3 reasons Eurozone’s investors love Danish bonds

Sunday, July 15th, 2012

by Sober Look

Would you pay Denmark’s government 0.6% to hold your money for two years? Sounds strange, but that’s exactly what investors are now doing. Denmark’s government paper yields just hit new lows. And it’s not only the short-term bills with the negative yield (short term bills sometimes go negative when investors seek immediate liquidity). The 2 and 3-year notes are now also comfortably in the negative territory as Eurozone’s investors simply can’t get enough.

Denmark’s 2 and 3-year government yields

Why do the Eurozone investors love Demark’s bonds so much that they are willing to lock in negative yields for 2-3 years? Here are 3 key reasons:

1. Eurozone based investors are not taking much FX risk because Denmark keeps EUR-DKK exchange rate tightly pegged.

DKK per 1 euro

2. Investors love Denmark’s economic fundamentals, particularly the relatively low government debt and deficit.

Source: Bloomberg/BW

3. Keeping funds outside the Eurozone may provide a hedge against potential problems associated with the monetary union’s stability.

Bloomberg/BW: – If the euro crisis worsens, foreign capital may keep pouring in, negative rates or no. Says Ian Stannard, chief European currency strategist at Morgan Stanley in London: “For an international investor with euro zone exposure, buying Danish assets can be a hedge against the extreme scenario of the euro breaking up.”

SoberLook.com

Tags: Bloomberg, Bw 3, Currency Strategist, Demark, Dkk Exchange Rate, Economic Fundamentals, Euro Zone, Extreme Scenario, Government Debt, Government Paper, International Investor, Key Reasons, liquidity, Lows, Monetary Union, Morgan Stanley, Negative Territory, Stannard, Term Bills, Zone Exposure
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Gartman: “Buy Assets Across the Board in Yen Terms”

Wednesday, March 21st, 2012

In today’s Globe and Mail, Martin Middlestaedt says the Japanese yen’s 40-year bull market is at a turning point. He also writes about betting against (shorting) the yen and in favour of risky assets. The recent decline (Dennis Gartman believes this is a trend to hitch hike on) of the yen is not only a welcome break for Japanese exporters, and currency speculators wishing to capitalize on its falling valuation; it is a welcome development (risk-on) for hedge funds, as it provides a basis for a resurgence in short-yen carry trades.

Here are some snippets:

- Dennis Gartman, is convinced that the long advance of the yen is finally over. He’s urging investors to sell the currency short, a trade he thinks will work for years as Japan’s economic problems continue to grow and the currency takes a drubbing.
- “I think it’s the trade of the next 10 years,” says Mr. Gartman of the Gartman Letter, a market advisory service. “The yen is doomed fundamentally. Japan just has so many problems, none of which are going to go away anytime soon.”
- Its government debt is twice the size of its GDP, the scariest ratio in the developed world. To make matters worse, its lofty currency is an obstacle for its exporters, it has been fighting persistent deflation, and its population is aging rapidly.
- “This is one of the slowest moving train wrecks in the history of finance, but we’re just not quite sure when it clicks over,” says Andrew Busch, global currency strategist at Bank of Montreal’s investment arm.
- Camilla Sutton, chief currency strategist at Scotia Capital, says sentiment “used to be quite bullish for yen for a very long time,” but the market view has “turned wildly negative just over the last few weeks.”
- Much of the yen weakness occurred after the Bank of Japan said in February that it would buy ¥10-trillion worth of government bonds – in effect printing money to finance the government’s debt.
- Another approach advocated by Mr. Gartman has been to buy futures contracts on gold and other commodities and simultaneously sell Japanese yen futures. If he buys contracts representing $1 million in gold, he then sells futures contracts on yen worth $1 million. “You create your own synthetic derivative” that allows purchases of assets in yen terms, he says of the strategy. “Generally I think you should buy assets in yen terms across the board.”
- These somewhat complicated trades will have supersized payouts if the yen falls and the various commodities rise, but will suffer large losses if the yen strengthens and commodity prices weaken.
- Mr. Gartman says there is an additional reason the yen will likely continue to be weak: Japanese companies want a cheaper currency to make exports more competitive. “Clearly, the Japanese corporate structure wants a weaker yen. They’re obviously cheering this on.”

