lot more expensive and more difficult to secure. Already, the higher revolver rates are leading some firms to forgo the credit lines or to issue more long-term bonds if they are able to. Weaker companies are pledging more assets to banks to get or renew revolvers.”

Source: Serena Ng, The Wall Street Journal, May 4, 2009.

Financial Times: Obama’s offshore tax crackdown
“President Barack Obama prosposes tax code changes that would eliminate rules that allow businesses and wealthy individuals to defer paying taxes on onverseas profits.”

Source: Financial Times, May 5, 2009.

BCA Research: Bonds - testing policymakers’ resolve
“Regional bond allocation will likely be unexciting and provide little in the way of excess returns this year as central banks remain on hold at extremely low target rates. However, in the absence of the Fed and BoE targeting the government curve, the cyclical trend should be for these markets to underperform relative to bunds.

“The chart shows the sensitivity of the various regional bond markets to changes in global growth. Historically, the US, Australia, New Zealand and the UK have had the highest (negative) betas, causing these markets to underperform during periods of recovering global growth. In contrast, the euro area, Switzerland and Sweden are the least sensitive to swings in global growth and tend to outperform during recoveries.

“We had been wagering that this cycle would be different for the US and UK, given that these economies had the largest structural economic and financial sector problems and their central banks were willing to engage in quantitative easing to depress yields below where they otherwise would be. However, this call has not panned out over the past few weeks and further underperformance of Treasurys and gilts looms if the Fed and BoE do not step up their purchases of government bonds (especially given the longer-term issuance concerns for these markets).

“Thus, we recommend standing aside. We are booking profits on our long-standing overweight gilt position and moving back to neutral. Similarly, we are cutting our recent overweight Treasury allocation with a slight loss and upgrading euro area bonds to overweight.”

Source: BCA Research, May 7, 2009.

BCA Research: US fixed income - maintain long duration but avoid Treasurys
“Investors should maintain long duration positions in non-government sectors, particularly in corporate bonds.

“Fed policymakers were confident enough with the outlook that they did not announce a new support program, expand an existing support program, or crank up the pace at which they are purchasing government or private sector securities after last week’s FOMC meeting. The Fed’s silence on the recent Treasury selloff was interpreted as a sign that policymakers are comfortable with higher yields, allowing the 10-year yield to break above 3%.

“Bond traders are likely to further test the Fed’s tolerance in the coming weeks. The Fed will tolerate the backup in government yields as long as it does not interfere with the decline in private sector borrowing rates. Most non-government fixed-income sectors continued to rally last week in absolute terms, despite the jump in Treasury yields (i.e. spreads narrowed faster than Treasury yields rose). Non-government bond sectors have outperformed cash since we shifted our long duration position out of Treasurys and into spread product last December.

“Fed policymakers would likely become more aggressive in capping Treasury yields if the government bond selloff begins to push up private sector borrowing rates prematurely (i.e. before the economy can handle more expensive credit). The implication is that investors should avoid government bonds and express long duration positions in other fixed income sectors where value is still attractive.”

Source: BCA Research, May 5, 2009.

Bill King (The King Report): Bonds breaking down
“… to say bonds are retreating due to economic growth is wrong, with the 80s as an example.

“The financial crisis to date is due to credit and solvency concerns. When people fear that an entity cannot meet interest payments or repay all or part of the principal, that piece of paper tanks. But debt without credit concerns remains buoyant; some debt increases in price on safe haven buying.

“But if bonds prices tumble, all debt gets marked down; and then there could be more derivative problems. If all debt instruments decline financial firms’ balance sheets will deteriorate severely.

“One reason for the severity of the credit crisis is that too many Street denizens, including model makers, had not experienced a credit cycle turn. The last occurred in 1990.

“This bond bull market commenced in 1982. Few money managers have experienced the savagery that a bond bear market brings.

“Estimates have CDS at $40 to $50 trillion notion value. Estimates put interest rate related derivates over 50% of the $1.4 quadrillion derivative market. We don’t have to elaborate about what might be triggered.

“If stocks tumbled on Thursday on concern about inflation and the bond market breakdown, the Fed is in deep stuff. Its intent has been to reflate financial asset prices. But declining bonds could trump the Fed.

“Ben is now chagrined because his effort to prop up bonds, possibly to appease China (after Hillary’s trek there) by announcing a $300 billion monetization, has produced the opposite of the desired effect. Ben’s scheme has inflamed inflation concern, as it should have and will continue to do so.”

Source: Bill King, The King Report, May 8, 2009.

Bespoke: High-yield credit spreads significantly down
“… high yield credit spreads are down to their lowest levels in over six months. Based on data from the Merrill Lynch High Yield Master Index, junk bonds are currently yielding 1,308 basis points above comparable treasuries. These levels are by no means normal, but they are considerably better than the 2,100 basis point spread investors were dealing with in December. Additionally, they are also indication that the doomsday scenario markets priced in following the Lehman bankruptcy are being erased.”

Source: Bespoke, May 6, 2009.

John Authers (Financial Times): Higher bond yields negative for equities
“If optimism remains intact, the trend in bond yields is clearly upwards. They could yet act as a brake on the stock market rally, and on the recovery.”

Click here for the article.

Source: John Authers, Financial Times, May 6, 2009.

Bespoke: S&P 500 dividend yield drops 100 bps
“Since the March 9 low, the indicated dividend yield of the S&P 500 has dropped from 4.12% to 3.12%. At the same time, the yield on the ‘risk-free’ 10-year Treasury Note has risen from a low of just over 2% to its current level of 3.15%. The fact that the 10-year yield is now higher than the dividend yield of the S&P 500 makes equities less attractive.”

Source: Bespoke, May 6, 2009.

Randall Forsyth (Barron’s): Stress tests bring relief to markets
“We’ve all become so inured to numbers in the trillions that $75 billion no longer sounds daunting. Given the revival of the capital markets, raising that prodigious sum appears doable.

“Indeed, it’s been the steady improvement in the equity, corporate debt and money markets that have instilled the confidence that banks could pass the stress tests.

“To be sure, the results of the tests, which were based on banks facing higher losses on business loans than during the Great Depression, helped further bolster optimism that these institutions could weather the worst conditions, with the addition of this additional capital.

“The stock market climbed the wall of worry posed by these what-if questions. But it has been boosted mainly by the provision of liquidity by the Federal Reserve through various innovative avenues that at least has credit flowing through the money market.

“Meanwhile, investors who have regained some measure of confidence, or have tired of earning virtually nothing on their growing stash of cash, have been putting it to work in the equity and debt markets. And woe be unto any professional money manager sitting on cash as the stock and corporate bond markets have been in rally mode.

“All of which has produced a huge advance from the March lows that has brought the major averages back to where they stood in January. But, according to Bank of America/Merrill Lynch chief North American economist David Rosenberg, that leaves the stock market in a much more precarious position now than 18 weeks ago.

“Professional investors appear to have covered their short sales, unwound their hedge positions and reduced their cash holdings in favor of getting back into the market, he writes in a research note. That makes the risk in the market much higher than when the averages stood at these levels around the beginning of the year - quite contrary to the view that the stress tests have lowered the risk level out there.

“With the ‘smart money’ now more fully invested, the stock market is more vulnerable to disappointments or reality checks, depending on your point of view. In which case, ‘this is a bear market rally that has run its course’, Rosenberg contends. Indeed, chances of a retest of the March lows are ‘non-trivial’, he adds.

“‘The rally of the past nine weeks appears to be rooted in green shoots. While it may be the case that the pace of economic decline is no longer as negative as it was at the peak of the post-Lehman credit contraction, the reality is that employment, output, organic personal income and retail sales are still in a fundamental downtrend,’ Rosenberg contends.

“Yet, stocks have rallied while Treasuries have backed up massively in yield, with the 10-year note up to 3.30%. That’s analogous to mid-2207, when the benchmark note hit 5.35% while the stock market was hitting new highs, Rosenberg recalls. As was the case then, he says the trade now is to take profits in stocks and put the money in Treasury bonds.

“‘Be careful about jumping into the stock market with both feet after this monumental rally. Consider whether or not it would be more appropriate to take advantage of the run-up to reduce equity exposure,’ Rosenberg writes in what sounds like his valedictory report ahead of his previously announced departure from Bank of America/Merrill Lynch.

“‘Our preference is to stick with fixed-income securities, which we believe will work much better from a total return standpoint, as they did for years after the economy hit bottom back in the early 1930s. When we are finally coming out of this epic credit collapse and asset deflation, we should expect that the trauma exerted on household balance sheets will have triggered a long wave of attitudinal shifts toward consumer discretionary spending, homeownership and credit. The markets have a long way to go in terms of discounting that prospect.’”

Source: Randall Forsyth, Barron’s, May 8, 2009.

Financial Times: Russell Napier - “cataclysmic bear market”
“Russell Napier, author of Anatomy of the Bear, tells John Authers that a rise in Treasury yields will cause a ‘cataclysmic bear market’ within two years.”

Source: Financial Mail, May 7, 2009.

Barry Ritholtz (The Big Picture): Sentiment reading - neutral
“One of the refrains we have heard lately is that ‘Everyone is too bullish’.

“Looking at the data, we find that the sentiment is decidely mixed - perhaps the best word is neutral. Consider the various data points:

• Investor Intelligence Newsletter Survey has Bulls 40.4 versus Bears 31.5 - this is the lowest level for the bears since June 2008. (See chart below). Overall, this is in neutral territory. It is neither excessively bullish (see October 2007) or excessively Bearish (see October 2008).

• The % of NYSE Stocks above their 200-day moving averages was deeply oversold at just 1% in March - its now just under 40%.

• Consumer confidence has been extremely low, and is now moving off of those levels.

• Earnings expectations have also been quite low - possibly too low. For the first time since the bear market began, earnings on the SPX are beating consensus.

• Money market cash as a percentage of total market value peaked in March at ~44%; Its down to 38% as of the end of April, significantly above historic levels.

• Cash in individual investor portfolios remains significantly above the 21.5 year mean of 25%; Its down from 44%, but remains elevated at 34%.

“The bottom line: Sentiment data is off of the extreme levels we saw at the lows in March; however, it has not yet reached levels that are associated with excessive bullishness.”

Source: Barry Ritholtz, The Big Picture, May 6, 2009.

Bespoke: Past years most correlated with 2009
“With the market dropping big in the first two months of the year and then rallying big over the last two months, investors are wondering where we go from here. We have a cool file here at Bespoke that looks at the market’s pattern in the current year and finds prior years with the most similar patterns. The file looks at the correlation between the year-to-date returns of the Dow at any point in the current year with all historical years.

“Since 1900, there have been two years that have a correlation with this year (as of May 5) of more than 0.75 (1 is perfectly correlated). These two years are 1982 and 2000.

“As shown in the chart below, the chart patterns through May 5 have been very similar for all three years, although the moves this year have been more extreme. The current year is most correlated with 1982 at this point, and as shown below, the Dow actually topped out in May of that year and went on to make a new low, only to post huge gains in the last quarter of the year to finish up 20%. If the rest of 2009 plays out anything like 1982, it will be painful at first but sweet in the end.

“In 2000, we had a similar decline through early March, saw a big rally into the Spring, and then traded sideways for the rest of the year to finish down 6%.”

Source: Bespoke, May 5, 2009.

Bespoke: Keep an eye on technology & financial sector relative strength
“The chart below shows the relative strength of the Technology and Financial sectors versus the S&P 500. In each chart, a rising line indicates that the sector is outperforming the S&P 500 while a declining line indicates underperformance. We have also included dots showing each time the Fed cut rates (red) and left rates unchanged (black dots).

“After a strong run of outperformance since late November, technology stocks have steadily outperformed the overall market. In fact, on Monday the tech heavy Nasdaq became the first major index to trade above its 200-day moving average. Since then, however, tech stocks have faltered and on each of the last three days, the sector has underperformed the S&P 500 by a wide margin.

“In terms of relative strength, Financials have yet to run into the problems that the tech sector has encountered. However, while the sector has had what can only be classified as an extraordinary rally, it has a ways to go before it even tests its downtrend in relative strength that has been in place over the last year.”

Source: Bespoke, May 7, 2009.

Bespoke: Breadth by the 50-day moving averages
“As the market continues to rally, the percentage of companies now trading above their 50-day moving averages also continues to rise. As shown below, 92% of the stocks in the S&P 500 are now trading above their 50-days. This is by far the highest reading since mid-2006, and it is indicative of extremely strong market breadth.

