Archive for the ‘Economy’ Category
Wednesday, April 3rd, 2013
A Man in the Mirror
by William H. Gross, PIMCO
I’m starting with the man in the mirror
I’m asking him to change his ways
And no message could have been any clearer
If you wanna make the world a better place
Take a look at yourself, and then make a…
— Michael Jackson
Am I a great investor? No, not yet. To paraphrase Ernest Hemingway’s “Jake” in The Sun Also Rises, “wouldn’t it be pretty to think so?” But the thinking so and the reality are often miles apart. When looking in the mirror, the average human sees a six-plus or a seven reflection on a scale of one to ten. The big nose or weak chin is masked by brighter eyes or near picture perfect teeth. And when the public is consulted, the vocal compliments as opposed to the near silent/ whispered critiques are taken as a supermajority vote for good looks. So it is with investing, or any career that is exposed to the public eye. The brickbats come via the blogs and ambitious competitors, but the roses dominate one’s mental and even physical scrapbook. In addition to hope, it is how we survive day-to-day. We look at the man or woman in the mirror and see an image that is as distorted from reality as the one in a circus fun zone.
Yet at first blush, there is a partial saving grace in the money management business. We have numbers. Subjective perceptions aside, we have total return and alpha histories that purport to show how much better an individual or a firm has been than the competition, or if not, what an excellent return relative to inflation, or if not, what a generous amount of wealth creation over and above cash … the comparisons are seemingly endless yet the conclusions nearly always positive, rendering the “saving grace” almost meaningless: everyone in their own mind is at least a six-plus or a seven, and if not for the most recent year, then over the last three, five, or 10 years. Investors thrive on the numbers and turn them in their favor when observing their reflections. That first blush becomes a permanently rosy complexion with Snow White cheeks.
The investing public is often similarly deceived. Consultants warn against going with the flow, selecting a firm or an individual based upon recent experience, but the reality is generally otherwise. Three straight flips of the coin to “heads” produces a buzz in the crowd for another “heads,” despite the obvious 50/50 probabilities, as do 13 straight years of outperforming the S&P 500 followed by … Well, you get my point. The Financial Times just published a study confirming that a significant majority of computer simulated monkeys beat the stock market between 1968 and 2011 – good looking monkeys that is.
In questioning initially whether I am a great investor, I open the door to question whether other similarly esteemed public icons like Bill Miller are as well. It seems, perhaps, that the longer and longer you keep at it in this business the more and more time you have to expose your Achilles heel – wherever and whatever that might be. Ex-Fidelity mutual fund manager Peter Lynch was certainly brilliant in one respect: he knew to get out when the gettin’ was good. How his “buy what you know best” philosophy would have survived the dot-coms or the Lehman/subprime bust is another question.
So time and longevity must be a critical consideration in any objective confirmation of “greatness” in this business. 10 years, 20 years, 30 years? How many coins do you have to flip before a string of heads begins to suggest that it must be a two-headed coin, loaded with some philosophical/commonsensical bias that places the long-term odds clearly in a firm’s or an individual’s favor? I must tell you, after 40 rather successful years, I still don’t know if I or PIMCO qualifies. I don’t know if anyone, including investing’s most esteemed “oracle” Warren Buffett, does, and here’s why.
Investing and the success at it are predominately viewed on a cyclical or even a secular basis, yet even that longer term time frame may be too short. Whether a tops-down or bottoms-up investor in bonds, stocks, or private equity, the standard analysis tends to judge an investor or his firm on the basis of how the bullish or bearish aspects of the cycle were managed. Go to cash at the right time? Buy growth stocks at the bottom? Extend duration when yields were peaking? Buy value stocks at the right price? Whatever. If the numbers exhibit rather consistent alpha with lower than average risk and attractive information ratios then the Investing Hall of Fame may be just around the corner. Clearly the ability of the investor to adapt to the market’s “four seasons” should be proof enough that there was something more than luck involved? And if those four seasons span a number of bull/ bear cycles or even several decades, then a confirmation or coronation should take place shortly thereafter! First a market maven, then a wizard, and finally a King. Oh, to be a King.
But let me admit something. There is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne. All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience. Since the early 1970s when the dollar was released from gold and credit began its incredible, liquefying, total return journey to the present day, an investor that took marginal risk, levered it wisely and was conveniently sheltered from periodic bouts of deleveraging or asset withdrawals could, and in some cases, was rewarded with the crown of “greatness.” Perhaps, however, it was the epoch that made the man as opposed to the man that made the epoch.
Authors Dimson, Marsh and Staunton would probably agree. In fact, the title of their book “Triumph of the Optimists” rather cagily describes an epochal 101 years of investment returns – one in which it paid to be an optimist and a risk taker as opposed to a more conservative Scrooge McDuck. Written in 2002, they perhaps correctly surmised however, that the next 101 years were unlikely to be as fortunate because of the unrealistic assumptions that many investors had priced into their markets. And all of this before QE and 0% interest rates! In any case, their point – and mine as well – is that different epochs produce different returns and fresh coronations as well.
I have always been a marginal or what I would call a measured risk taker; decently good at interest rate calls and perhaps decently better at promoting that image, but a risk taker at the margin. It didn’t work too well for a few months in 2011, nor in selected years over the past four decades, but because credit was almost always expanding, almost always fertilizing capitalism with its risk-taking bias, then PIMCO prospered as well. On a somewhat technical basis, my/our firm’s tendency to sell volatility and earn “carry” in a number of forms – outright through options and futures, in the mortgage market via prepayment risk, and on the curve via bullets and roll down as opposed to barbells with substandard carry – has been rewarded over long periods of time. When volatility has increased measurably (1979-1981, 1998, 2008), we have been fortunate enough to have either seen the future as it approached, or been just marginally overweighted from a “carry” standpoint so that we survived the dunking, whereas other firms did not.