Source: Globe and Mail

Tags: Andrew Busch, Bank Of Japan, Bank Of Montreal, Currency Speculators, Currency Strategist, Dennis Gartman, Development Risk, Directional Flow, Equilibrium Equation, Gartman Letter, Global Currency, Globe And Mail, Globe Mail, Government Bonds, Hitch Hike, Investment Arm, Japanese Exporters, Japanese Yen, Moving Train, Printing Money, Risky Assets, Scotia Capital, Train Wrecks, Welcome Development
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Gold is Money

Wednesday, March 17th, 2010

by Nick Barisheff, BMG Inc.


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Unlike the world’s currencies, gold retains its value

In a speech I recently gave at The Empire Club of Toronto , I referred to gold as the “anti-currency.” Gold is not and never has been a currency. Gold is something entirely different and far more valuable. It is money.

“If you’re holding paper currency, you have to have some kind of trust that the country that issued it is not just going to print its way out of its problems. That’s a real concern right now. Gold, on the other hand, has real intrinsic value, unlike a paper currency which can be debased by its government.”

- Sacha Tihanyi, currency strategist, Scotia Capital

Currency versus money

Most investors confuse money and currency, but they are not the same thing. Money is defined as a medium of exchange, a unit of account and a store of value. For centuries, money referred to coins made of rare metals (gold and silver) with intrinsic value, and to notes backed by precious metals.

Currency, while it is a medium of exchange, is not a store of value. It only derives its value by arbitrary fiat – government decree and hence the term “fiat currency”. Paper banknotes represent money but they are not money. They are simply promissory notes whose long-term “value” or purchasing power depends entirely on the fiscal and monetary discipline of the government that issued them.

And therein lies the problem. In an era of massive fiat currency expansion by profligate governments across the globe, today’s currencies are depreciating in value faster than yesterday’s news. Fortunately for precious metals investors, gold and precious metals have risen in value, and will continue to rise in value against all currencies because they have once again resumed their historical role as stores of value: money.

“When the price of gold moves, gold’s price isn’t moving; rather it is the value of the currencies in which it’s priced that is changing.”

- John Tamny, economist, H.C. Wainwright Economics

The decline of the world’s currencies

Currency debasement isn’t a recent phenomenon. For decades, governments around the world, through their central banks, have been creating money out of thin air to cover their excessive spending and mounting debt. Investors have for the most part accepted this subtle form of taxation, because it seemed to have little personal impact. But appearances are deceiving. Investors are discovering that the value of their dollar-denominated assets has actually declined a staggering 82 percent since 1971 (not coincidentally, the year the US cut its link to the gold standard). Figure 1 tells the story.



The media are using the wrong measuring stick

Every day, the media (via currency traders) informs Canadian investors about the latest price of the Canadian dollar in US dollar terms, while US investors compare the US dollar to a basket of the world’s major currencies. But this information gives investors surprisingly little insight into the true value of their portfolios. If we started measuring the world’s currencies against money (i.e., gold), investors would be horrified at the stark decline in the value of all currencies. Most investors’ portfolios are heavily weighted towards currency-denominated financial assets (stocks and bonds), but few realize that the true value or purchasing power of their portfolios is declining every single year because of currency depreciation.

The rate of currency decline is accelerating

Since 1913 (the year the US Federal Reserve was established), the US dollar has lost over 95 percent of its value. The US and Canadian dollars have lost 82 percent of their value since 1971, as noted earlier. But the rate of currency decline is now accelerating.

In the past ten years alone, the US dollar, the Canadian dollar, the UK pound and the euro have collectively fallen 70 percent in value if measured in real (currency-debased) terms. In other words, when they are priced in terms of gold (Figure 2).

It’s all about the (fiat currency) money supply

Not too long ago, all the world’s major currencies were backed by gold because it was a universally recognized store of value. The gold standard imposed fiscal and monetary discipline, since each country had to hold enough gold to equal the amount of money in circulation. But not any longer. Government spending around the world is exploding, and (fiat currency) money supply, along with government debt in the world’s major economies, is exploding along with it. But nowhere in the world has spending become more out of control than the US (Figure 3), where the monetary response to last year’s financial crisis is creating yet another bubble, and this time it will be the bubble to end all bubbles.