“Every sector except Health Care and Consumer Staples has a >50-DMA reading of more than 90%. The Consumer Staples sector is at 88%, and Health Care is at 75%. Telecom only has 9 stocks in the sector, and all of them are trading above their 50-days. The Industrials sector ranks second at 98%, followed by Energy and Utilities at 97%. While still high, Financials and Consumer Discretionary have actually seen a decline in the percentage of stocks above their 50-days over the last week. The indicator maxes out at 100%, so there isn’t currently much upside room from a breadth perspective. A pullback in these extraordinary numbers would be neither surprising nor unhealthy.”

Source: Bespoke, May 5, 2009.

NDTV: Mark Mobius - load up on growth stocks
“The rally has caught many by surprise, particularly the retail investors who have mostly missed a ride. But there is a lot for them to look forward to, if one goes by the optimism of Mark Mobius, executive chairman at Templeton Asset Management.

“‘India has broken out of the downturn. It is a matter of building a base now. The Indian markets will move up and down before dramatically moving up,’ he said.

“He said that emerging markets will move first once the global recovery process kicks in, given that these markets are better prepared with high reserves and low debt, both at the country and company levels.

“He suggests investors to be aggressive on the markets and look particularly at growth stocks, which will do well over a five-year time frame.

“On the current rally, Mobius said, ‘We are building the base for the next bull market and the markets are saying that one year down the line the economies of the world will recover.’”

Source: NDTV, May 5, 2009.

Sanjiv Duggal (Halbis): Indian election weighs on equities in short term
“The near-term outlook for Indian stocks is unfavourable in spite of a strong rally because of uncertainty about the outcome of the country’s election, according to Sanjiv Duggal, head of Indian equities at HSBC’s Halbis investment arm.

“In dollar terms, he says, the broad BSE 200 has in just 32 days surged more than 50% from its March low, the fastest short-term rally.

“‘Equity raising and placements are likely to shoot up given this pre-election rally, partially meeting this sudden greed for stocks,’ Mr Duggal says.

“‘The amount of hot money coming through derivative holdings has increased while small and mid-cap stocks have recently outperformed large caps. These tend to be initial warning signs that speculative and retail participation is back.’

“He expects volatility to pick up ahead of and after the election results. None of the three main coalitions is likely to gain a majority.

“Mr Duggal is positive longer term.

“‘We expect the broad market to deliver a compound annual growth rate of about 15% over the next decade.’

“He says that the market does not appreciate the full magnitude of the government’s stimulus measures and that growth will be further supported by aggressive monetary easing during the past six months.

“‘Although the journey will be volatile, these factors should ultimately drive share prices higher,’ he says.”

Source: Sanjiv Duggal, Halbis (via Financial Times), May 7, 2009.

Bespoke: Bespoke’s commodity snapshot
“Below we provide the year to date change of ten major commodities. As shown, copper is up the most in 2009 at 54.3%, followed by orange juice (21.81%), oil (18.61%) and platinum (17.71%). While platinum is up 17.71%, gold is up just 0.84%. Last year, platinum traded down to a 1 to 1 ratio with gold, even though the metal is much rarer than gold. So far this year, however, platinum is diverging from gold on the upside once again. Natural gas continues to be the big loser with a decline of 37.23% year to date.”

“Below we provide our trading range charts of some of the commodities highlighted above. The green shading represents between 2 standard deviations above and below the commodity’s 50-day moving average. When the price moves outside of this green shading, the commodity is considered overbought or oversold.

“Oil is pretty close to the top of its trading range, and the last time it moved above the green shading, it pulled back pretty quickly. Natural gas is the closest to oversold territory and continues to trend downward. Gold, silver, and platinum have broken their uptrends recently and are approaching the bottom of their trading ranges. Copper, corn, wheat, orange juice, and coffee are closer to the top of their range than the bottom.”

Source: Bespoke, May 4, 2009.

Commodity Online: Jim Rogers - gold prices may go to a bottom
“Will the International Monetary Fund’s (IMF) decision to sell 403 metric tons of gold drive down gold prices? Yes, gold prices will plunge to $700 or below that if and when IMF really sells its gold reserves, says legendary global commodities investor Jim Rogers.

“Rogers, who left the United States to settle down in Singapore last year, and who is regarded as a commodities guru globally said he will hold on to his gold and is waiting to buy more gold because he expects gold prices to considerably come down when IMF sells its gold holdings.

“‘The fact is that IMF is trying to get permission from everybody to sell gold. I don’t know it will succeed or not. But if and when IMF sells its gold, gold prices may go to a bottom. Who knows? It may go down to US$700. IMF has got a lot of gold to sell. If it does, I hope I’m brave enough and smart enough to buy more,’ Rogers told Bloomberg Radio in an interview.

“Rogers who is hot on China has been investing heavily into Chinese investment and agricultural funds in the last year. According to Rogers, three billion people living in Asia, most of them in India and China, will account for a major portion of the total demand for commodities in the coming years.

“In an interview to Commodity Online Rogers said recently: ‘China is a fascinating place to invest in. China is on the rise, like America 100 years ago, and the problems the Asian giant is encountering right now in certain, mainly export-driven, sectors of its economy will not alter the country’s long-term trajectory.’”

Source: Commodity Online, May 3, 2009.

John Authers (Financial Times): Putting faith in China
“Rallying markets think the Chinese economy has made a V-shaped recovery, but its is difficult to tell to what extent we can trust the encouraging economic data coming out of Beijing.”

Click here for the article.

Source: John Authers, Financial Times, Mei 4, 2009.

Financial Times: ECB cuts rates to combat recession
“European central banks on Thursday intensified their efforts to combat the continent’s severe recession by unveiling bolder-than-expected moves to buy assets and boost growth through historically-low interest rates.

“The European Central Bank cut its main interest rate by a quarter percentage point to 1%, the lowest yet, and announced plans to buy €60 billion of covered bonds, which are backed by mortgage or public sector loans.

“Separately, the Bank of England said it would pump a further £50 billion into the UK economy through its programme of ‘quantitative easing’.

“Signalling significantly greater flexibility, Jean-Claude Trichet, ECB president, said official eurozone borrowing costs could fall again.

“Several ECB governing council members had previously publicly opposed cutting rates below 1%, and Mr Trichet had warned of the dangers of letting rates fall to zero.

“The announcements reflected increased ECB gloom over the economic outlook for the 16-country eurozone, which is expected to be hit worse this year by the global slowdown than the US or UK.”

Source: Ralph Atkins, Chris Giles and David Oakley, Financial Times, May 7 2009.

Tags: Cboe Volatility Index, Corporate Bonds, Definitions Of Stress, Dow Jones Industrial, Dow Jones Industrial Average, Emerging Market Bonds, Emerging Markets, ETF, Government Bonds, Graphic Source, India, Mental Tension, Merriam Dictionary, Merriam Webster Dictionary, Msci Emerging Markets Index, Msci World Index, oil, precious metals, Risky Assets, Safe Havens, Stress Test, Stress Tests, Volatility Index Vix, Walt Handelsman
Posted in Bonds, Commodities, Credit Markets, Economy, Emerging Markets, Gold, India, Markets, Oil and Gas, Outlook | No Comments »

The $33,000,000,000,000 question

Friday, May 8th, 2009

This post is a guest contribution by Niels Jensen*, chief executive partner of London-based Absolute Return Partners.

Is the crisis really over?
Commercial paper spreads have come down dramatically. Libor rates are (hmm - almost) back to normal. Even high yield spreads are narrowing. It certainly appears as if the credit crisis is well and truly over or, at the very least, the light which most of us think we can see at the end of the tunnel is no longer that of an oncoming freight train.

No wonder equities are currently enjoying one of their best spells ever. And while equities continue to go up and up, most of us are left scratching our heads. Is this the real thing or will it go down in history as ‘just’ another bear market rally? Not so long ago, the entire financial system stared Armageddon in the face. Now, only a few months later, equity markets behave as if all the worries of yesterday have been washed away. How is that possible?

The great bank illusion
The current bull market began in earnest in the second week of March, but what really got everyone going were the surprisingly good Q1 US bank earnings which were reported during the first half of April. Most commentators interpreted the numbers as the clearest piece of evidence yet that we are now firmly on the road to recovery.

Of course US banks made good money in Q1. The environment created for them is the equivalent of the US government reducing the cost of goods to zero for its embattled car manufacturers and then going on to buy - courtesy of the US tax payer - a couple of million cars that nobody really needs. Even Detroit would make money given those conditions!

Liquidity is trapped
The problem for the rest of us is that the banks are not sharing the candy they have been handed. Much of the liquidity created by the central banks remains trapped in the financial sector. Quite simply, the multiplier is not doing its job, as many banks prefer to hoard cash rather than increase lending at this juncture.

This is both good and bad news at the same time. Good because it implies that we probably do not have to worry too much about the inflationary effect of the aggressive monetary easing currently taking place; bad because it means that the economy is not going to kick back to life as quickly as everyone would like - and expect

Meanwhile investors are growing cautiously optimistic about the GDP outlook for the second half of the year with many now forecasting modest growth – at least in the United States. Only a fool would suggest that GDP would shrink by 5-10% per quarter in perpetuity, as has been the case over the past two quarters. The economic slowdown is now decelerating and, as I pointed out last month, there are good reasons why we may see a temporary lift in economic activity later this year, but it will almost certainly prove transitory.

Click here for the full report.

* Niels Jensen has 24 years of investment banking, private banking and asset management experience. He founded Absolute Return Partners LLP and is its chief executive partner.

Tags: Absolute Return, Armageddon, Bear Market, Car Manufacturers, Central Banks, Commentators, Credit Crisis, Executive Partner, Financial Sector, Freight Train, high yield, Hoard Cash, Job Banks, Libor Rates, liquidity, Market Rally, Million Cars, Multiplier, Niels Jensen, Tax Payer, Us Bank
Posted in Credit Markets, Economy, Markets | No Comments »

David Rosenberg’s Revealing Parting Thoughts

Wednesday, May 6th, 2009

David Rosenberg, Merrill’s respected chief North American economist, is leaving the firm this month to return to his native Toronto, where he will join a buy-side firm, Gluskin Sheff & Associates.

Tyler Durden has posted some of David’s parting comments on his Zero Hedge blog site and these are shared verbatim in the paragraphs below.

We are in year 9 of an 18-year secular bear market

The S&P 500 peaked in real terms back in August 2000. Adjusted for the CPI, it is down 58% since that time. So, we would say that we are in year 9 of what is likely to be an 18-year secular bear market, because if you look at long waves in the past, they tend to last about 18 years with near perfection.

What happened during the last secular bear market

As an example, go back to the last secular bear market, and you will see that the S&P 500 peaked, again in real terms, in January 1966 and bottomed in July 1982, 18 years later. But there were plenty of mini-cycles in between. In fact, there were four recessions and three expansions during that entire 18-year period and unless you were a completely passive investor, you definitely wanted to be in the game during the three expansions because the S&P 500 rallied an average of 50% during those phases. Again, it is important to note that these were rallies you could rent, not own, but they did last an average of 20 months. So, it’s not exactly as if they have an extremely short shelf life.

Playing a game of devil’s advocate

With all this in mind, we went through an exercise over the weekend and played a game of devil’s advocate. If Rosie had to face off against Rosie, what would we say if we were forced to take the other side of the debate, keeping in mind that in fact, we may be overly bearish at the present time. And believe it or not, we did manage to come up with some pretty compelling material.

Past the half-way point in the recession

First, our in-house model of predicting where we are in the cycle, for the first time, gave us a signal late last week that we are past the half-way point in the recession. Considering that the stock market bottoms 60% of the way through, this is an encouraging signpost.

We’ve worked through the effects of the Lehman collapse

Second, our propriety proxy for private sector interest rates has come down from 8.11% at the nearby peak to 7.18% now despite the backup in Treasury yields, to stand at their lowest since last September. The TED spread is back to where it was last September, as are most credit spreads. The VIX has finally broken to 35, back to where it was last September. 10-year TIPS breakeven levels, which were predicting deflation at the end of last year, are now forecasting 1.5% average inflation rates for the next decade. Again, we last saw this in September of last year. This is interesting because even though the economy and the markets were clearly in the doldrums back in September, the fact that so many market barometers are back to where they were then means that at the very least, we have worked through the ill-effects of the post-Lehman collapse.