My point is this: PIMCO’s epoch, Berkshire Hathaway’s epoch, Peter Lynch’s epoch, all occurred or have occurred within an epoch of credit expansion – a period where those that reached for carry, that sold volatility, that tilted towards yield and more credit risk, or that were sheltered either structurally or reputationally from withdrawals and delevering (Buffett) that clipped competitors at just the wrong time – succeeded. Yet all of these epochs were perhaps just that – epochs. What if an epoch changes? What if perpetual credit expansion and its fertilization of asset prices and returns are substantially altered? What if zero-bound interest rates define the end of a total return epoch that began in the 1970s, accelerated in 1981 and has come to a mathematical dead-end for bonds in 2012/2013 and commonsensically for other conjoined asset classes as well? What if a future epoch favors lower than index carry or continual bouts of 2008 Lehmanesque volatility, or encompasses a period of global geopolitical confrontation with a quest for scarce and scarcer resources such as oil, water, or simply food as suggested by Jeremy Grantham? What if the effects of global “climate change or perhaps aging demographics,” substantially alter the rather fertile petri dish of capitalistic expansion and endorsement? What if quantitative easing policies eventually collapse instead of elevate asset prices? What if there is a future that demands that an investor – a seemingly great investor – change course, or at least learn new tricks? Ah, now, that would be a test of greatness: the ability to adapt to a new epoch. The problem with the Buffetts, the Fusses, the Granthams, the Marks, the Dalios, the Gabellis, the Coopermans, and the Grosses of the world is that they’ll likely never find out. Epochs can and likely will outlast them. But then one never knows what time has in store for each of us, or what any of us will do in the spans of time.
What I do know, is that, like Michael Jackson sang in his brilliant, but all too short lifetime, I am and will continue to look at the man in the mirror. PIMCO, Gross, El-Erian? – yes, we’re lookin’ good – in this epoch. If there’s a different one coming though, to make our and your world a better place, we might need to look in the mirror and make a Chaaaaaaaange … Depends on what we see, I suppose. We will keep you informed.
Man in the Mirror Speed Read
- Investors should be judged on their ability to adapt to different epochs, not cycles. An epoch may be 40-50 years in time, perhaps longer.
- Bill Miller may in fact be a great investor, but he’ll need 5 or 6 more straight “heads” in a future epoch to confirm it. Peter Lynch is a “party pooper.” Warren is the Oracle, but if an epoch changes will he and others like him be around to adapt to it?
- No matter how self-indulgent you think this IO is, I just looked in the mirror and saw at least a 7. You must be blind!
William H. Gross
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material contains the current opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
Saturday, March 30th, 2013
The Economy and Bond Market Radar (April 1, 2013)
Treasury yields fell for the third week in a row following continued uncertainty in Europe, even though a revised plan for Cyprus was put in place and banks reopened on Thursday to relative calm. Economic data was generally weaker than expected, which also likely played a role in sending yields lower. A good example is consumer confidence which came in well below estimates and somewhat surprisingly has just bounced around in a range for more than a year. Beginning-of-the-year tax increases and the sequestration continue to weigh on consumer confidence.
- Europe avoided a larger crisis by coming to a resolution on the Cyprus banking system, but the process does not instill a lot of confidence.
- The Case-Shiller 20-city price index rose 8.1 percent versus a year ago in January. Signs that the housing market continues to recover are very supportive of continued economic expansion.
- Durable goods orders rose 5.7 percent in February on a spike in aircraft orders.
- Consumer confidence fell sharply in March as the economy lacks alacrity.
- Eurozone economic sentiment also fell in March after seeing steady improvement in recent months.
- Initial jobless claims rose to 357,000 this week, reversing a recent trend of better numbers.
- The Fed continues to remain committed to an extremely accommodative policy.
- Key global central bankers are still in easing mode such as the European Central Bank (ECB), Bank of England and the Bank of Japan. The Bank of Japan in particular appears willing to implement additional monetary policy easing in the near future.
- The economy appears to be gaining momentum. The risk for bondholders is that this trend continues and bonds sell off.
- Inflation in some corners of the globe is getting the attention of policy makers and may be an early indicator for the rest of the world.
Monday, April 25th, 2011
QE2 is going to go down as one of the worst monetary policy initiatives in the history of the modern Federal Reserve era. On almost any metric applied, QE2 ends up not only falling well short of its proposed goals, but actually turns certain metrics like GDP growth negative compared with the prior quarter, and heading in the wrong direction.
Costs Eat into Corporate Profits = No Hiring
Analysts all over Wall Street are starting to revise their 2nd quarter GDP forecasts down, and some like Goldman Sachs have made several downward revisions as higher input costs due to a weak dollar are creating an additional burden on businesses and consumers and thus slowing economic growth.
A weak dollar (Fig. 1) to a point can help exports, but an extremely weak dollar which in combination with QE2 liquidity juicing up commodities even further, turns out to be a net negative on the economy, and risks sending the economy into another recession.
The reason for this is if businesses are having to eat higher input costs, and start to have lower margins, guess what? They start cutting costs again, and that means either stagnant employment practices or workforce cuts in the future. This would start sending the employment figures in the opposite direction, and negate much of the recent progress made over the last year.
Increase Cost of Living = Consumer Pullback
These higher commodity prices negatively affect consumers as well because they have to apply more of their income to food and energy needs, which means they have less discretionary income to spend for entertainment, retail shopping, vacations, traveling, and discretionary consumption which infuses the economy and creates jobs in the overall economy.
And since the US is largely a consuming nation, if the consumer pulls back, then businesses are going to pull back as well. This linkage of events does not bode well for employment growth, and this shows how rising input costs not only hurt one of the fed`s mandates for price stability, but can also have a negative impact on their other mandate which is to increase employment.
Increase Consumer Debt…& Defaults
There is another angle we saw back in2008 with these same level of gas prices. Namely, consumers were feeling pinched by the jump in costs for food and energy (see charts below), so they started filling out credit card applications, and charging up their credit cards in order to pay for the additional costs to their weekly and monthly budgets for food and energy. In short, the higher costs for these items resulted in more debt for consumers.
This means that the recent gains of consumers paying off their debts, and having more money to spend at retailers over the past year will start to reverse as consumers pay a higher percentage of their monthly budget in finance costs. The real damage starts to add up as consumers start to default on their credit cards as the high food and energy costs continue to be financed on credit cards until the consumer hits the breaking point, and just defaults.
We saw a lot of this in 2008, and this is where we are heading again unless commodity prices start to come down in a rapid fashion. There are a large group of consumers whose monthly budget doesn`t allow for a 30% increase in gasoline prices at the pump, or a 10% rise in food costs at the grocery store. So they just pile up debt until they max out their credit cards.
Dominos to Credit Card Issuers
These increases in credit card defaults hurt businesses like banks and credit card firms as they have to write off more accounts, and thus their margins start to get squeezed. This means additional contractionary effects as they respond by cutting costs, and you can readily see how this starts to become a vicious deflationary cycle.
Deflation by High Commodity Prices
This is why high commodity prices are actually deflationary in the long run. Something the fed should think about the next time they embark on a dollar weakening campaign, whether intended or not QE2 has been a dollar weakening campaign.
And for those of you who still do not understand the chain of events, and how the Federal Reserve is responsible in large part for higher commodity prices here is the chain of events.