Countries are increasingly at risk of sovereign debt default

“In the process of saving a few ‘too big to fail’ corporations and their bond holders, policymakers are greatly increasing the risk of sovereign defaults.”

- Puru Saxena, editor/publisher, Money Matters

The risk of massive and widespread sovereign debt default has never been higher. “Official” US government debt has soared to 90 percent of GDP, while multi-trillion-dollar budget deficits for the next several years will send that number soaring. Japan, the world’s second-largest economy, was recently put on credit watch. Its debt is twice total GDP, yet its newly elected government has announced much higher spending for 2010. The UK’s 2009 budget deficit will be over 14 percent of GDP, adding to a net debt that will reach 56 percent of GDP this year, 65 percent in 2010 and 78 percent by 2015.

Spain, Italy and Portugal are facing major fiscal deficits, as is Eastern Europe. Dubai is billions in debt and its prize jewel, Dubai World, is bankrupt. Greece’s credit rating has been slashed, and its debt is forecast to reach 130 percent of GDP. And then there is Iceland, whose debt had exploded to seven times GDP before the global meltdown. The country’s banking system has now collapsed, its currency is deeply devalued, its real estate market has imploded and the country is in a full-blown economic depression.

The incredible shrinking dollar

As the world’s reserve currency, the US dollar is a proxy for the rest of the world’s currencies. The dollar’s decline is a direct reflection of America’s deepening financial troubles, exacerbated by a ravaged banking system that, by 2010, may see over one thousand banks insolvent. In 2009, the US incurred a budget deficit of $1.4 trillion, and its debt rose by $1.9 trillion due to off-budget expenditures. These off-budget expenditures alone were more than the 2008 budget deficit. At the end of 2009, America’s total debt was over 100 percent of GDP.

In their attempt to reflate the bubble-driven economy, President Barack Obama, Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner have decided to add to this financial house of cards. Instead of raising taxes or cutting expenditures, they have decided to borrow their way out of the problem and have the Fed create money out of thin air, which will almost certainly create another bubble. This bubble will make the others pale by comparison and will help destroy the US dollar. The dollar may be the world’s reserve currency, but China and other countries are not only questioning its status, but also actively campaigning for greater use of alternative currencies.

Investors are demanding real money

Where are most investors putting their cash? It should no longer be in stocks. Key stock indices like the Dow Jones Industrial Average have been flat to negative in nominal terms since the end of the last century. But if the Dow is priced in gold (in other words, money) as opposed to depreciating dollars (in other words, fiat currency), its decline is far more dramatic. As Figure 4 shows, the Dow:Gold Ratio is not only in a downtrend, the downtrend is steepening which is a continuing indicator to move from equities to bullion.



Global creditors who currently hold trillions of dollars’ worth of dollar-denominated financial assets are dumping them to preserve their wealth. That is why gold bullion, along with its precious metals cousins, silver and platinum bullion, have been consistently keeping their value against financial assets (Figure 5).



Central banks are buying gold bullion

“We have a market-friendly Fed injecting a lot of liquidity in the system which will set us up for another bubble economy. Excessive monetary accommodation just takes us from bubble to bubble to bubble.”

- Stephen Roach, chief economist, Morgan Stanley

India recently bought 200 metric tonnes of gold bullion from the International Monetary Fund for $6.7 billion. Russia has recently added 120 tonnes of bullion to its reserves, while China has steadily (and surreptitiously) increased its gold bullion reserves from 600 tonnes in 2003 to 1,054 tonnes today. China is even urging its people to put five percent of their savings into gold and silver because it is so worried about the dollar. And because trillions of dollars of its reserves remain in US dollar-denominated assets, China’s central bank will be diversifying into gold for many years to come.

The world’s central banks know that gold is primarily a monetary asset, not a commodity. That’s why a growing number of them are quietly diversifying out of US dollars and adding to their 29,000 tonnes of gold reserves.

In its 2010 Precious Metals Outlook, Scotiabank noted that “seeing the value of the dollar steadily erode must be a nightmare for large US creditors such as China, Japan, South Korea, Russia, the oil producing countries and Sovereign Wealth Funds (SWF)…

Major investors are diversifying into gold

“Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that.”