Stock market has lagged relative to other asset classes

All an equity bull really has to do is point to the fact that the S&P 500 last September was trading around 1200. The only difference is back then we were looking at it from the perspective of being 20% off the highs whereas a move back to September levels, which, after all, would only mimic what many other market indicators have accomplished, would be viewed as an 80% surge off the lows not to mention another 35% potential upside from where we are today. Even the CRB raw industrials are now back to where they last October when the S&P 500 was hovering around the 950 level. So again, if we were equity bulls, and maybe we should be, we would simply point out that of all the asset classes that have bounced back to life, the stock market has actually been a laggard.

Three indictors that suggest cyclical bear market is over

Third, we found three indicators that have stood the test of time and strongly suggest that the cyclical bear market in equities and the economy have drawn to a close: the ISM, the Conference Board’s coincident-to-lagging indicator and the University of Michigan consumer sentiment survey. The ISM bottomed in December 2008 at 32.9 and is now 40.1. Going back to 1950, we found that recessions end within three months of the ISM hitting bottom, and never by more than six months. The coincident-to-lagging ratio just turned in successive lows of 89.6. The data go back to 1960 and we found that recessions ended within two months of this indicator, 100% of the time. And, the U of M consumer sentiment index bottomed at 55.3 last November. As we saw on Friday it had rebounded to 65.1 as of the end of April. The data show recessions end typically within six months of the bottom in this key leading indicator, and not once was the lag longer than eight months.

We could be on the precipice of a cyclical upturn

This is not to say that our secular views have changed. However, we could well be on the precipice of a cyclical upturn, and whether it is sustainable or not may have to be a story for another day. We don’t see as many green shoots as others do, but then again, we endured more than a year of jobless recoveries following the market lows of 1990 and 2002.

The most glaring example

The most glaring example of all is the fact that the S&P 500 bottomed in the summer of 1932 and yet by the end of the 1930s, seven years after ‘New Deal’ stimulus, the unemployment rate was still 15%, consumer prices were deflating at a 2% annual rate, and let’s face it, the Great Depression did not actually end until 1941. But for investors, the worst was over in the summer of 1932 in the immediate aftermath of the acute government intervention at the time. While there were recurring setbacks along the way, including the severe bear market of 1937-48, the fundamental lows had already been turned in long before.

Investors have been able to price out financial tail risks

Fast forward to March 2009, and the same mantra was heard - ‘nationalization’, ‘depression’ and ‘deflation’. As was the case with FDR’s early days as President, what the last half of Obama’s first ‘100 days’ managed to accomplish was to eliminate these words from the investment lexicon. The degree of intervention from the Treasury and the Fed has been so intense that investors have been able to price out financial ‘tail risks’ that had dominated the market landscape through much of the first quarter.

The market is gravitating to a new mean

So, the way to look at the situation is that by removing the ‘tail risks’ of an outright systemic financial collapse, the market has gravitated to a new ‘mean’ (in the sense that at any given point in time, market prices reflect some expected distribution of possible outcomes - a very bad potential outcome has been taken out of the probability distribution, at least according to Mr. Market). This is why if the bulls have a solid argument, it is the prospect that the S&P 500 can indeed approach those pre-Lehman levels, which back in September, seemed rather bearish, but is only bullish today benchmarked against where we are.

Still not sold on the bull case for equities

Despite all these powerful arguments, we are still not totally sold on the bull case for equities. Valuation is not compelling, in our view. Sentiment has completely swung towards a bullish consensus (which is a contrary negative). Home prices and employment are still in freefall, the former undermining the balance sheet and the latter exerting a drag on the income statement and suggestions that a mild improvement in the negative growth rate is something to be excited about seems off base.

Difficult to ascertain who the marginal buyer will be

It seems hard to believe that after being burned by two bubbles seven years apart that the baby boomer is going to line up at the trough one more time. So, it’s difficult to ascertain who the marginal buyer is going to be. Disposal of durable goods assets to pay off a record household debt burden seems like a multi-year deflation story as far as we are concerned. Since the boomer household is income constrained and underweight fixed-income securities on its balance sheet, we believe that demand for high-quality bonds is going to strengthen in coming years. Government policy will remain highly pro-cyclical but there is no match for the contractionary effects from a shrinking US household balance sheet.

Deflation will win out over inflation

We are concerned that deflation will win out over inflation this time around. While the data cited above are indeed impressive in terms of their track record, since this is not a manufacturing inventory recession but rather a downturn deeply rooted in asset deflation and credit contraction, we may find out that the economic releases that were tried, tested and true in the other post-war cycles may not be appropriate today given the overpowering secular trends of consumer deleveraging and frugality.

Source: Tyler Durden, Zero Hedge, May 4, 2009.

Tags: American Economist, Canada, CPI, David Rosenberg, Devil S Advocate, Expansions, Face Off, Long Waves, Native Toronto, Parting Comments, Parting Thoughts, Passive Investor, Playing A Game, Present Time, Rallies, Recession, Recessions, Rosie, Secular Bear Market, Shelf Life, Tyler Durden
Posted in Commodities, Credit Markets, Economy, Markets, Oil and Gas, Outlook | No Comments »

Words from the (investment) wise for the week that was (April 27 – May 3, 2009)

Sunday, May 3rd, 2009

“Goodbye safe havens, hello risky assets.” This was the refrain of investors’ theme song during the past week. Safe-haven assets were out of favor as better-than-feared corporate earnings and signs of a budding economic recovery emboldened investors’ appetite for reflation trades such as equities and commodities.

Investors’ sentiment improved notwithstanding a number of influences that could potentially disturb financial markets. These included a three-day delay in the release of the stress test results of the 19 biggest US banks until May 7, the plight of the beleaguered US automakers with General Motors (GM) proposing a sweeping debt-for-equity restructuring and Chrysler filing for Chapter 11 bankruptcy protection, and fears of an escalation in the number of swine flu (H1N1) cases.

Source: Vita

As to be expected given the countless catalysts, the past week’s trading was bumpy, but the major global stock market indices nevertheless managed to resume their eight-week rally. Further testimony of investors’ zest for risky assets came from the following:

• a solid performance by crude oil, base metal and agricultural commodities (with the exception of pork bellies and lean hogs - despite the fact that humans cannot contract swine flu by eating pig meat)

• tighter credit spreads (especially high-yield corporate bonds)

• a jump in Treasury Note yields to levels last seen in November

• a decline in the US dollar and Japanese yen as traders switched to high-yielding currencies such as the Australian dollar, New Zealand dollar and South African rand (all resource-linked currencies)

The performance of the major asset classes is summarized by the chart below, expanded to now also include Treasury inflation-protected securities (TIP) and investment grade (LQD) and high-yield corporate bonds (HYG).

Source: StockCharts.com

Marking eight straight weeks of gains, the MSCI World Index advanced by 1.6% (YTD -2.6%) on the week, the MSCI Emerging Markets Index by 2.3% (YTD +16.9%) and the Nasdaq Composite Index by 1.5% (YTD +9.0%) - the Nasdaq’s longest advance since December 1999. After recording declines during the prior week, the Dow Jones Industrial Average (+1.7%; YTD -6.4%) and the S&P 500 Index (+1.3%; YTD -2.8%) also added to the gains notched up since the rally commenced off the March 9 lows.

Global indices also celebrated solid gains for calendar month April, with the MSCI World Index (+10.9%) recording its top monthly advance since January 1987 and the MSCI Emerging Markets Index (+16.3%) its strongest monthly showing since December 1993. The S&P 500 (+9.4%) had its best month since March 2000, placing the Index in the middle of its top 20 monthly gains since 1950.

Click on the table below for a larger image.

Using four-day performances for markets that were closed for the May Day (International Workers’ Day) holiday on Friday, returns around the world ranged from top performers Indonesia (+8.7%), Ireland (+8.4%), Greece (+8.1%), the Czech Republic (+6.9%) and Turkey (+6.7%) to Luxembourg (-4.7%), Bulgaria (-4.0%), Malta (-2.7%), Macedonia (-2.6%) and Oman (-2.5%), which experienced selling pressure. The Mexican Bolsa Index surprised by only declining 3.0% amid swine flu fears. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

By the end of last week, more than 70% of the companies in the S&P 500 Index had reported first-quarter earnings. According to Bespoke, the Index’s annual decline in earnings (Q1 ‘09 versus Q1 ‘08) on Friday was of 32.3%. This compares with analysts’ estimates of -37.4% at the start of the earnings season. Also, as shown in the graph below, the percentage of companies beating earnings estimates has been rising steadily during the reporting period to 62% on Friday. ”With three quarters of companies having already reported, this earnings season is shaping up to be one of the best in years,” said Bespoke.

John Nyaradi (Wall Street Sector Selector) reports that the strongest exchange-traded funds (ETFs) on the week were the Market Vectors Coal (KOL) (+15.1%), iShares MSCI Taiwan Index (EWT) (+13.8%) and Claymore US-1-The Capital Markets Index (UEM) (+11.4%). On the other end of the performance scale the SPDR KBW Bank (KBE) (-6.1%), PowerShares Active US Real Estate (PSR) (-5.8%) and Vanguard Extended Duration Treasury Index (EDV) (-5.7%) performed poorly.

For April, the “ETF of the Month” was the iShares Dow Jones Real Estate Fund (IYR) that gained +22.6%. Click here for a chart.

An interesting analysis on country ETFs was published by Bespoke last week, specifically indicating that markets around the world are extended into overbought levels from their normal trading ranges. Click here for the study.

On the credit front, the cost of buying credit insurance for US and European companies eased during the past week, as shown by the narrower spreads for both the CDX (North American, investment grade) Index (down from 175 to 163) and the Markit iTraxx Europe Index (down from 153 to 139).

Another indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.

Source: I-Net Bridge

The quote du jour relates to the stress test and belongs to Bill King (The King Report), who said: “A major problem with the ‘stress test’ is it depends on modeling and it’s the precise practice responsible for much of this economic and financial mess. It’s extraordinary that so many people believe that the Fed and Treasury, after missing the financial disaster, housing debacle, recession and derivative implosion, can now extrapolate economic conditions and resultant financial effects from its models. How did all that rocket-science modeling for subprime defaults and securitization workout? Yet many people already forget or ignore this reality.”

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “market”, “stock”, “economic”, “economy”, “bank” and “financial” again featured prominently. Let’s hope “flu” does not stake its claim among the dominant words over the next few weeks.

But back to the stock market. In order to gather some perspective on the current stock market rally, Chart of the Day highlighted the duration (calendar days) and magnitude (percentage gain) of all significant Dow rallies that occurred during the 1929-1932 bear market (solid blue dots). By means of illustration, the bear market rally that began in October 1931 lasted 35 calendar days and resulted in a gain of 35%. “… the current Dow rally (hollow blue dot labeled ‘You are here’) is slightly below average in both duration and magnitude relative to the average 1929-1932 bear market rally (hollow red dot),” said Chart of the Day.

Source: Chart of the Day, May 1, 2009.

As shown in the table below, the 50-day moving averages have been cleared comfortably by all the major US indices and the early January highs are the next important targets. As a matter of fact, the Nasdaq Composite Index is already above this level. It has to rise by a further 2.1% in order to reach the key 200-day moving average - an indicator often used to distinguish between primary bull and bear markets. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to remain intact.

Two S&P 500 sectors - Consumer Discretionary (XLY) and Technology (XLK) - have actually just broken above their 200-day moving averages. Bespoke said: “This … signals the end to a long-term downtrend and the confirmation of an uptrend. It’s also a positive for the overall market that two cyclical sectors (one that is extremely tied to the consumer) are the first ones to break above their 200-days.”

Still talking technical analysis, Kevin Lane of Fusion IQ said: “The S&P 500 Index had stalled at the 878 level on three separate occasions over the past five months. However, prices then subsequently gave way to profit-taking and closed back below that level. Only a close above that level would open the way to higher prices.

“On the sentiment front, the CBOE Equity Put/Call Ratio, the AAII Bearish Sentiment Survey and the VIX’s deviation from its 50-day moving average have all moderated from constructive levels to more neutral levels. … these indicators are not at levels that would suggest sentiment is overly bullish yet, but their deterioration is enough cause for concern that a corrective wave may occur.”

“All the things are in place for the bear market to have ended,” Anthony Bolton, president of investments at Fidelity International in London, said in an interview with Bloomberg Television. “When there’s a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I’d like to bet against that.”