- The Fed undertakes QE2 Initiative – States goal to raise asset prices
- Assets trade as a group: Equities, Silver, Gold, Oil, Gas, Corn, Soybeans
- The US Dollar is used as a carry trade with such low fed funds rate (0-.25%)
- The Fed encourages investors to take more risk: Go out of safe assets like bonds, and go into riskier assets like commodities and stocks.
- When traders take on more risk, they use more leverage-This means shorting the dollar, as part of the carry trade like a funding bank, to use these additional funds (leverage) to invest in risk assets like Gold, Silver, Oil and Dow Stocks.
- The trade starts to work, reinvest profits to buy more risk assets.
- Strong Trends emerge, attracting other traders looking to capitalize on trending markets.
- Technical Analysis confirms the validity of the trade –The trade becomes self-reinforcing
- The dollar is shorted more for leverage, other currencies strengthen against the dollar
- Dovish Fed talk serves to reinforce the trade further, dollar weakens more.
- OH NO! The US Dollar is falling apart, fear spreads: Investors really buy Commodities as an inflation hedge.
- Other countries like China start worrying about a falling US Dollar: They hedge by investing in Commodities.
- Higher Commodities = Higher Input Costs for Businesses and Consumers
- Results in Lower Business Margins and Less Consumer Discretionary Income
- Higher costs, lower profits, less consumption, less goods being sold and produced
- Lower GDP Growth Rate as a result of QE2 once the US Dollar reaches critical level where commodity prices rise to the breaking point where businesses and consumers pull back.
- QE2 Actually damaging the economy right now.
Currency Crisis Looming
So you ask, and I am sure this is the Fed`s thinking on this matter. Well, what can just another two months of QE2 do to hurt the economy? It is almost over anyway. Let`s just continue it through to the end. Well, it is that very thinking that has investors and foreign governments concerned about the future and stability of the US Dollar.
A lot of countries and investors rely on the dollar as a store of value for their assets because it has the Reserve Currency Status. It can be weak, but if global investors start to have legitimate doubts about the safety of their assets parked and backed by the US Dollar, then we have a much bigger problem than just a slow recovery. We could end up in a currency crisis that takes down the entire global economy, thus sending us right back to where we were in the depths of the financial crisis.
Silver Market Signals Irrational Investing
But that is more macro analysis, and things would really have to spiral out of control to get to that stage, but it is possible, and that is why people are worried enough to buy physical Silver at $50 an ounce when it very well could be worth less than $20 an ounce once the rate tightening cycle begins. It makes no rational investing sense to buy Physical Silver during a low rate environment, because the investor will be stuck with a well under water investment in a 5% rate environment, unless there are legitimate concerns about the long term stability and security of the currency.
The time to buy Physical Silver was when the Fed Funds Rate was 5.25%, and the time to sell Physical Silver is now during the last vestiges of an equivalent Zero Fed Funds Rate. This irrational investing in the Silver Market, based upon concerns regarding the long term stability and security of the US Dollar, is one of the unintended consequences of the QE2 Initiative, and from a macro standpoint should raise a few eyebrows within the Federal Reserve.
Micro & Macro Effects
The Federal Reserve should weigh not just the Micro benefits to a policy initiative, but also the macro effects as well. Furthermore, there are many unintended consequences and macro concerns created by the QE2 Initiative that merit careful study to avoid some of these same mistakes being repeated in the future by monetary policy initiatives.
However, the more practical concern for the Fed is this–If they leave QE2 to finish out on course, and attach some dovish language to boot, investors will add another 50 cents to the price of gasoline at the pump, food prices will go up another 3 to 4%. After all, they have to pass on higher transportation costs to consumers. Businesses can expect higher commodity input costs for the next two months. The US Dollar will get even weaker, and GDP will be affected even more, as two additional months of damage will be pushing through the US Economy and Supply Chains. So this could result in the third quarter GDP be even more significantly revised down by economists.
Benefits of Ending QE2 Early
This is all to be juxtaposed with the alternative of ending QE2 early, which would lead to the US Dollar strengthening, and send a strong message to speculators, driving them out of commodities, and immediately reducing input costs for businesses and consumers. This cycle becomes reinforcing which leads to a further lowering in commodity prices as funds flow out of this asset class, thus providing an instant and even greater stimulus for the economy.
In essence, the ending of QE2 this month, serves to jumpstart GDP Growth for the remaining two months of the 2nd quarter, which will then build some momentum going into the third quarter, and should boost 3rd quarter GDP growth, and set the stage for a robust 4th quarter GDP number.
Significant Two Months
The momentum is the key; you either have an accelerating economy or a decelerating economy. And right now due to the effects of QE2 we are starting to decelerate, and another two months of deceleration makes it twice as hard to restart the acceleration process. So two months could make a huge difference in either creating or destroying momentum, and setting the growth rate pace for the remainder of 2011.
The choice is obvious when asking the question regarding would the economy be better off without QE2 for the next two months? It is a resounding yes! Why this is even an issue at this stage seems more to do with the Federal Reserve saving face, than based upon any sound economic analysis of the facts at hand.
Give Consumers a Break
If President Obama wants to address the speculators for raising gasoline prices for consumers, he might want to investigate the real culprit in QE2. The easiest way to give consumers a break at the gas pump would be to end QE2 this month. The price of Oil, priced in Dollars, would drop like a rock as the US Dollar strengthens if QE2 is suddenly stopped, and Gasoline prices also trading opposite a weak dollar would start dropping immediately at the pump as the US Dollar strengthens.
In summation, if President Obama wants cheaper gas prices for consumers over the next two months, then all he has to do is make a call over to the Federal Reserve. I hear they are having a meeting this week and are deliberating over the future of QE2.
Tags: Commodity Prices, Corporate Profits, Discretionary Income, Employment Figures, Employment Growth, Employment Practices, Federal Reserve, Gdp Forecasts, GDP Growth, Gold, Goldman Sachs, Input Costs, Linkage, liquidity, Monetary Policy, Policy Initiatives, Pullback, Quarter Gdp, Recession, Weak Dollar, Wrong Direction
Posted in Economy, Markets | Comments Off
Sunday, April 24th, 2011
Gold Market Cheat Sheet (April 25, 2011)
For the week, spot gold closed at $1,504.13, up $17.43 per ounce, or 1.17 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 3.24 percent. The U.S. Trade-Weighted Dollar Index slid 0.97 percent for the week.
- After S&P lowered its rating outlook on the U.S., the gold price surged early in the week and reached an all-time high of $1,507 per ounce Thursday on a weak jobless claims report.