- Lou Jiwei, Chairman, China Investment Corporation

It is not just governments that are dumping dollars for bullion. A rapidly growing number of sovereign wealth funds (including China Investment Corporation) are participating, as are major institutional investors. Hedge fund manager John Paulson, who made $3 billion in 2008 by shorting subprime mortgages, recently took a multi-billion-dollar position in gold as a hedge against inflation. Northwestern Mutual Life Co.’s CEO Edward Zore said his company purchased $400 million in gold (the first time in its 152-year history) because “the downside risk is limited, but the upside is large. We have stocks in our portfolio that lost 95 percent. Gold is not going down to $90.”

Hedge fund manager David Einhorn, through his Greenlight Capital fund, has sold gold ETFs in order to invest in longer-term and lower-risk gold bullion because of current US economic policy. Lone Pine Capital significantly increased its stake in gold this year. Perhaps of even greater interest to the unwary investor is a survey of US hedge fund managers by London-based Moonraker Fund Management: 90 percent (20 of the 22) of the hedge fund managers surveyed admitted they had bought physical gold for personal investment. These sophisticated investors know something that the average investor doesn’t: that the global policy response to the financial crisis will not only devalue the world’s major currencies, it will decimate the US dollar.

Many investors still view gold as a commodity

Individual investors are not so farsighted – yet. Because most of them have only experienced one kind of market – a 25-year bull market in stocks – many still think gold is just a commodity like copper, zinc or pork bellies. But gold is far more than that. It has a 3,000 year history as money; for much of that time, it was the universal medium of exchange because of its divisibility, portability, rarity, beauty, malleability and indestructibility. Despite today’s negative sentiment, gold is not a speculation or a barbaric relic. Gold is money. Gold retains its purchasing power year after year, as Figure 6 shows.



Forty years ago it took 66 ounces of gold to buy a compact car. Today it takes only 14 ounces. If you had put your money in gold instead of dollars, the same car would actually be 79 percent cheaper, because gold keeps its value. Houses, stocks and virtually every other asset on earth would also be cheaper if bought with physical gold.

The more investors learn about bullion, the better for their portfolios. If you are already a bullion investor, now is the time to add to your portfolio. If you are new to investing in bullion, now is the time to start dollar-cost-averaging into bullion. I encourage investors to learn as much as they can about bullion and about the markets in general. A good place to begin is the Learning Centre section of our website (www.bmgbullion.com). It offers a comprehensive look at the economy, money, markets and bullion investing, and provides a variety of thought-provoking articles written by experts in the field of gold and precious metals.

Gold is money

Gold is money because it cannot be created out of thin air by government decree. Unlike bonds, gold does not represent someone else’s liability and, unlike stocks, gold does not rely on someone else’s promise of performance. Gold is money because, unlike currencies, impatient monetary policymakers cannot change its value. The rising gold prices we have experienced for the last eight years do not signal a bull market in precious metals, but rather a vote of decreasing confidence in the future value of paper currencies.

Currency-denominated financial assets are a disaster waiting to happen. The current economic rebound is a mirage, being entirely dependent on something artificial and unsustainable: massive government spending. A new crisis is building out of unprecedented fiscal and monetary mismanagement. Fortunately, smart investors can protect their wealth from the coming storm. The true level of risk has not been priced into the markets. The time to shelter your wealth from the storm is now. And there is no safer investment on earth than bullion, because bullion is and always will be money.

1. Gold Outlook for 2010
Gold Resuming its Historical Monetary Role – as the Anti-Currency
http://bmgbullion.com/document/648

Nick Barisheff
Bullion Management Group

Nick Barisheff is the co-founder and President of Bullion Marketing Services Inc., which was established to create and manage The Millennium BullionFund. The fund is Canada’s first and only RRSP eligible open-end Mutual Fund Trust that holds physical Gold, Silver and Platinum bullion www.bmsinc.ca.