Remaining across the pond, David Fuller (Fullermoney) put matters in context as follows: “Base formations, confirming not only the ending of a bear market but the beginning of a new bull market, come in all shapes and sizes. The leading stock markets, which generally have better fundamentals, usually form smaller bases before commencing their uptrends, as we have seen with China and a number of other emerging markets from Asia to South America. Fundamentally weaker markets, such as the US and most of Europe, require a longer convalescence before a significant recovery occurs. This explains the new lows in late February and early March.

“This impressive rally is overextended in the short term, so we can expect it to spill over into a reaction and consolidation before long. The recent uptrend consistency will be followed by some choppy action as legitimate fundamental concerns remain.”

The last (cautionary) word goes to Richard Russell, writer of the Dow Theory Letters newsletter: “On the bear market decline, we never saw the great values that usually appear at major bear market bottoms. The ‘great value’ area is the place where I would normally suggest that investors load up with blue-chip stocks. For this reason, I would prefer waiting out this rally or making a limited trade with DIAs [Dow Diamonds ETF] with stops. I continue to believe this is an upward correction in an ongoing primary bear market. I note that many observers are saying that ‘this is a market that won’t go down’. Believe me, all markets go up - and all markets go down.”

And here is the venerable R man taking the bull by the horns!

For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Investors “look past the valley“, “Sell in May and go away: Fact or fallacy?” and “Donald Coxe - Investment recommendations (April 2009)” (And also make a point of listening to Coxe’s webcast of May 1, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
“Global business sentiment is improving. Confidence remains very weak, but it improved last week to its best level since late last October. Much of the improvement has been in Asia and South America, although sentiment is more upbeat everywhere. Expectations regarding the outlook six-months hence are particularly buoyant,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com.

Although it is premature to conclude that the global recession is ending, a number of indicators, compiled by US Global Funds, could signal better times ahead.

• The inflation-adjusted inventory component of US GDP dropped by more than $100 billion in the first quarter of 2009. This figure represents nearly 1% of GDP. Such drops in the past have been associated with the end of recessions. At the least, it raises the chances of GDP growth in the current quarter.

• The latest industrial production (IP) numbers coming from Asia are positive. South Korea’s IP was up 5.2% from February, while Thailand’s IP improved by 2.5% and Japan’s gained 1.6%. Manufacturing inventories in South Korea and Japan continued their decline in March after peaking in late 2008.

• In China, the Purchasing Managers Index (PMI) rose for the fifth straight month in April (see blue line in chart below). The latest PMI figure is 53.5 - any reading over 50 indicates that the manufacturing sector is growing. The last time the PMI was this high was in May 2008. Another promising PMI figure, the employment sub-index, is also over 50, meaning that job growth in manufacturing is under way.

Source: Kevin, Sinolise.com, May 1, 2009.

The April update of the ISM Manufacturing Index shows that the US manufacturing sector failed to grow for the fifteenth straight month, but the April reading of 40.1 was significantly higher than the 36.3 figure for March. The index has been improving for four straight months.

Rebecca Wilder (News N Economics) summarized the global economic picture as follows: “Overall, hope that key economies are no longer in free fall is emerging; however, the economic decline is ongoing.”

In an interview with The Washington Post, Nouriel Roubini said: “I don’t believe we are going to end up in a near-depression. Six months ago I was more worried about an L-shaped near-depression. Today, after the very aggressive policy actions taken by the US and other countries … we are, instead, in the middle of a U.”

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

May 01
• The ISM Manufacturing Survey points to imminent economic recovery, possibly in 2009
• Auto sales edged down in April

April 30
• Consumer spending and income decline
• Initial Jobless Claims declined but Continuing Claims advanced

April 29
• Federal Open Market Committee (FOMC) meeting ends with no surprises
• GDP growth - another quarter of deep and wide contraction in economic activity

April 28
• Case-Shiller Home Price Index confirms message from other reports
• Consumer Confidence Index improves mostly on surge in Expectations Index

The FOMC announced no change to monetary policy on Wednesday following the conclusion of its meeting. The communiqué said the Committee expected to keep the Fed funds rate target in the 0-0.25% range “for an extended period”. Moody’s Economy.com reported as follows: “The remarks on current economic conditions were less pessimistic than in recent months; the statement said that the pace of economic contraction ‘appears to be somewhat slower’ and that ‘the economic outlook has improved modestly’ since March.”

The FOMC included the following paragraph in the statement regarding its programs to buy agency debt, mortgage-backed securities and Treasuries: “The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.”

The dire tone of GDP growth in the last two quarters has invariably caused analysts to draw comparisons with the Great Depression. The table below, courtesy of Asha Bangalore (Northern Trust) compares the behavior of real GDP, unemployment, inflation and stock prices during the early-1930s with the current situation.

Click the table below for a larger image.

On the eve of the Berkshire Hathaway annual shareholders’ meeting in Omaha, Warren Buffett told CNBC that September’s “strike against the heart of the American system” was behind us, and that we have moved past the “economic Pearl Harbor”.

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

Source: Yahoo Finance, May 1, 2009.

In addition to Fed Chairman Ben Bernanke’s testimony before the Joint Economic Committee in Washington (Tuesday, May 5) and interest rate announcements by the bank of England and the European Central Bank (both on Thursday, May 7), the US economic highlights for the week, courtesy of Northern Trust, include the following:

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

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

Source: Wall Street Journal Online, May 1, 2009.

J. Kenfield Morley said: “In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well.” Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers in properly assessing risks before making investment decisions.

Our thoughts are with those affected by the swine flu virus, and we pray that the spreading is contained. By the way, an interesting way of tracking the occurrences of the virus is by means of Google Maps (click on “Satellite” along the horizontal menu bar for the best image).

That’s the way it looks from Cape Town (yes, I’m actually back home for a change!).

Source: Mike Keefe, The Denver Post.

Financial Times: Bank objections delay stress tests
“US regulators will delay the release of stress test results for the country’s 19 biggest banks until next Thursday, after some lenders, including Citigroup and Bank of America, objected to government demands that they needed to raise billions in fresh capital.

“Citi, one of the biggest victims of the crisis that has already been bailed out three times by the government, is believed to have been told by regulators that it needs more than $5 billion in fresh capital, while BofA might need to convert $45 billion in government preferred shares into common equity.

“Both companies are still contesting the findings and might still persuade the government they need less, or no capital, according to people close to the situation. Citi’s own projections are believed to show the company will have hundreds of millions of dollars in excess capital.

“After a week of tense talks between regulators and the banks, government sources said the Treasury and the Federal Reserve were set to unveil the outcome of the tests after the market closes on May 7 - three days later than anticipated.

“The authorities’ decision to let the original timetable slip also reflects the widespread belief that, after months of speculation since the tests were first announced in February, their outcome has the potential to disturb the markets.

“Government sources said regulators were likely to release both aggregate and individual data for each of the 19 banks, detailing their losses and capital needs under adverse economic scenarios.

“Some of the banks will then supplement those data with regulatory filings and analysts’ calls. Bankers said a number of lenders had pleaded with regulators for more time to lay out plans to plug any capital shortfall identified in the stress tests, by raising equity from either the government or from the stock market.”

Source: Francesco Guerrera and Sarah O’Connor, Financial Times, May 1, 2009.

Option Armageddon: Stress test - tangible common equity
“Ahead of official announcements regarding stress test results, OA thought we’d publish our latest update for banks’ tangible common equity, a metric that is likely to figure prominently.

“A recent Reuters report said ‘US regulators want the top 19 banks being stress-tested to have at least 3% [TCE].’ In other words, regulators want leverage ratios below 33x.* Surreal, no? That the banking system has grown so bloated that 33x leverage can be considered ‘healthy?’

“Anyway, using the 3% Test, the results for the nation’s nine largest banks are mixed … four pass, five fail. And by the way, this is before ‘stressing’ the balance sheet per future ‘adverse’ scenarios. As you can see, most banks fail the test before they even sit for it …

“To be clear, this is not a prediction of the government’s verdict. As Jack Ciesielski of The Analyst’s Accounting Observer points out: “there is no iconic definition of TCE. Treasury may come up with one of their own that takes into account ‘questionable items’ so that all the banks pass. That would be totally consistent with early reports …”

Source: Rolfe Winkler, Option Armageddon, April 24, 2009.

Financial Times: US taxpayers to take majority GM stake
“US taxpayers would take a majority shareholding in General Motors under a sweeping debt-for-equity restructuring proposal that the carmaker revealed on Monday in a bid to avoid bankruptcy.

“Under the plan, GM said it would shut 13 of 47 plants by the end of next year, resulting in an additional 7,000 job losses. The latest job cuts would reduce GM’s US workforce from 61,000 last year to about 40,000 by the end of 2010.

“The carmaker, which lost its crown as the world’s biggest carmaker to Toyota last year, said it would give up its 83-year-old Pontiac brand and cut its dealership network from 6,200 to 3,600 by the end of 2010.

“Fritz Henderson, chief executive, said: ‘The objective here is not to survive. The objective is to develop an operating plan that allows us to win.’

“The Obama administration has set a June 1 deadline for GM to produce a viable turnaround plan in exchange for further government aid, or face bankruptcy. The carmaker has received $15.4 billion in emergency loans and expects the total to rise to about $20 billion by the end of next month.

“GM warned in a letter to bondholders that if the debt-for-equity swap failed to go through by June 1 it would ‘expect to seek relief through the US bankruptcy code’. In such circumstances, GM said bondholders might receive no ‘consideration at all’. GM set a May 26 deadline for bondholders to respond.

“Calling the proposal ‘neither reasonable nor adequate’, an ad hoc committee of GM bondholders said it believed ‘the offer to be a blatant disregard of fairness for the bondholders who have funded this company, and amounts to using taxpayer money to show political favouritism of one creditor over another’.”

Source: John Reed and Bernard Simon, Financial Times, April 27, 2009.

Financial Times: Chrysler files for Chapter 11 protection
“Chrysler filed for Chapter 11 bankruptcy protection on Thursday after President Barack Obama criticized hedge funds for blocking an out-of-court restructuring of the US carmaker’s $6.9 billion debt.

“The Obama administration said the owner of Jeep and Dodge would emerge from a ‘surgical’ bankruptcy process with more government aid and new shareholders, including Italy’s Fiat and the United Auto Workers union. Bob Nardelli, Chrysler chief executive, will step aside as part of the deal.

“Mr Obama praised JPMorgan Chase and other large banks for accepting the terms of the proposed restructuring plan. He laid blame for the bankruptcy filing on ‘a small group of speculators’ who refused to buy into an offer to swap Chrysler’s debt for $2.25 billion in cash.

“They were hoping that everybody else would make sacrifices and they would have to make none,” he said. “Some demanded twice the return that other lenders were getting. I don’t stand with them.”

“Under the plan outlined on Thursday, Chrysler will face 30-60 days in Chapter 11, which enables businesses to restructure and reorganize under court supervision. During that period, Chrysler will close most of its North American plants, idling tens of thousands of workers.

“When Chrysler emerges from bankruptcy it will be 55% owned by the UAW and a separate workers’ healthcare trust. Fiat will take an initial 20% stake with the option of increasing it over time.”

Source: Tom Braithwaite and John Reed, Financial Times, April 30, 2009.

Charlie Rose: A discussion about Chrysler’s bankruptcy plan
“A discussion about Chrysler’s bankruptcy plan with author Paul Ingrassia, Micheline Maynard, senior business correspondent for the New York Times and John Stoll of The Wall Street Journal.”

Source: Charlie Rose, April 30, 2009.

The Big Money: Dow Jones says it can measure economic sentiment by reading the press
“Just as a technological revolution is blowing up newsrooms across the country, Dow Jones has come up with an algorithm to prove that yesterday’s newspapers are useful for more than just fish wrap. According to the publishing giant, you can plumb the language and tone of newspapers to finger turning points in the economy.

“The news, it seems, is a moderately reliable economic compass. And today, Dow is quantifying that assertion with the release of its newly minted Economic Sentiment Indicator, a monthly assessment of the ‘tone’ of content in 15 metropolitan dailies. The ESI, informally known as the Optimism Index, is a simple barometer based on a scale of zero to 100 - the higher the number, the more upbeat the news and, by extension, the stronger the economy. Dow Jones back-tested the indicator to 1990 and found that it could signal critical turning points in the economy, sometimes a bit earlier than other economic measures.”

Source: Nancy Miler, The Big Money, April 30, 2009.