- The University of Texas Investment Management Company, which manages the endowment for the Texas teacher’s pension fund, has placed 5 percent of its assets in gold bullion.
- What is significant about this purchase is that the buyer has taken delivery of the physical gold into its own custodial accounts versus relying on an intermediary to hold the bullion through a paper claim on its behalf. This represents a purchase of $1 billion of gold bullion and makes a strong statement about the seriousness of pension funds treating precious metals as a legitimate asset class.
- Negotiations for higher electricity prices are nearing conclusion, as Zambia expects to agree on higher electricity prices with mining companies this year in a move that is likely to increase costs for miners within the country, a senior industry official said.
- David Rosenberg, chief economist and strategist at Gluskin Sheff, noted debt-strapped governments are pulling in around 9.5 percent more revenue year-over-year, showing the economy may be getting stronger.
- Conversely this increase in government revenue may be a pick-pocket effect of governments’ having raised sales taxes, unveiled high income surcharges or boosted top marginal rates. This, along with the hammering the consumer has taken from rising food and fuel costs, is absorbing a near 23 percent share of wages and salaries.
- There is chatter in the foreign exchange market that China may do a surprise 10 percent Yuan revaluation and Greece may strike a deal to cut its bonds by 40 percent. It would appear the Chinese government has guided multinational corporations to expect a 5 percent revaluation in the near term, but 10 percent is a big number and would likely support the gold price.
- Earlier this week the Chinese supported the Spanish bond auction. Notably, the eurozone is China’s largest trading partner and it appears they may be more concerned about keeping the euro from collapsing versus a steady decline in the dollar.
- Gold’s decade-long bull run could continue in the next four years, though at a slower pace, with positive inflation risks partially cooled by a shift towards more normal economic conditions, analysts polled by Reuters said. The median forecast of 12 analysts polled in the past two days for the average price in 2015 was $1,700 an ounce. “Gold will be underpinned by sovereign debt in the eurozone, United States and Japan, as well as the dollar weakness and further reserves diversification by central banks,” said Robin Bhar, an analyst at Credit Agricole.
- A U.S. law threatens natural treasures including Grand Canyon National Park as mining claims on public lands proliferate, an environmental group said. The 1872 Mining Law, signed by President Ulysses S. Grant, allows mining companies, including foreign-owned ones, to take about $1 billion a year in gold and other metals from public lands without paying a royalty, according to a report by the nonprofit Pew Environment Group. Non-governmental organizations have been very successful in aligning themselves with state and federal regulators that see creating new rules as a means to greater job security.
- Nevada mining operations may soon face three tiers of regulations and legislation aimed at eliminating constitutional caps on net proceeds of mines taxation and clamping down on net proceeds tax deductions. Senate Majority Leader Steven Horsford argued that state regulators need to close mining tax loopholes as soon as possible “so the state gets every dollar it’s entitled to.”
- Jim Rogers, a well respected commodity expert, said “Silver and gold, yes, will be a bubble someday…There’s no question in my mind that all commodities will be a huge bubble someday. But I don’t think that bubble is going to happen in 2011. I think it’s going to be more likely 2017, or 2018…you know, a few years from now. I’m not picking a year, just saying its a few years away.”
Tags: Chief Economist, Custodial Accounts, David Rosenberg, Dollar Index, Electricity Prices, Food And Fuel, Foreign Exchange Market, Gold, Gold Bullion, Gold Equities, Gold Market, Gold Price, Investment Management Company, Marginal Rates, Philadelphia Gold, physical gold, precious metals, Silver Index, Spot Gold, Texas Teacher, Wages And Salaries
Posted in China, Economy, Gold | Comments Off
Monday, January 11th, 2010
Keynote Speech Presented by Nick Barisheff at the Empire Club’s 16th Annual Investment Outlook Luncheon
Thursday January 7, 2010
To download the PDF version of this article, click here.
Good afternoon. As always, it is a privilege to speak at the Empire Club.
Each year for the past three years, I have returned to share perceptions about the precious metals industry and specifically about gold. Generally, this forces me to step back and assess the previous year’s events and then to speculate about what they may indicate for the coming year. Choosing the seminal events this year has been more difficult than usual. Lately the pace of gold-related news has accelerated exponentially with gold’s rising price. While 2009 was an exciting year for gold, setting a new average high of $1,088, 2010 promises to be even more exciting.
In 2009 gold resumed its historical monetary role – as the anti-currency. Therefore, the influences and events that affect its price are not simple commodity supply/demand fundamentals, but the more complex global monetary issues.
To summarize some of the important key events, I thought it would help to separate them into three categories.
First, there are the obvious events-those whose implications for gold are self-evident.
Second, there are the events that require some interpretation and, finally, there are the events that we might call “incipient”. These events and stories are in their early stages of development. They may amount to nothing, or they may develop into tectonic forces that completely disrupt the gold-related financial landscape.
It is more than a year since Wall Street made some very bad bets that resulted in unprecedented losses, losses that were passed on to the American taxpayer. For their incompetence and greed, most of the company heads responsible were rewarded with generous severance packages, or with new jobs commensurate in pay and status to the ones they left behind. Even more surprising, perhaps, is that one year later many of these people continue to advise the US government’s financial policy makers. My associate, trend analyst Richard Karn, likens this particular situation to a group of chickens getting together and consulting with the foxes about a problem that is plaguing their community-the rapidly decreasing chicken population. Since the same key figures remain firmly in charge of US fiscal policy, we can assume the status quo will continue until the ship finally hits the iceberg.
So let’s start with the obvious gold events of the past year. It was the first time in 20 years that gold purchases for investment purposes outpaced gold purchases for jewellery demand. However, in terms of significance, central bank buying of gold this past year upstaged all other events. For the first time in over 20 years, central banks became net buyers rather than net sellers of gold. This is a watershed event.
India’s central bank purchase of over 200 tonnes of IMF gold in the fall of 2009 demonstrated that large central banks were willing to pay the market price for gold. This removed the concern that official sector sales could cut short any meaningful rally. Although the central banks have been selling less gold each year lately, the threat of IMF sales had continued to weigh on the market. Russia and China further dispelled this fear with the disclosure that they too have added 130 and 454 tonnes respectively. Several smaller central banks such as those in Sri Lanka and Maritius also added to their gold reserves. Therefore, central bank buying was clearly the significant gold event of 2009 and will likely continue to be in 2010.
The next level of news events had implications that might not have been so obvious at first glance. On October 6, Robert Fisk, a veteran Middle East correspondent writing for the UK’s Independent, published an article entitled “The Demise of the Dollar.” The article described how “Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading.” Although the central banks immediately rejected these rumours, the market treated their denials as a clear admission of guilt and gold broke through year-long resistance at $1,020 an ounce into an entirely new trading range that day.