Bespoke: Tracking the business cycle through Google trends
“Google Trends is a cool tool that has been around for a few years that tracks search volume and news reference volume for various words and phrases. We like to use it as a sentiment gauge of the public. Below we highlight the Google Trends result for the word ‘recession’. As shown, there was a big spike at the start of 2008 when the economy began to stumble. Then it died down only to spike again in Q4 ‘08 when things got really bad. Over the last couple of months, however, the ‘recession’ worries seem to be dwindling again, but they are still elevated. It’s also interesting to note how little chatter there was about it in 2004, 2005, 2006, and 2007.”

Source: Bespoke, April 30, 2009.

Charlie Rose: A conversation about the economy
“A conversation about the economy with Bill Ackman, major investor and hedge fund manager of Pershing Square Capital Management LP, Kate Kelly of The Wall Street Journal, Andrew Ross Sorkin of The New York Times and Joseph Stiglitz, economist and a member of Columbia University faculty.”

Source: Charlie Rose, April 24, 2009.

CNBC: Buffett - “economic Pearl Harbor” is over
“Billionaire investor Warren Buffett tells CNBC’s Becky Quick that this past September’s ‘strike against the heart of the American system’ is behind us, and that we have moved past the ‘economic Pearl Harbor’. However, he cautions that the war isn’t over just yet.”

Source: CNBC, May 1, 2009.

CNBC: Munger on Berkshire’s off year
“Berkshire vice chairman Charlie Munger discusses Berkshire’s difficult year and where he thinks the economy is headed, with CNBC’s Becky Quick.”

Source: CNBC, May 1, 2009.

The Washington Post: Roubini - “I am not Dr. Doom”
“Lally Weymouth of Newsweek and The Post sat down last week with economist Nouriel Roubini. Excerpts:

“Q. You are the economist known for predicting the economic downturn in 2008. What do you believe is happening to the economy today?

“A. The consensus among economists is that they see the economy that was contracting for the last two quarters at 6% going into positive economic growth by the second half of this year … I believe that the rate of economic contraction is going to slow from negative 6% in the last two quarters to negative 2% by the fourth quarter.

“Next year, I believe that the growth rate is going to be low - 0.5% for the US, compared to the consensus view of [plus] 2%. I believe the unemployment rate this year is going to go well above 10% and will be well above 11% next year, so even if we are technically out of a recession, we are going to feel like we are in a recession.

“I do agree that there is an improvement in the sense that the rate of contraction is not going to be as much as it has been in the last couple of quarters, but I still believe that the bottom of the economy [will be seen] toward the beginning or middle of next year. So my views are more bearish than the consensus.

“I believe things are going to be very mediocre throughout the world; in particular, in Europe and in Japan. They will only get out of their recession toward the end of next year.

“So you are still Dr. Doom?

“No, I am not Dr. Doom. I am Dr. Realist. I don’t believe we are going to end up in a near-depression. Six months ago I was more worried about an L-shaped near-depression. Today, after the very aggressive policy actions taken by the US and other countries … we are, instead, in the middle of a U.”

Click here for the full article.

Source: Lally Weymouth, The Washington Post, April 27, 2009.

Paul Kasriel (Northern Trust): Coming out of the downturn
“Paul Kasriel, Northern Trust’s Chief Economist, discusses the current economic climate and the potential impact on market consumption during any recovery.”

Source: Paul Kasriel, Northern Trust, April 30, 2009.

CNBC: Sheila Bair - the economy & financial crisis
“FDIC Chair Sheila Bair discusses the current state of the economy and the financial crisis.”

Source: CNBC, April 27, 2009.

CEP News: Fed keeps target rate and asset purchases unchanged
“The US Federal Reserve maintained the status quo on Wednesday. It kept rates unchanged, as expected, and maintained the amount of Treasuries, mortgage-backed securities and government sponsored enterprise (GSE) assets it intends to purchase.

“The Fed said it will evaluate the timing and amount of future asset purchases over time, and that the vote to keep the program as is was unanimous.

“In the monetary policy statement, the central bank said there are some signs that the economic outlook is improving, including stabilization in consumer spending and a slower pace of economic contraction.

“‘Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time,’ the statement read.

“Nevertheless, the Fed said the US will eventually resume a sustainable economic growth path.

“The Fed said it will employ all available tools to promote a recovery. As of the last meeting, the Fed plans to spend up to $1.25 trillion on agency mortgage-backed securities, up to $2,900 billion in agency debt and up to $300 billion in Treasury securities.”

Source: CEP News, April 29, 2009.

Asha Bangalore (Northern Trust): Another quarter of deep and wide contraction in economic activity
“Real gross domestic product (GDP) fell at an annual rate of 6.1% in the first quarter of 2009 after a 6.3% drop in the fourth quarter of 2008. Real GDP has declined at an annual rate of 6.2% in the last two quarters, which is the largest since the 1957:Q1-1958:Q2 period when the annualized reduction in real GDP was 7.4%.

“A decline in real GDP, albeit more modest, is projected for the second quarter. GM’s plans to cut production should translate into another noticeably weak third quarter headline for real GDP, followed by a stronger than previously expected fourth quarter. The annual decline in real GDP is now projected to be roughly 3.5% in 2009, which is a tad higher than the 3.3% decline assumed in the alternative adverse scenario of the stress test of the 19 major banks under the Treasury’s Capital Assistance Program.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 28, 2009.

Asha Bangalore (Northern Trust): ISM Manufacturing Survey points to imminent economic recovery, possibly in 2009
“The April survey results of the ISM Manufacturing Survey results indicate that the factory sector is contracting but the pace of contraction has slowed significantly. The composite index (PMI) rose to 40.1 in April from 36.3 in March. Indexes below 50.0 denote a contraction in activity but indexes moving toward 50.0 imply a deceleration in the pace of factory activity. The cycle low for the composite index is the December 2008 reading of 32.9.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, May 1, 2009.

Standard & Poor’s: S&P/Case-Shiller - home prices still declining
“Data through February 2009, released today [Tuesday] by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices shows continued broad based declines in the prices of existing single family homes across the United States, with 10 of the 20 metro areas showing record rates of annual decline, and 15 reporting declines in excess of 10% versus February 2008. For the first time in 16 months, however, the annual decline of the 10-City and 20-City composites did not set a new record.

“The chart above depicts the annual returns of the 10-City Composite and the 20-City Composite Home Price Indices. The 10-City and 20-City Composites recorded annual declines of 18.8% and 18.6%, respectively. This is a slight improvement from their returns reported for January, where they fell by 19.4% and 19.0%, respectively.

“‘While the declines in residential real estate continued into February, we witnessed some deceleration in the rate of decline in some of the markets,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s.”

Click here for the full report.

Source: Standard & Poor’s, April 28, 2009.

Asha Bangalore (Northern Trust): Consumer spending and income decline
“Personal income fell 0.3% in March following a 0.2% drop in February. Personal income has declined in five out of the last six months. It is more troubling to note that personal income on a year-to-year basis grew only 0.3% during March, the smallest gain since 1959 when record keeping began for this series.

“Consumer spending, after adjusting for inflation, fell 0.2% in March after upwardly revised gains of 0.9% and 0.1% in January and February, respectively. In light of the absence of support from income, a setback to consumer spending in the near term is almost certain. In the meanwhile, personal saving as a percent of disposable income increased to 4.2% in March from 4.0% in February, putting the quarterly average at 4.2%, the largest average seen since the third quarter of 1998.”

Source: Asha Bangalore: Northern Trust - Daily Global Commentary, April 30, 2009.

Asha Bangalore (Northern Trust): Initial jobless claims declined but continuing claims advanced
“Initial jobless claims fell 14,000 to 631,000 during the week ended April 25, marking the third weekly decline in the last four weeks. The four-week moving average appears to have peaked in the week ended April 4.

“Continuing claims, which lag initial claims by one week, rose 133,000 to a new record high of 6.271 million and the insured unemployment rate advanced to 4.7% from 4.6% in the prior week.”

Source: Asha Bangalore: Northern Trust - Daily Global Commentary, April 30, 2009.

Asha Bangalore (Northern Trust): Consumer Confidence Index improves mostly on surge in expectations index
“The Conference Board’s Consumer Confidence Index shot up 12.3 points to 39.2 in April. The Present Situation Index moved up only 1.8 points to 23.7, while the Expectations Index increased 19.3 points to 49.5.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 28, 2009.

The American Banker: Credit card losses
“Credit card losses suddenly escalated in the first quarter as unemployment and other economic conditions worsened, spooking issuers to the point where most shied away from forecasting losses beyond the near term.”

Source: The American Banker, April 29, 2009.

Rasmussen Reports: 26% say US already has partially socialist economy
“Twenty-one percent (21%) of American adults say that the US economy is partially socialist and another five percent (5%) say generally speaking it’s already a socialist economy.

“A new Rasmussen Reports national telephone survey found that 26% believe the United States generally has a free market economy and that 41% say the country has a partially free market economy.

“Seventy-seven percent (77%) of all voters say they prefer a free market economy over a government-managed one. That’s up seven points since December.

“But only 53% of American adults believe capitalism is better than socialism. This clearly suggest that many Americans draw a sharp distinction between capitalism and a free market economy.

“Belief that the United States has a free market economy generally rises with income level. Those who earn the most are most confident that the market is at least partially free.”

Source: Rasmussen Reports, April 28, 2009,

Financial Times: Commercial mortgages at risk
“The volume of commercial mortgages at risk of default has quintupled since the beginning of 2008 as a deteriorating economy has made it increasingly difficult for shops and businesses to keep up with their payments.

“Special servicers, companies that collect payments from borrowers in distress on behalf of mortgage bond investors, reported $23.7 billion of mortgages under their care at the end of the first quarter, according to Fitch Ratings.

“That was five times higher than the $4.6 billion of mortgages needing special servicing at the end of 2007. Servicers experienced an almost 50% increase in the volume of distressed commercial mortgages in the first quarter alone.

“Mortgages for multi-family residential properties suffering from the housing downturn represented the largest share of the troubled loans at 31%, said Fitch. However, mortgages for shops and businesses were catching up, with retail loans at 28% of the distressed pools.

“Fitch analysts said they expect commercial mortgage defaults to continue to increase this year. At the end of the first quarter, defaults and payments more than 60 days late were at 1.53% of outstanding mortgages. Fitch said they could reach 4% by the end of 2010.”

Source: Saskia Scholtes, Financial Times, April 28, 2009.

Asha Bangalore (Northern Trust): 10-year Treasury Note yield and mortgage rates after March 18, 2009
“The March 18 FOMC policy statement noted the following:

‘To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.’

“The 10-year Treasury note yield closed at 2.51% on March 18, reflecting a 51 bps rally compared with the close on March 17, 2009, and has since held above the March 18 reading. The 10-year Treasury note yield on April 24 was 3.03% and as of this writing it was trading around 2.97%.

“The Fed has purchased $73.742 billion of Treasury securities between March 23, 2009 and April 27, 2009. The chart below indicates the Fed has not succeeded in guiding Treasury securities lower after the announcement. The goal of the purchase program is to buy $300 billion of longer-term Treasury securities over a six-month period. Effectively, the Fed has roughly $226 billion of Treasury securities more to purchase under this program.

“The good news is that mortgage rates have declined further after the Fed expanded the purchase of mortgage-backed securities ($1.25 billion, up from prior announcement of $750 billion) and agency debt ($200 billion, up from earlier plan of $100 billion) as per the March 18 announcement. The 30-year mortgage rate stood at 5.03% during the week ended March 20 and was quoted at 4.80% as of April 24.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 27, 2009.

Bespoke: Treasuries and high-yield bonds converge
“IEF is an ETF that tracks the price of long-term Treasuries (7-10 years), while HYG tracks the price of high-yield (junk) bonds. During the flight to safety panic that occurred in late 2008, Treasuries soared (yields fell), while junk bonds tanked (yields rose). This caused high-yield spreads to spike to levels not seen in decades. As the market has regained some of its footing in the last couple of months, however, spreads have begun to come in, and the price charts of IEF and HYG highlight this convergence. As shown, IEF (Treasuries) are getting close to testing February support, and the ETF is down from more than $100 to the low $90s. HYG, on the other hand, has rallied from the low $60s to the high $70s since the March equity market lows. If IEF breaks this support in the coming days, it will probably be a sign that the current trend will continue on for longer.”

Source: Bespoke, April 30, 2009.

Barron’s: Big money poll - the long view
“After the worst stretch for stocks in decades, America’s money managers say they’re bullish. But do they really believe it? Based on the results of our latest Big Money poll, the pros are hoping for the best, but … hold on! Aren’t those fresh bear tracks in the mud?

“Nearly 60% of our respondents call themselves bullish or very bullish about the stock market’s prospects through the end of 2009, a significant increase from the 50% who proclaimed themselves bulls last fall. Yet, signs of unease abound. For one, just 56% of today’s poll participants think the stock market is undervalued, down from 62% last fall. Thirteen percent say stocks are overvalued, up from a prior 7%. And an alarming 58% say the market hasn’t bottomed yet, even though the Dow Jones industrials hit a low of 6,469 in March, before recovering to a recent 8,100.

“The managers are similarly wary about the outlook for the economy, at least through the end of this year. And they are downright doubtful that the government’s first stimulus package, announced with fanfare shortly after the Obama administration moved into the White House, will be the last.

“Given these and other concerns, only 26% of the Big Money men and women expect to be net buyers of stocks in the next six months, although 66% say they will be putting more money to work in the 12-month span. But don’t look for fresh dough to flow solely to US equities. Just 44% of our respondents think the US will be the strongest market in the next year; 42% expect emerging markets to take the baton and lead. As Keith Wibel, a money manager at Foothills Asset Management in Scottsdale, Ariz., put it, ‘Confidence has been fractured. The psyche is slow to heal.’

“The market isn’t much faster. Big Money’s bullish cohort expects the Dow to end 2009 at 8,676, about 7% above current levels but flat for the year. Things, or at least stocks, will pick up thereafter, with the blue chips rising another 10% or so, to 9,488, by mid-2010. In concert with their short-term-skittish, long-term-sunny stance, more than 40% of bulls predict the Dow industrials will reach or breach 10,000 by the middle of next year.

“The optimists see the Standard & Poor’s 500 jogging to 906 by December 30, en route to 1,003 next June. The popular benchmark closed Friday at 866. Their mean predictions for the Nasdaq Composite: 1,683 by year end, and 1,841 by mid-2010, up from last week’s 1,694.

“Some big money managers are notably upbeat even - or especially - after a global financial meltdown has cut most stock indexes in half. ‘They don’t ring a bell when they announce a sale on Wall Street, but prices are as good as I’ve seen them in my entire career,’ says David Corbin, president of Corbin & Co. in Fort Worth, Texas.”

Source: Jack Willoughby, Barron’s, April 27, 2009.

Bespoke: Sector earnings growth in the first quarter
“More than 70% of the companies in the S&P 500 have now reported first quarter earnings, so the growth puzzle for the quarter is beginning to take shape. Below we highlight the current year over year % change in earnings for Q1 ‘09 versus Q1 ‘08. We also provide the estimates for these numbers as they stood just before earnings season began.

“As shown, the S&P 500 is currently seeing earnings decline by 32.3% in the first quarter. At the start of earnings season, this number was estimated at -37.4%, so it’s coming in a little better than expected. Consumer Discretionary looks the best when comparing actual versus estimates, but earnings have still declined by 52.5% in the sector. The only two sectors that are coming in weaker than expected are Financials and Energy.

“We also provide the price performance of the sectors since April 2nd. Interestingly, most of the sectors that are up the most are the worst in terms of actual earnings versus estimates.”

Source: Bespoke, May 1, 2009.

David Fuller (Fullermoney): Will stock markets stay above March lows
“The important question is whether or not Wall Street continues to range above its March lows? The answer will have significant implications for other stock markets.

“At Fullermoney, we maintain that the S&P 500 Index will most likely hold above its March low, as it continues to develop a base formation. The main reason, previously stated, is that we are witnessing the greatest attempt at asset reflation in human history. In comparison, it makes Greenspan look, well … almost Austrian and the USA is certainly not the only country engaged in a record reflation. The secondary reason is the record levels of cash held by institutional investors.

“Let us now consider three scripts for Wall Street and its implications for other stock markets: 1) the S&P keeps on rallying, surprising even the bulls; 2) the S&P ranges in extended base formation development for many more months; 3) the S&P rolls over and resumes its bear market by moving well beneath the March low.

1) In this event, the stock markets and sectors that are already considerably outperforming the S&P - mainly Fullermoney themes, including China-led emerging Asia, South American-led resources markets and technology - will continue to do much better than the S&P. Other OECD stock markets, (tech & telecom weighted Sweden excepted), will track the S&P, albeit usually with a slightly higher beta.

2) The Fullermoney themes in (1) above outperform, extending their ranging upward trends. Most OECD stock markets track Wall Street.

3) Fullermoney themes fall back and extend their base formations. Most OECD stock markets track Wall Street, with Sweden being the most likely exception.

“What do I expect? I think it will be (2) above, although possibly in combination with (1). I will not worry too much about (3), provided the S&P can maintain approximately half of its gains from the March low during the next reaction phase.”

Source: David Fuller, Fullermoney, April 29, 2009.

David Fuller (Fullermoney): Global stock markets leaders - what are they saying?
“Fullermoney has long maintained that the leaders lead in both directions. In other words, the leaders of a global stock market recovery will usually lead the next correction. The same applies in reverse.

“Which are the leaders and what are they indicating today?

“China is one of the few stock markets capable of providing a leash effect. Among bigger capitalisation markets, it has led on the upside since its October 2008 low. We pointed out China’s downside key day reversal on April 22 and it is experiencing downside follow through, indicating susceptibility to a further pullback. This will probably create another buying opportunity and I would only be concerned if the last reaction low near 2,040 was exceeded. Meanwhile, it will take an upward dynamic to check this reaction beyond a brief pause.

“Taiwan is a China satellite, strong on tech, which has once again been a leading sector. Consequently Taiwan has been an outstanding performer, that is until its downside key day reversal on April 17. This occurred near the psychological 6,000 level and we saw another downward dynamic today. A close above 6,100 is currently required to offset scope for an additional reaction.

“Brazil has been South America’s comparatively big-cap leader among these resources markets, often cited by Fullermoney. It shows none of the downside keys or other bearish dynamics and actually reached a new high on Friday, although that gain was not maintained today. A close under 44,270 would confirm an upside failure and susceptibility to an additional short-term reaction.

“Conclusion - Fullermoney anticipated the impressive global stock market rally, not least with the help of indices shown above, plus other regional leaders such as Sweden, which is still appreciating, albeit approaching lateral and psychological resistance near 800. We remain medium-term bullish but would be cautious in the short term.

“We have always spoken of a lengthy convalescence in response to the financial crisis. Consequently we have favoured accumulating equities on easing within this base building phase and early stage uptrends among the leaders.

“Meanwhile, there is still more than enough worrying news, in terms of corporate disappointments, to frighten buyers from time to time. Conversely, there is more than enough cash on the sidelines to cushion downside risk during the inevitable reactions and consolidations. For OECD laggards which experienced March lows, I would be concerned if they gave up more than half of their gains from those lows during a reaction.”

Source: David Fuller, Fullermoney, April 27, 2009.

Richard Russell (Dow Theory Letters): Lowry’s statistics do not favor a new bull market
“The Lowry’s statistics do not favor the argument that a new bull market has started. Normally, based on the long history of the Lowry’s studies, when a new bull markets starts, their Buying Power and Selling Pressure Indices move apart by roughly the same number of points.

“The fact - since the March 9 low, Lowry’s Buying Power Index has gained 57 points, but their Selling Pressure Index has only dropped 20 points. This is at sharp variance with all other bull market starts in the Lowry’s history.

“Basically, when a new bull market starts, the background is that the urge to sell has been exhausted. The pressure to press that market down further has disappeared. Thus, the market is left in the hands of those who wish to buy. In the current case, there is still a potential supply of stocks to be sold. In other words, the situation is not correct for the start of a new bull market, based on 76 years of the Lowry’s data.”

Source: Richard Russell, The Dow Theory Letters, March 31, 2009.

Bespoke: Mid-April short interest
“Short interest figures as of mid-April were released on Friday after the close and showed an overall decrease in short interest for NYSE and Nasdaq listed stocks. In the chart below, we show the average short interest as a percentage of float for S&P 500 stocks. After peaking at 5.6% in mid-March, short interest as of mid-April has now declined to 5.5% of the average stock’s float.

“At first glance, it is somewhat surprising that short interest has only declined by a marginal amount. Given the 25%+ rally in the S&P 500, one would expect to see short interest decline by a much larger amount. Digging into these numbers, however, the headline short interest numbers are somewhat misleading due to the extraordinarily large short interest in Citigroup (C). Due to the arbitrage taking place over the upcoming conversion of the preferred into common shares, Citi’s short interest represents 12.1% of the total short interest for the S&P 500. If one were to back Citi out of the calculations, short interest would be about 5.4% of the average stock’s float.

“Even though short interest has declined, there are still plenty of stocks investors are heavily betting against. For example, 82 stocks in the S&P 500 currently have over 10% of their float sold short, and 12 have more than 20% shorted. Given the state of the Financials, one would think most of the names would come from that sector, but the reality is that Citigroup (C) and Avalon (AVB) are the only two names from that sector to make the list. The Consumer Discretionary sector is currently the most popular on the “least popular” list (more than 20% sold short), as six of the 12 names are from the sector.”

Source: Bespoke, April 27, 2009.

Bespoke: Largest companies in the world
“… below we highlight the 25 largest companies in the world. For each company, we provide its country, sector, price (local currency), year to date change, and market cap in dollars. As shown, Exxon Mobil (XOM) is the biggest company in the world and the only one worth more than $300 billion. PetroChina ranks second and is the only other company worth more than $200 billion. The Industrial and Commercial Bank of China is the world’s third largest company, giving China two of the biggest three. Wal-Mart and Microsoft round out the top five. The United States still dominates the list with 12 of the 25 spots. China ranks second with four spots. General Electric used to be the biggest company in the world, but it has slipped all the way down to the 18th spot. Google (GOOG) is also on the list at number 22.”

Source: Bespoke, April 27, 2009.

Bespoke: Country ETFs overbought
“… we highlight below various country ETFs and their current trading levels. An ETF becomes overbought when it trades more than one standard deviation above its 50-day moving average. The % overbought number is how far the ETF is currently above this initial overbought level. This is the first time in quite awhile that all country ETFs have been overbought at the same time, and it’s a sign that markets around the world are extended from their normal trading ranges. The Taiwan ETF is the most overbought at 13.32%, followed by Italy (8.34%), India (7.92%), Brazil (7.14%), Sweden (7.08%), and South Korea (7.08%). Japan is the least overbought at 1.4%.”

Source: Bespoke, April 30, 2009.

The Wall Street Journal: The IMF’s gold gambit
“The fund’s misuse of bullion reserves is crucial to its plan to use the financial crisis to expand its power.

“The International Monetary Fund (IMF) deserves credit, figuratively speaking, for cleverly manipulating the financial troubles of emerging and low-income nations to procure a fresh infusion of capital for itself. But its tactics at this month’s G-20 summit in London - where President Barack Obama signed off on tripling the IMF’s lending resources - should not hoodwink anyone, least of all American taxpayers who pay the largest share of IMF expenses.

“Lost in the lofty talk about putting the IMF in the center of world economic recovery is the fact that the organization has been quietly attempting to ensure its own survival by seeking permission to engage in gold sales …

“The US should not replenish the coffers of a multilateral bureaucracy that quite literally lost its reason for being on August 15, 1971 - the day President Richard Nixon ‘closed the gold window’ and brought an end to the Bretton Woods agreement, which allowed countries to convert their dollar holdings, via the IMF, into gold at a fixed price. Instead, Congress should call for the IMF’s dismantlement and restitution of its assets.

“The most solid asset owned by the IMF, purely as a legacy of its original incarnation, is gold. The IMF holds 3,217 metric tons (103.4 million ounces) of gold, which makes it the world’s third largest official holder. Actually, it’s a misnomer to say the IMF ‘owns’ the gold since the bullion belongs, according to the IMF articles of agreement adopted at Bretton Woods in 1944, to its member nations.”

Source: Judy Shelton, The Wall Street Journal, April 28, 2009.

Julian Jessop (Capital Economics): China’s gold reserves jump
“The revelation of a jump in China’s official gold holdings to 1,054 metric tonnes is supporting gold prices and reviving fears that reserve diversification will undermine other dollar assets, notably US Treasuries.

“But the news may be less significant than some people think, says Julian Jessop, chief international economist at Capital Economics.

“‘Gold was in a bull market from 2002 to 2008, so it is no great surprise that China was buying over this period. The reported amounts are also small compared to the production from China’s own mines, official sales by other central banks, and the record purchases by private investors via exchange traded funds,’ he notes.