The Iranian oil bourse, which allows oil sales in several currencies except the US dollar, is another indication that this trend will continue. In addition, the US’s greatest supporter of the petrodollar, Saudi Arabia, announced that it would no longer trade oil futures on the NYMEX. And on October 19 a related event occurred that received almost no mainstream press coverage; in fact, the only mention I could find of this story at first was at Al Jazeera Online. This was an agreement between ten member states in Central and South America and the Caribbean to use the sucre rather than the dollar for intra-regional trade. Venezuela, one of the West’s largest oil suppliers, is also a member of this new alliance.
This trend is significant to gold because, since 1973, the US has been able to accumulate huge deficits thanks to an agreement with OPEC to price oil in dollars exclusively. This system worked until the 2008 financial crisis, which many felt weakened the dollar’s inherent worth beyond repair. The petrodollar experiment, which started in 1971 with the removal of the dollar’s peg to gold and continued in 1973 when the dollar was essentially backed with oil, is coming to an end after only 36 years. However, given the weakness of other currencies and the fact that no other paper currency currently threatens to replace the US dollar, the process may take years to complete. The end of the petrodollar’s hegemony, which is inevitable in my opinion, will have significant implications for gold.
Another event whose implications may require some extrapolation was the move by the Chinese government to encourage and facilitate gold buying by the Chinese public. China watchers know the Chinese have a long-term love for gold. In fact, on December 9, Reuters announced that China had surpassed India as the world’s largest gold buyer, for the first time in recorded history. The Chinese have also demonstrated a strong propensity for saving. With their government making no secret of its displeasure with the US dollar, and with few other safe investment options available, the Chinese public could provide the fuel to move the gold price to new highs. One ounce purchased by each of the 80 million middle-class Chinese would equate to 2,500 tonnes of gold. It is important to remember that during the last gold bull, the Chinese public was unable to participate. This is a story that definitely bears watching.
Finally, in the third category, is the news we might compare to the first spark of a match that either extinguishes uneventfully or ignites a raging, out-of-control forest fire. Most of us in the gold industry have discovered that we ignore these flickers at our own peril. Many of the stories that started as hints or rumours a few years ago are now accepted as fact. The first of these issues we are watching is the imbalance between gold derivatives and paper proxies and the amount of physical gold in existence. This is important because despite its best efforts, Wall Street still cannot print gold.
Since almost all the gold ever mined remains in existence and gold reserves and production estimates are monitored meticulously, such discrepancies will show up faster in the relatively small gold market than they might with other commodities. As Wall Street churns out new gold investment vehicles, people are starting to do the math. If it becomes apparent that financial institutions have sold more paper gold than actually exists in physical form, then the price of paper gold and physical gold could diverge.
This year, many analysts began to apply increased scrutiny to the gold and silver ETFs. In mid-July, hedge fund giant Greenlight Capital announced they were moving assets out of the world’s largest gold ETF – SPDR Gold Shares – and into physical gold. Greenlight is an industry leader whose movements are carefully studied and often emulated. Although Greenlight’s manager, David Einhorn, claimed it was cheaper to own and store physical gold than it was to pay the ETF fees, the fact that a major, industry-leading fund would move to physical bullion set off many alarm bells.
Since ETFs do not actually purchase their assets, there is nothing prohibiting Authorized Participants from contributing baskets of borrowed gold. The amount of borrowed gold held by ETFs is a matter of speculation. With multiple claims on the bullion, ETF investors may suffer unexpected losses under stress conditions when they need their gold the most.
So with these events of 2009 in mind, I am often asked, “How high might the price of gold go?”
Let’s look at some figures.
We know that the US must refinance at least two trillion dollars of debt in 2010. They can raise this money in one of three ways: through the sale of bonds, through increased taxation, or through monetization by the Federal Reserve. Foreign investors showed decreasing appetite for US treasuries in 2009. Rising unemployment along with an aging population makes increased taxation a poor option. Therefore, the US Fed will be forced to monetize the ballooning debt, further eroding confidence in the dollar as the world’s reserve currency.
This will encourage central bankers, especially those of the developing countries, to accelerate their accumulation of gold. Stephen Jen, a managing director at hedge fund BlueGold Capital and an expert on sovereign wealth funds from his days at Morgan Stanley, estimates that the percentage of gold held by the Chinese, Indian and Russian central banks is just 2.2 percent. This compares with 38 percent held by Western central banks. According to Jen, they would have to buy $115 billion dollars worth of gold at current prices to raise their bullion to just 5 percent of total reserves, and $700 billions’ worth to reach just half of Western levels.
Along with many others in the gold industry, we have noticed that fund managers are starting to buy gold as long-term insurance, which they intend to hold for several years. By one estimate, if the world’s pension funds and hedge funds moved only five percent of their assets into gold, which these days seems quite conservative, gold would trade above $5,000. With leading wealth managers such as David Einhorn, John Paulson and Paul Tudor Jones allocating significant amounts of their portfolios to gold, the process may have already begun.
In conclusion, the events of the past year bode well for the price of gold in 2010. At the recent highs of $1,200 many thought that gold was overbought. For those who feel this way, I would like to close with some recent words from investment legend Richard Russell who said, “If gold is going parabolic, then there’s no such thing as ‘overbought’,” Almost any of the events of 2009 I have highlighted could trigger such a parabolic rise. Right now the Chinese and Indian public, the non-Western central banks, the sovereign wealth funds, the pension funds and the hedge funds of the world are all looking for ways to increase their long-term gold holdings. The pull-back from the recent highs of $1,200 seems to be over, providing an attractive entry point for investors. In 2010 we will likely see prices rise to at least $1,300 to $1,500.
It is important to understand that this isn’t a typical bull market. Unless governments around the world stop creating massive amounts of new money, the price of gold will continue to rise.
There is a famous investment axiom that states, “Now is always the most difficult time to invest.” To that I would add, “But now is also the best time to insure the wealth we have accumulated is protected through the ownership of gold.”
Tags: American Taxpayer, China, Commodities, Commodity Supply, Emerging Markets, Empire Club, ETF, ETFs, Financial Landscape, Gold, Gold Bullion, Gold Outlook, Good Afternoon, Greed, Incompetence, India, Investment Outlook, Keynote Speech, Monetary Issues, New Jobs, oil, Pdf Version, Precious Metals Industry, Previous Year, Russia, Seminal Events, Severance Packages, Stages Of Development, Tectonic Forces, Unprecedented Losses
Posted in Canadian Market, China, Economy, Emerging Markets, Energy & Natural Resources, ETFs, Gold, India, Markets, Outlook, Silver | Comments Off
Friday, September 25th, 2009
Canada is on the cusp of something big. A boom in commodities means Canada will outperform the US over the next decade. Our recovery and upward trajectory is tied to global demand coming from China and India, and the rest of the developing world. And with attractive risk/reward fundamentals, sound fiscal position, and strong banking sector, Canada is destined to become a darling of global investors. At this time, Canada resides in a sweet spot of long term investing opportunity, but not for the one reason – inflation – that gets cited most often. Not yet anyway.
Mark Carney says Canada’s economic recovery is merely a ‘consequence’ of unconventional measures. And, his report cites that prices are still falling in Canada.
This flies in the face of all the hoopla surrounding the inflation-motivated theme of investing in commodities and/or commodities producers. Investing in commodities producers is by no means a bad idea; its the rationale for doing so, by way of inflation, that may be flawed. Investing in commodities falls under the aegis of inflation protection, because if indeed we find ourselves in inflationary times again, we will be happy to own real things, such as commodities and real estate.
In the U.S. however, is it really a big surprise that the G20 meeting is yielding a “strong dollar” consensus? China, and other dollar reservists, Brazil, Russia and India, have been squawking about the faltering greenback, threatening to take measures to reduce its appetite/dependency on the US dollar since before the crisis began. If you listen to the Michael Pettis interview regarding China, you’ll get the idea very clearly that China is in no position to undo its marriage to the US. At least not anytime soon. Un-pegging from the greenback would have destabilizing consequences for China, not too mention the global economy, if not because of its effect on China, then due to its effect on the US economy. The US/China relationship is a symbiotic one. In the meantime, we will watch the U.S./China economic ballet continue.
Therefore, as the G20 has reached a strong dollar consensus, the Canadian, Aussie and NZ dollars have all pulled back. It preserves balance for the dollar, yen and euro economies, and more importantly it keeps everyone happy politically. As for the Canadian dollar rising in value, it’s not a good development for the Canadian economy, but rather a by-product of the demand for what we produce. Its terrible for our non-commodity exports. So, balance works for us too, in the long run.
Kathy Lien: The Canadian Dollar tumbled against the greenback as investors took profits ahead of G20 meeting. Oil prices also fell more than 4 percent while gold prices closed below $1000, providing no support for the commodity currencies. The Canadian government returned to easier monetary policy after Canadian Finance Minister Jim Flaherty proposed an expansion of mortgage buy-backs to C$125 Billion or $116.4 Billion. The proposal comes on the midst of yesterday’s comments by Governor Mark Carney who claims the recovery is not “self-sustainable” and is a mere consequence of unconventional measures. If they proceed further with this, we could see a turnaround in the Canadian dollar.
In What is Gold to China?, we discussed the idea that gold is a safer long term bet as a result of the “Beijing put,” the notion that whenever gold falls to lower levels, the Chinese come in as strong buyers, bidding gold back up, as they are continually out to diversify their reserves into other currencies. Its all part of a symphony of intervention that is choreographed between the US, Europe, the IMF, Japan, and China to keep the dollar in a fundamentally stable range. Having said that, this too, benefits Canada as one of the world’s biggest gold producers, despite the fact the price of gold is subject to the manipulation of central bankers.
In that vein, Canada, as important as it is in today’s world, is along for the ride. Our recovery will depend upon a stable global recovery determined by steady interest rate policy and coordinated currency balancing.
Herein lies the opportunity; we just need to recognize it, and get our (long-term) peas lined up.
The long-term rationale for investing in Canada
Canada has what the world needs (resources), a sound fiscal position, and a strong banking system – So why haven’t the dollar reservists chosen to invest in Canada bonds, as an ultra-safe alternative to US Treasuries? Simple.
Canada has so much of what the reservists (BRICs and other emerging economies) need and want in order to build out their own economies, that investing in our debt would raise the price of the very things they want to buy from us, such as wheat, oil and gas, metals, and minerals. They are not just interested in importing commodities from us; more important, they have their eyes on buying the companies that produce the commodities, as well. Despite this, Canada’s bond market may perform well in the near term, as a by-product of today’s continued price weaknesses. And, the time will come, though not in the near future, when foreign investors will alternatively opt to buy Canada bonds.
Among the great inefficiencies that have plagued Canada is our conservatism (or rather the reluctance among Canadians to invest risk capital in the most strategic areas of our economy), and our complacency. Canadian companies have historically faced shortages of domestic investor capital, and that issue has forced them to look first to the US, and now globally for substantial sources of capital. This has meant that Canadians have foregone the ownership of our homegrown companies to foreign interests. Its this inefficiency that makes the opportunity to invest in our own commodities producers, and other companies so attractive.
By the way, every time something creative comes along to make it easy to raise money in Canada, for example, income trusts, someone in government comes along and shuts it down. There’s no doubt that there was some abuse and stretching of the rules which led to the legislation shutting them down, but then again, it was also one of the most successful equity financing periods in Canada’s capital markets history. At times it feels as though the Canadian government would rather help foreign investors take over our industries, rather than police the tax incentives that make raising capital easier, more fairly. Then again, this too, is part of our conservatism as a society, isn’t it?
Foreign investors are more interested in our companies than we are. As a country and as investors we need to realize that our assets are worth far more to foreigners right now than they are to us. We take our greatest assets, our natural resources, water, oil and gas for granted, because we have always lived in a state of surplus and exported most of what we produce, mainly to the US.
Now that the balance of demand is coming increasingly from the large emerging economies who face massive future shortfalls of materials, water, food, and energy we need to prepare for the geometric growth of demand coming in the next several decades. We sincerely owe it to ourselves to exercise our right to own and nurture these precious assets, before they pass into the hands of foreign corporate interests.
David Rosenberg states in his latest report, out today, that Canada is in the sweetest of spots because we are in the midst of a secular commodities boom. He cites Chindia as the key driver of demand over the next decade, but initially 2009 and 2010, where it is shown that China and India will lead the world in GDP growth, and currently command 21.4% share of Global GDP. This is no big surprise to anyone following commodities, but rather, more confirmation.
We believe that commodities are in a secular bull market, and this is where Canadian outperformance relative to the United States comes into play – nearly 45% of the TSX composite index is in resources; almost triple the share in the U.S. Almost 60% of Canada’s exports are linked to the commodity sector, roughly double the U.S. exposure. This explains how it is that the Canadian equity market has managed to outperform the S&P 500 this year by a cool 2,000 basis points (in this sense, Canada is basically a low-beta way to play the emerging markets via commodity exposure).