“‘What’s more, the fact that China has already increased its gold holdings by 75% does not necessarily mean further purchases and higher prices in the future. It would make more sense to announce an increase in gold holdings once a buying programme has been completed, rather than part way through.

“‘We are also sceptical that the increase in gold holdings tells us anything about the plans for purchases of other assets. Even if all of the additional gold were bought last year at the average 2008 price of $872 an ounce, the total cost would only be around $12.6 billion. This is just a drop in the ocean compared with the total increase in China’s official reserve assets last year of $419 billion.’”

Source: Julian Jessop, Capital Economics (via Financial Times), April 27, 2009.

The Wall Street Journal: Understanding swine flu
“The trouble starts in poor countries where too many people live in proximity to pigs and poultry.

“Unfortunately, conditions in many countries are conducive to the emergence of such new infectious agents, especially flu viruses, which mutate rapidly and inventively. Intensive animal husbandry procedures that place poultry and swine in close proximity to humans, combined with unsanitary conditions, poverty and grossly inadequate public-health infrastructure of all kinds - all of which exist in Mexico, as well as much of Asia and Africa - make it unlikely that a pandemic can be prevented or contained at the source …

“Pigs are uniquely susceptible to infection with flu viruses of mammalian and avian origin. This is of concern for a couple of reasons. First, pigs can serve as intermediaries in the transmission of flu viruses from birds to people. And when avian viruses infect pigs, they adapt and become more efficient at infecting mammals - which makes them more easily transmitted and dangerous to humans.

“Second, pigs can serve as hosts in which two (or more) influenza viruses infecting an animal simultaneously can undergo ‘genetic reassortment’, a process in which pieces of viral RNA (the virus’s genetic material, similar to DNA) are shuffled and exchanged, creating a new organism. The influenza viruses responsible for the world-wide 1957 and 1968 flu pandemics - which killed about 70,000 and 34,000, respectively, in the US - were such viruses, containing genes from both human and avian viruses …

“Because they have been stockpiled for use in the event of an avian flu pandemic, large amounts of the antiflu drugs Tamiflu and Relenza are available. However, they must be administered during the first couple of days after symptoms begin to be an effective treatment. They can also prevent the onset of the disease if administered in adequate doses prior to exposure. The danger of using antiflu drugs in poor countries with inadequate public-health facilities such as Mexico is that they may be administered improperly and in suboptimal doses, which would promote viral resistance and intensify an outbreak.

“If the swine flu outbreak becomes a pandemic with a high rate of severe complications (such as pneumonia) and death, we will need to be smart, nimble and flexible. That will involve triage on many levels - including decisions about which patients are likely to benefit from scarce commodities such as drugs and ventilators - as well as ‘social engineering’ determinations about issues such as mandatory quarantine, the canceling of public events, shutting airports and closing our southern border. Let’s hope it doesn’t come to that.”

Source: Dr Henry Miller, The Wall Street Journal, April 29, 2009.

John Authers (Financial Times): Swine flu
“The outbreak of swine fly has barely dented stocks in Mexico, which plainly stands at risk of severe economic damage from a disease that has been linked to the deaths of almost 200 of its citizens.”

Click here for the article.

Source: John Authers, Financial Times, April 30, 2009.

ETF Trends: Three ETF sectors that could feel impact from swine flu
“The swine flu epidemic, which could possibly turn into a pandemic, may not just be a hit to our health. It could also be a major hit to stock markets and related shares of exchange traded funds (ETFs).

“Many are worried about the economic effects of swine flu as it interrupts day-to-day living, travel and purchases. Some countries are already warning their citizens against travel to Mexico and the United States.

“Drug Makers. One beneficiary could be the pharmaceutical industry, though. Certain makers of drugs and vaccines may be caught off guard to the recent epidemic of swine flu, because of commercial orders getting impacted by government stockpile orders from the late avian flu threat.

“Retail & Consumer. Sam Stoval talked to Steve Chiotakis on MarketPlace and reports that the broader economic drawbacks of the swine flu hit upon trade and travel as well as day-to-day purchases. A short-term situation aside, if the outbreak were to remain out of control, consumers are likely to stay at home, which would effect gasoline, oil and energy consumption. Purchases on food and leisure items would dwindle, as well.

“Airlines. In an effort to secure borders and keep the swine flu contained, the United States is now screening for the swine flu at the Mexican border, and Europe’s Health Commissioner urged Europeans to avoid traveling to the United States or Mexico. Could people hold off on travel altogether because of this? According to Richard Aboulafia on MarketPlace, at least a half dozen airlines, including American, United and Continental, are waiving penalties for changing flights to or from Mexico.

“Upon arrival into the United States from an international flight, expect to be screened in customs, including having your temperature taken. Russia, Taiwan and China are all preparing to quarantine anyone with flu-like symptoms.”

Source: Tom Lydon, ETF Trends, April 27, 2009.

CEP News: UK consumer confidence up for the third straight month
“Confidence among UK consumers rose for the third straight month in April, according to the latest consumer survey report from the GFK Group.

“According to the report, consumer confidence in the UK improved slightly more than expected in April rising three points to -27. Economists had been expecting a -28 reading.

“The UK consumer confidence survey results were compiled from the responses of approximately 2,000 individuals over the age of 16. The survey was conducted on behalf of the European Commission.”

Source: Erik Kevin Franco, CEP News, April 29, 2009.

CEP News: UK Hometrack Housing Survey moderates slightly in April
“The UK housing sector’s decline abated slightly in April, according to the country’s Hometrack Housing Survey, released just after midnight on Monday (Sunday night EDT).

“On a monthly basis, the survey declined by 0.3%. This was less severe than march’s level, which fell an unrevised 0.6%. Hometrack announced that this was the slowest rate of month-over-monthly declines in a year.

“Similarly, the survey’s 10.1% annualized fall was slightly less severe than the prior month’s decline of 10.3%, a level that was also unrevised.”

Source: CEP News, April 26, 2009.

CEP News: Japan’s economy to contract 3.1% in 2009, BOJ says
“The Bank of Japan has revised down its economic growth forecasts for the 2009 fiscal year and projects corporate profits and household consumption to weaken further in the coming quarters.

“In its semi-annual economic outlook published on Thursday, the BOJ said it expects the economy to contract 3.1% in the 2009 fiscal year, down from the 2.0% decline previously forecast.

“Earlier in the day, the BOJ’s Policy Board voted unanimously to keep the overnight call rate targeted at 0.1%.

“According to the central bank, domestic private consumption will continue to deteriorate. However, the pace in export and production declines will ease as inventories are adjusted both domestically and abroad.

“‘Therefore, the pace of deterioration in economic conditions will likely moderate gradually and start to level out,’ the central bank said.

“The BOJ also noted that corporate financing conditions had begun to loosen compared to the latter part of 2008 due to improved issuing conditions in both the corporate bond and commercial paper markets.

“‘However, given the deterioration in corporate profits, the situation as a whole remains severe as an increasing number of firms are reporting that their financial positions are weak and lending attitudes of financial institutions are tight,’ the bank added.

“Looking ahead to the 2010 fiscal year, which begins on April 1, 2010, the BOJ projects that the economy will recover to a growth rate of 1.2%, with estimates out of the Policy Board ranging from +0.8% to +1.5%.”

Source: Todd Wailoo, CEP News, April 30, 2009.

CEP News: Japanese manufacturing PMI jumps in April
“Manufacturing conditions in Japan improved in April, according to a report from Nomura and the JMMA on Thursday.

“According to a report, the country’s manufacturing PMI advanced to 41.4 from 33.8 in March.

“Although the index remains below the 50 level, which indicates a contracting industrial sector, the figure is well above the 29.6 reading recorded in January.”

Source: Erik Kevin Franco, CEP News, April 29, 2009.

James Pressler (Northern Trust): Japan - deeper into the red
“At this early stage in the global recession, most of the industrialized economies are still only speculating when production will turn around or at least stop contracting so rapidly. The US consensus is that growth will return by the end of ‘09, while Europe remains a mixed bag of hard landings and slow recoveries. Today, Japan’s government released a revision of its own outlook, and placed itself amongst the worst-off of the G-7 countries.

“In the government’s latest biannual economic outlook, the fiscal year just ended in March experienced a 3.1% contraction in GDP, while the current FY2009-2010 will experience a sharper slide of 3.3%. The latter figure is a dramatic revision from October’s forecast of 0% growth, and is somewhat more pessimistic than recent statements from Tokyo suggesting a recovery starting in Q1 2010.

“Expectations for exports and business investment were also slashed across the board, with the only positive figure coming from minor growth in public consumption - courtesy of the fiscal stimulus package that came into effect at the beginning of the month. In short, the government has conceded that it will not be able to export its way out of this recession, and eight quarters of contracting GDP (starting in Q2 2008) might even be a little optimistic.

“However, something good may yet come out of all of this - at least for the ruling LDP. PM Taro Aso and his party have not surprisingly taken a beating in the opinion polls over the past six months, and with general elections due this year there was every likelihood that this icon of Japan’s government would be run out of Tokyo entirely. But, a scandal within the opposition Democratic Party (DP) has offered a brief window of opportunity and it appears Aso is pouncing on it. To counter the particularly negative themes of this latest outlook, Aso’s Cabinet is proposing another fiscal stimulus package for FY2010-11. Furthermore, his government submitted a supplementary stimulus package worth ¥15.4 trillion ($159 billion) and all but challenged the opposition-controlled upper house to stall the legislation and force him to call an early election. After being hobbled by scandal, Aso’s dare forces the DP to either roll the dice at the ballot box or cede the economic momentum back to the LDP.”

Source: James Pressler, Northern Trust - Daily Global Commentary, April 27, 2009.

Financial Times: Swiss seek tax treaty trade-off
“Swiss and US officials will meet in Bern on Tuesday for their first talks on a new tax treaty after Switzerland asked the Obama administration to drop a legal case involving the Swiss bank UBS in exchange for the accord.

“The talks were announced earlier this month.

“Tim Geithner, US Treasury secretary, this weekend met with Hans-Rudolf Merz, Swiss finance minister and head of state this year under the country’s rotating presidency.

“Mr Merz told Mr Geithner that an aggressive investigation by US tax authorities into accounts at UBS could make it very difficult to secure approval for a new tax treaty in the Swiss parliament and in a referendum.

“‘US officials told the Financial Times that Mr Geithner did not dismiss the importance of appropriately resolving the matter,’ one said.

“However, the official added: ‘Tax treaty negotiations will be conducted by the Treasury Department with input from the Department of Justice and the Internal Revenue Service. All pending enforcement decisions will be made by the Department of Justice and the IRS.’

“The US response suggests it might be possible for the two sides to strike a deal, though the official added: ‘Both President Obama and Secretary Geithner have made very clear their commitment to tackling tax shelters and other efforts to abuse US tax laws.’”

Source: Haig Simonian and Krishna Guha, Financial Times, April 26, 2009.

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Video Digest: Investors “look past the valley”

Friday, May 1st, 2009

As the financial markets await the bank stress test results in the US, a potpourri of video clips was produced. Although the discussions were varied, a golden thread prevailed: the duration of the financial crisis and the economic recession, and whether stock markets have hit bottom.

Needless to say, the plight of the beleaguered automakers and fears of an escalation in the number of swine flu cases also captured the attention of battle-weary investors. However, the S&P 500 Index rallied to a gain of 9.4% for April - representing its best monthly advance since March 2000 - and US Treasury yields jumped to levels last seen in November as investors “looked past the valley”.

Commentators featured on camera in this post include Simon Johnson, Michael Perino, Jim Walker, Steve Forbes, Christopher Whalen, Joseph Stiglitz, Marc Faber, Bill Ackman, Paul Kasriel, James Galbraith, Paul Volcker, Sheila Bair, Mark Mobius, Robin Griffiths and Jim Rogers.

The selection kicks off with a recession singalong - a Walt Handelsman animation entitled “Worst Slide Story”, and concludes with an interesting visualization of President Obama’s planned budget cuts.

Walt Handelsman: Animation - recession singalong!
“The classic ‘West Side Story’ is enjoying its Broadway revival. Now comes the remix, ‘Worst Slide Story’.”

Source: Walt Handelsman, Newsday, April 13, 2009.

CNBC: How swine flu spreads in humans
“A deadly outbreak of swine flu has killed more than 100 people in Mexico, and infections have been reported around the world. Malik Peiris, professor at University of Hong Kong, spoke to CNBC about how the flu can spread.”