This by no means indicates that the US and the Western consumer will cease to be the world’s top consumer, but rather that we will have to line up with the new consumers from the developing world, to buy the same stuff. That is ultimately inflationary, but not for some time.
Rosenberg points out very nicely that commodities prices bottomed last year at the highest recession levels ever.
And, that prices bottomed at levels above historical peak prices.
This last chart is remarkable, because it illustrates how strong demand has gotten during the last ten years with the rise of China and India. Even after last year’s blow-off, prices are fundamentally higher because of the surge coming from the developing world’ growing appetite for food, shelter and commerce.
Forget about inflation, at least for now, as a reason to buy commodities. There are two overriding themes, that should be front and centre:
1) demand for commodities – Foreign interests wish to lock up supply which means the commodities themselves will be bid up.
2) demand for producing companies - Foreign interests, particularly China and its rapidly developing and mutually rich peers have their eyes squarely focused on our businesses and our natural resources. Mergers acquisitions and hostile takeovers will bid up the prices of Canada’s most desirable commodities producers, and it won’t be only China which comes knocking, though they will likely turn out to be the most aggressive. The onslaught of foreign-sourced capital markets activity is likely to come well in advance of peak prices for the commodities themselves.
What do policymakers think of, in the now wealthier, fastest growing countries of the world, whose nations are facing shortages of materials, oil, water, and food that would be devastating to their economic progress? “What will we need, and what do we have to do to get it?”
Let’s come back to the notion of complacency. Canadian complacency. We have taken our most valuable assets for granted, because they are abundantly available in our backyard. Also, the last year’s turmoil has also made it more difficult for investors to commit long term capital out of fear.
In the period ahead, it is not so much inflation, but rather pure and simple demand for the future supply of commodities that will take centre stage. Inflation, when it re-appears will be the icing. Canadian investors should view any market corrections as opportunities to accumulate meaningful overweight positions in their portfolios in the commodities complex in some combination of commodities and commodities producers.
This period represents Canada’s big chance to get out in front of foreign interests in our own backyard. We have the right to participate in the growth that will come Canada’s way as a result of the massive global economic transformation that is underway or we can choose to be bystanders.
We will continue to write and drill deeper into this subject in the coming weeks and months.
Tags: Aegis, All The Hoopla, Aussie, Bad Idea, Balance Works, Banking Sector, Brazil, BRIC, BRICs, Canadian Dollar, Canadian Economy, Canadian Finance Minister Jim Flaherty, Canadian Government, Canadian Market, Commodities, Commodity, Commodity Exports, Consequence, Currencies, Cusp, David Rosenberg, Dollar Yen, Economic Recovery, Effec, Emerging Markets, energy, Finance Minister Jim Flaherty, Fiscal Position, Forces At Work, G20 Meeting, Global Demand, Global Economy, Global Investors, Gold, Gold Prices, Greenback, India, Inflation Protection, Investing In Commodities, Investors, Mark Carney, Measures, Michael Pettis, Midst, Monetary Policy, Mortgage, Natural Gas, Natural Resources, Nz Dollars, oil, Oil Prices, Profits, Proposal, Relatio, Risk Reward, Strong Dollar, Sweet Spot, Term Investing, Time Canada, Turnaround, Upward Trajectory, Usd Cad
Posted in Brazil, Canadian Market, Economy, Emerging Markets, Gold, India | Comments Off
Friday, May 29th, 2009
Money managers, investment advisors and investors alike face a daunting emotional and financial challenge in these markets as a result of all the conflicting signals the markets and the economy are giving. In addition, when what you hear, see and feel do not match up, seasickness or motion sickness may set in.
Economists are reporting that the rate of economic worsening is slowing down, treasury yields are rising again at the long end, and there are so-called green shoots. Government is signalling a turn in the economic outlook.
The stock market has enjoyed what some are calling (hoping) a new bull market and others, a massive bear-market rally, and corporate earnings beat severely beat-down earnings forecasts in the latest reporting season. Questions remain as to what is stable, and what is not?
In a recent post, Barry Ritholtz referred to Randall Forstyh’s “Green Shoots = Ganga” article in Barron’s:
Randall Forsyth elicits chuckles via his clever phrase-turning. He turns his poison pen on the ubiquitous nonsense known as “green shoots” that has been so in vogue amongst the perma-wrong crowd:
“So, why the attraction of green shoots? One can only speculate that they must be in some ways intoxicating. Perhaps not the shoots exactly, or the stems or seeds, but the leaves of a certain plant. Those might be smoked or otherwise ingested to bring about a euphoric effect. From what I’ve read, the current crop is far more potent than the commodity available in years past. How else to explain the mind-bending notion that an economy that is declining less quickly is somehow improving?”
Like all great inventions, it obvious in hindsight.
Once someone else has invented it, everyone says (or at least thinks to themselves) “How on earth did I not come up with that myself . . . ?”
Dan Dorfman discusses an interview with an asset manager who repeatedly referred to himself as an idiot, to make the point about “the unrelenting pressures facing Wall Street’s performance-oriented big guns, many of them leery, and offers a credible reason why the beleaguered stock market could get another significant shot in the arm provided it doesn’t cave in first.”
When I told him of my interest in writing a piece on his latest market thinking, he chuckled and shot back: “Why would you solicit the views of an idiot?”
Why such a disparaging reference?, I asked. “Because my gut and the facts tell me the market is going lower, maybe a couple of thousand Dow points lower, and that the economy, contrary to what a lot of economists are saying, will not bounce back very much in the second half,” he says. “Yet, I’ve been reducing cash reserves and buying some stocks fairly aggressively,” he tells me. “Only an idiot would do that.”
Then why buy? Because the performance pressures from clients are enormous, he explains. “My phone is ringing off the hook at all hours of the day and night. My clients all know the market is up about 30% from its March lows and all they want to hear is how much money I’m making for them after a lousy 2008. With the kind of explosive rally we’ve had,” he says, “they can’t imagine my not being an active participant in it, and you really can’t explain to people something they don’t want to hear — that it could be a buying trap or a bear market rally.
In one of this week’s posts published here, the legendary and incredibly modest Jeremy Grantham, of GMO, as interviewed by Smart Money (May 21, 2009) discusses why he changed his mind about the market after over a decade of being characterized as a perma-bear:
SM: Why were you so certain things were going to get so ugly?
G: There wasn’t a whole lot of doubt where I was coming from. I thought the fair value of the S&P was 925; the S&P went to 1500. And by 2006 the housing bubble was at a 100-year peak. This was the 32nd asset bubble that we’ve tracked, and all but the U.K. housing bubble have popped.
SM: … for the first time in years, you like US stocks.
JG: We think a fair price for the S&P 500 index is 900. By sheer divine intervention we bought into the market on Mar. 6, the day it hit the recent low of 666. It’s likely, but far from certain, that we’ll go back and make a new low. You aren’t going to get to buy at the absolute low unless you have a time machine.
SM: Anything else besides US stocks?
JG: US stocks were nicely cheap, and frankly, the rest of the world was even cheaper. In early March, when we bought, we invested only in stocks we thought would have a 10 to 14 percent average annual return after inflation. That’s magnificent. We haven’t seen anything like that in 20 years. It was somewhat disappointing that prices moved up so fast in just a couple of weeks. The odds are a bit more than 50-50 that we will go back and test that low.
SM: So you’ve made a quick buck. Now what?
JG: You have a set of possibilities. First, if the market nosedives, it’s easy: You buy. The second is confusing, when the market just goes sideways, between 700 and 800. The market is irritatingly cheap then, but not super cheap. The longer that goes on, the less probability we will set a new low, so we’ll ultimately put money each month into the market.
SM: What if stocks keep rallying?
JG: If the market goes higher, above 950, and then starts moving sideways, between 950 and 1050, we probably do very little. Then the market is moderately overpriced.
David Rosenberg, Gluskin Sheff’s Chief Economist (ex-Merrill), has the following to say in yesterday’s Breakfast with Dave:
Okay, the gloves are off. Just as was the case in the summer of 2007, the bond bears are coming back out of hibernation, and we see and hear that they have a new set of pencils and rulers out and declaring, yet again, the end of the secular bull market in Treasuries. Not so fast.
About longer-term Treasury Bonds…
We think that this sharp correction in Treasuries (4.5% loss so far this year) started off as a flight-out-of-safety when the Obama economics team put a floor under the financials, then the second stage were the ‘green shoots’, followed by recurring asset mix rebalancing, and then by talk and technicals — the exact stage when the blowoff occurs; and the blowoff is what provides the opportunity.
Let’s not forget what the upcoming round of data releases are going to look like after GM declares bankruptcy — jobless claims are likely going to test the old highs, ISM the old lows, and the boom in consumer confidence is going to seem like a distant memory by Labour Day.
Well, we have a sneaking suspicion that the nearby peak was May 8 when the yield on the 10-year T-note was 3.29%. That was the tipping point for the stock market, which has only done backing and filling ever since; and some wild swings (three triple-digit up Dow sessions; four triple-digit down days).
We would have to think that a 4.63% yield compares quite favourably with a 2.6% S&P 500 dividend yield — the spread hasn’t been that wide in at least eight months. Not only that, but the stock market has become increasingly “less cheap” — over the last six months, 2009 consensus earnings estimates have been pared from +30% growth expectations to a mere +9%. The S&P 500 is trading at multiples of around 17-18x, which is no bargain in our view.
Now for the rock and the hard place. Do you stay invested in equities as though its a new bull, or do you take the precautionary measures in case the bears are right?
Its not always clear, but after reading through a fair bit of opinion it seems that the simple, sensible thing to do next, may be to rebalance from equities to bonds. Equities and government bond yields have had quite a run up on the ‘green shoots’ and Obama’s ‘floor-under-financials’, and upcoming economic data may be, very mildly put, uninspiring.
Finally, some advice on seasickness:
There are three things which trigger sea sickness, and it is advisable that you avoid them, if you are prone to it, or try to do as little as possible: if you go below the deck for a long time (there the wag is bigger), if you look through binoculars or other optical device, and finally – if you read a book, look at a compass or do any work that requires gazing at one point for a long time. Just try to keep your peripheral vision on objects that your brain will interpret as stable (because in fact they are not, and there will be clash in the sensory information and it will end in sea sickness).
Tags: Asset Manager, Barron, Bear Market, Corporate Earnings, Dan Dorfman, David Rosenberg, Earnings Forecasts, Economic Outlook, Financial Challenge, Great Inventions, Hindsight, Investment Advisors, Market Rally, Money Managers, Motion Sickness, Place Money, Poison Pen, Reporting Season, S Green, Seasickness, Treasury Yields
Posted in Economy, Markets, Outlook | Comments Off
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.
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.)
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.)
– Road map for the near-term performance of the economy
– Index of Leading Indicators signals improving economic conditions
– Auto industry events will continue to distort jobless claims data
– Plunge in multi-family starts conceals small gain of single-family units
– 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
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.
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.
Tags: Aaa Credit, American Economist, American Stocks, Bill Gross, Brazil, BRIC, BRICs, Canadian Market, David Rosenberg, Day Job, Debt Levels, Dramatic Expansion, Emerging Markets, ETF, Gdp Ratio, Gold, Gold Bullion, Gold Silver, Government Bonds, Government Debt, High Note, India, Interesting News, Market Commentators, Medium Term Outlook, Merrill Lynch, New York Post, oil, Risky Assets, Stock Markets, Us Debt Clock
Posted in Brazil, Canadian Market, Commodities, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, ETFs, Gold, India, Markets, Oil and Gas, Outlook, Silver | Comments Off
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
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, Energy & Natural Resources, Gold, India, Markets, Oil and Gas, Outlook, Silver | Comments Off
Thursday, May 21st, 2009
Mint.com creates great, attention getting charts. As the old saying goes, a picture says a thousand words. The US-China trade chart below does a great job of presenting how both countries trade with each other and the rest of the world.
Introduction by Mint.com
Like it or not, the US and China have a trading relationship that has global repercussions. The plastic US flags that say Made in China don’t tell the whole story. No, not everything is made in China. In fact the US manufactures and exports almost as much as China but it consumes a great deal more. Hence, the trade imbalance. What’s interesting is exactly what the US imports, stuff like machinery and toys and as much steel and iron as it does shoes. And what we export — high-tech stuff like airplanes and medical equipment and, for some reason, 7 billion dollars worth of oleaginous fruit which is used to make cooking oil, presumably for Chinese food.
Click On The Image For A Larger Version (Note:Image accessed via Mint.com)
Tags: Airplanes, Billion Dollars, China Trade, China Trading, Chinese Food, Cooking Oil, Countries, Flags, Global Repercussions, Job, Medical Equipment, Mint, Reason, Relationship, Rest Of The World, Shoes, Stuff, Toys, Trade Imbalance, World Introduction
Posted in Economy, Emerging Markets, Energy & Natural Resources, Markets, Oil and Gas | Comments Off