Source: CNBC, April 27, 2009.

Bloomberg: Jim Rogers says flu may be “disaster in weak economy”
“Jim Rogers, chairman of Rogers Holdings, talks with Bloomberg’s Betty Liu and Peter Cook about the potential impact of swine flu on the global economy.

Rogers, author of ‘A Gift to My Children’, also discusses the restructuring efforts at US automakers, ‘short’ strategy and investment opportunities in commodities. He speaks from Singapore.”

Source: Bloomberg, April 28, 2009.

Bill Moyers (PBS): Conversation with Simon Johnson and Michael Perino
“Bill Moyers speaks with economist Simon Johnson and Ferdinand Pecora biographer and legal scholar Michael Perino. Johnson is a former chief economist of the International Monetary Fund (IMF) and a professor at MIT Sloan School of Management, and Perino is a professor of law at St. John’s University and has been an advisor to the Securities and Exchange Commission.”

Source: Bill Moyers Journal, PBS, April 24, 2009.

CNBC: Financial crisis still has long way to go
“Hold on to your horses as the global financial crisis still has a long way to go, says Jim Walker, founder & CEO at Asianomics. He tells CNBC’s Martin Soong that we are probably in the horizontal part of a L-shaped recession.”

Source: CNBC, April 29, 2009.

Fox Business: Forbes - recovery hinges on credit market

Source: Fox Business, April 27, 2009.

CNBC: Christopher Whalen on financial fallout from stress tests
“What the stress test results will mean for financials going forward, with Paul Miller, FBR Capital Markets, and Christopher Whalen, Institutional Risk Analytics.”

Source: CNBC, April 27, 2009.

The Wall Street Journal: Can America handle the truth?
“Evan Newmark and Dennis Berman discuss whether Americans can swallow ‘the truth’, especially in relation to the results of the bank-stress tests.”

Source: The Wall Street Journal, April 28, 2008.

Credit Suisse: Joseph Stiglitz calls for US bank nationalization
“Leading economist and Nobel Laureate Joseph Stiglitz advocated the nationalization of troubled US banks and raised concerns about the American government’s efforts to stimulate the economy, in the keynote economic session at the Credit Suisse Asian Investment Conference.

“Addressing a record crowd of delegates, Stiglitz said the current global downturn had been worse than he had expected. ‘The one ray of optimism in this really dark cloud is that China and India look like they’re going to continue to grow, although somewhat slower than they have been growing,’ he said.

“Stiglitz said the US will play a critical role in the recovery of the world economy, and that the key issues would be consumption growth - which until now had been led by ‘unbridled borrowing - and the restructuring of the financial institutions. ‘(Americans were told) if you don’t have income, don’t let it bother you, keep spending, and we lent them money and they kept borrowing and the debts grew,’ he said.”

Source: Credit Suisse, April 17, 2009.

The Wall Street Journal: Was John Thain a scapegoat?
“In an interview with WSJ’s Susanne Craig, former Merrill Lynch Chief Executive John Thain told her he was unfairly scapegoated for the growing problems of Bank of America.”

Source: The Wall Street Journal, April 27, 2009.

CNBC: GM’s third restructuring plan
“General Motors CEO Fritz Henderson discusses the automaker’s third restructuring plan since December, with CNBC’s Phil Lebeau.”

Source: CNBC, April 27, 2009.

Financial Times: Wilbur Ross on Detroit and the economy
“Wilbur Ross, chief executive and chairman of WL Ross & Co, talks to Chrystia Freeland, FT’s US managing editor, about the possible bankruptcy of GM, the fate of the auto suppliers and the future ownership structure of GM. He also discusses the treatment of bank bondholders, the US government’s handling of the economic crisis and the prospects for recovery this year.”

Source: Financial Times, April 30, 2009.

Bloomberg: Faber says GM’s debt offering right way to restructuring
“Marc Faber, publisher of the Gloom, Boom and Doom report, talks about General Motors Corp’s offer to exchange $27 billion of bondholder claims for equity. Faber also discusses the Federal Reserve’s money printing efforts to fight economic crises.”

Source: Bloomberg, April 27, 2009.

CNBC: Global meeting of the minds
“Insight on the world leaders convening in Washington over the weekend for the G-7 meeting, with Dominique Strauss-Khan, IMF managing director, and John Sununu, former senator (R-NH).”

Source: CNBC, April 27, 2009.

Charlie Rose: A conversation about the economy
“A conversation about the economy with Bill Ackman, major investor and hedge fund manager of Pershing Square Capital Management LP, Kate Kelly of The Wall Street Journal, Andrew Ross Sorkin of The New York Times and Joseph Stiglitz, economist and a member of Columbia University faculty.”

Source: Charlie Rose, April 24, 2009.

Paul Kasriel (Northern Trust): Coming out of the downturn
“Paul Kasriel, Northern Trust’s Chief Economist, discusses the current economic climate and the potential impact on market consumption during any recovery.”

Source: Paul Kasriel, Northern Trust, April 30, 2009.

Fox Business: Galbraith - economic strings attached?
“Professor James Galbraith on his concerns about the economic turnaround. He makes four essential points about the expansion yet to come.”

Source: Fox Business, April 29, 2009.

Bloomberg: Volcker - economy leveling off, stimulus not needed
“Former Federal Reserve Chairman Paul Volcker talks with Judy Woodruff about the outlook for the US economy.”

Source: Bloomberg (via YouTube), April 29, 2009.

CNBC: Bair Speaks
“CNBC’s Trish Regan talks about banks and the economy with FDIC Chair Sheila Bair.”

Source: CNBC, April 28, 2009.

CBS: Shrinking necessities
“A new study finds that Americans are downsizing their list of things considered essential. Charles Osgood reports.”

Source: CBS, April 27, 2009.

Barron’s: Big money poll - the long view
“After the worst stretch for stocks in decades, America’s money managers say they’re bullish. But do they really believe it? Based on the results of our latest Big Money poll, the pros are hoping for the best, but … hold on! Aren’t those fresh bear tracks in the mud?

Click here for the article.

Source: Jack Willoughby, Barron’s, April 27, 2009.

Financial Times: Have markets hit bottom?
“Have markets reached a bottom? How the market participants affect the direction of stock markets? Michael Mauboussin, an expert in the wisdom of crowds theories, talks to John Authers about market timing and understanding how different players change sentiment.”

Source: Financial Times, April 28, 2009.

Money Control: Mark Mobius - emerging markets on cusp of next big bull run

Click here for the article.

Source: Money Control, April 27, 2009.

John Authers (Financial Times): Deflating the earnings bubble
“The bad news is that shares are predicting a 50% fall in non-financial companies’ earnings. The good news is that this is already priced in.”

Click here for the article.

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

CNBC: Hugh Hendry - downturn still underway
“The recent rise in stocks and talk about green shoots in the markets are optimistic assumptions, as the world downturn ‘still has a way to run’, Hugh Hendry, CIO at Eclectica, told CNBC.”

Source: CNBC, April 28, 2009.

CNBC: Charts - Asia signals new bull market
“While western stock indexes struggle to rally in an overall bear market, their emerging counterparts are set to enjoy the real thing, Robin Griffiths, technical strategist at Cazenove Capital, told CNBC.”

Source: CNBC, April 27, 2009.

John Authers (Financial Times): Obama’s first 100 days
John Authers puts Obama’s first 100 days into context, looking at equity markets, volatility and overall economic sentiment.”

Click here for the article.

Source: John Authers, Financial Times, April 28, 2009.

YouTube: Obama budget cuts visualization
“How much is the $100 million dollars in budget cuts compared to the federal budget as a whole? This video imagines the budget as $100 in pennies to provide the answer.”

Source: YouTube, April 24, 2009.

Tags: Bill Ackman, Broadway Revival, Christopher Whalen, Deadly Outbreak, Economic Recession, Emerging Markets, ETF, Flu Cases, India, James Galbraith, Jim Rogers, Joseph Stiglitz, Marc Faber, Mark Mobius, Paul Kasriel, Paul Volcker, Robin Griffiths, Sheila Bair, Steve Forbes, Swine Flu, Us Treasury Yields, Walt Handelsman, West Side Story
Posted in Bonds, Commodities, Credit Markets, Emerging Markets, Gold, India, Markets | No Comments »

Roubini Global Economics: 2009 World Economic Outlook

Thursday, April 30th, 2009

By RGE Monitor

Today we present some of the main conclusions of the recently released update to the RGE 2009 Global Economic Outlook.

The global economy is in the middle of a synchronized contraction that will push global growth into negative territory in 2009 for the first time in decades. This will be the worst financial crisis since the Great Depression and the worst global economic downturn in decades. Global trade volumes face their sharpest contractions of the postwar era - trade is expected to contract 12% in 2009 due to the severe and prolonged global demand slump, excess capacity across supply chains and the continued crunch in trade finance.

Many analysts and commentators are pointing out that the second derivative of economic activity is turning positive (i.e. economies are still contracting but a slower rather than accelerated rate) and that green shoots of an economic recovery are blossoming. RGE Monitor’s analysis of the data suggests that the global economic contraction is still in full swing with a very severe, a deep and protracted U-shaped recession. Last year’s economic consensus forecast of a V-shaped short and shallow recession has vanished.

While the rate of economic contraction is slowing compared to the free fall rates of Q4 of 2008 and Q1 of 2009, we are still a long way away from the economic bottom and from a sustained recovery of growth. In particular, in Europe and Japan there is little evidence of a positive second derivative of economic activity.

However, by the end of Q1 2009, there were some signs that the pace of contraction had slowed in many economies especially in the US and China, where policy responses have been more significant and leading indicators in the manufacturing sector may have bottomed before they did in Europe and Japan. However, major economies including all of the G7 will continue to contract throughout 2009, albeit at a slower pace than at the beginning of the year.

Moreover the global recovery might be sluggish at best in 2010 given the overhang of credit losses of financial institutions, lingering credit crunch, need for retrenchment by overstretched and over-indebted households in current account deficit countries and a slow resumption of demand prompted by extensive government stimulus.

Some key elements of RGE Monitor’s outlook include:

• Global economic activity is expected to contract by 1.9% in 2009. Advanced economies are expected to contract 4% in 2009. Japan and the eurozone will suffer the sharpest downturns. US GDP will continue to contract, albeit at a slower pace throughout 2009, with negative growth in every quarter.

• Emerging markets will slow down sharply from the stellar growth rates of the past few years, with the BRIC economies growing at half their 2008 pace.

• Deteriorated terms of trade, slower capital flows and tighter credit will push Latin America into recession from the 4.1% growth of 2008. Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela will all shift to negative territory on a year-over-year basis while smaller countries, like Peru, will experience a significant slowdown.

• Countries in Eastern Europe and the CIS will experience some of the sharpest contractions given the withdrawal of foreign credit and the risk of a severe financial crisis. The reduction in oil revenues and financial stress will contribute to a 5% yoy contraction in Russia and some countries - especially in the Baltics - are at risk of double-digit contractions.

• Export-dependent Asia’s growth will slow significantly to less than 3% in 2009. China will have a hard landing with GDP growth falling to 5.5% while India will slow sharply to 4.3%. All four Asian Tigers (Singapore, Taiwan, South Korea and Hong Kong) as well as Malaysia and Thailand will experience recessions.

• The Middle East and Africa will mark much slower growth, half of their 2008 pace, given the reduction in capital inflows, reduced demand from the US and EU and decline in commodity prices and output. Israel and South Africa will suffer slight contractions.

• The unprecedented fiscal and monetary stimulus may help alleviate the substantial contraction in private demand and reduce the risk of a global L-shaped near-depression. Debt financing may be a challenge for many countries though, especially emerging markets or the most vulnerable Western European economies.

• Job losses during the current global recession might exceed those in recent recession, contributing to increases in defaults and posing additional risks to banks. The unemployment rate in developed countries will reach double-digits by 2010 (as early as mid-2009 in the US) and push more people in developing countries into poverty. Moreover, despite new funding from multilateral institutions, severe contractions will raise the risk of social and political unrest.

• Commodities as a class are likely to come under renewed pressure in 2009 despite some support from production cuts. RGE expects the WTI oil price to average about $40 a barrel in 2009 as demand destruction continues to outweigh crude supply destruction.

Source: RGE Monitor, April 21, 2009.

Tags: BRIC, Economic Activity, Economic Consensus, Economic Contraction, Economic Downturn, Emerging Markets, Excess Capacity,