Tags: BMG Inc., Canadian Market, Currency Paper, Currency Strategist, Empire Club, ETF, ETFs, Fiat Currency, Fiat Money, Gold, Gold And Silver, Gold Bullion, Gold Metals, Government Decree, India, Intrinsic Value, Medium Of Exchange, Metals Precious, Money Currency, Paper Currency, precious metals, Price Of Gold, Promissory Notes, Purchasing Power, Rare Metals, Russia, Scotia Capital, Value Money, Wainwright
Posted in Canadian Market, Energy & Natural Resources, ETFs, India, Markets, Outlook, Silver | Comments Off

UniCredit Bank Warns Plunge In Sterling And Gilts, Britain Is Next “To Be Pummeled By Investors”

Friday, March 12th, 2010

This article is a guest contribution from ZeroHedge.com.

Kornelius Purps, director of fixed income at Europe’s second-largest bank, UniCredit, has issued a stark warning to clients who wish to invest in the Britain: “I am becoming convinced that Great Britain is the next country that is going to be pummeled by investors.” Ambrose Evans-Pritchard reports reports that “Mr Purps said the UK had been cushioned at first by low debt levels but the pace of deterioration has been so extreme that the country can no longer count on market tolerance” and that “Britain’s AAA-rating is highly at risk. The budget deficit is huge at 13pc of GDP and investors are not happy. The outgoing government is inactive due to the election. There will have to be absolute cuts in public salaries or pay, but nobody is talking about that.” And everyone was wondering why the U in STUPID stand for UK (actually make that just CNBC, who never really bothered to even read the original definition). So can the whole sovereign default wave skip the PIIS and go straight to the U?

From the Telegraph:

“Sterling is going to fall further over coming months. I am not expecting a crash of the gilts market but we may see a further rise in spreads of 30 to 50 basis points.”
Yields on 10-year gilts have already crept up to 4.14pc, compared to 3.94pc for Italian bonds, 3.48pc for French bonds, and 3.19pc for German Bunds, though part of this reflects worries about higher inflation in Britain.
Ian Stannard, currency strategist at BNP Paribas, said markets are fretting over how the UK will cover its deficit following the pause in quantitative easing by the Bank of England. The Bank has absorbed £200bn of debt, more than total Treasury issuance over the last year.

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“The UK may have difficulty in attracting extra investors to fill the gap. We think they will have to do more QE as recovery falters,” he said.
BNP Paribas expects sterling to drop to $1.31 against the dollar this year and reach parity against the euro despite troubles in Club Med. “We’re very bearish on the UK,” he said.

And the biggest insult to the island nation? The insinuation that Greece is actually better off that Britain.

UniCredit said Greece is better placed than the UK in coming months even if deficits look comparable. “The polls point to a minority government in the UK, while Greece’s government can count on a majority to push austerity measures through parliament. Secondly, the British tax system offers less leverage for a rise in revenue,” he said.
Paradoxically, Greek tax evasion creates scope for a surge in revenues from tougher enforcement. “It is not out of the question that we will see a positive surprise in Greece: is there any such hope for Britain?” said Mr Purps.

Well Mr. Purps, this means that there is still hope for America. As the still sentient part of the population has decided to show the corrupt administration and the criminals on Wall Street the middle finger and maxed out their withholding exemptions, all it will take is an order from the US politbureau that the Treasury can withhold 100% of every paycheck, and in addition, garnish wages in perpetuity, DCFed at Ben Bernanke’s favorite discount rate of -100%.

Tags: Aaa, Ambrose, Bank Of England, Basis Points, Bnp Paribas, Budget Deficit, Bunds, Cnbc, Currency Strategist, Debt Levels, Evans Pritchard, Fixed Income, Gap, Gilts, Issuance, Outgoing Government, Plunge, Public Salaries, Qe, Stannard
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As The Dollar Takes Off, The Dow Falters – Risk Appetite is Threatening Collapse

Friday, January 22nd, 2010

This article is a guest contribution by John Kicklighter, Currency Strategist for DailyFX.com.

Any doubts that the market has forged higher without the support of stable fundamentals should be completely dispelled after this week’s sharp reversal. Even if this recent slump in investor sentiment doesn’t ignite into a true reversal of capital flows; the simple fact that the markets retraced so aggressively and in tandem stands as testament to the fear that lies just beneath the surface.

-    The Dollar Takes Off and Dow Falters – Risk Appetite is on the Verge of Collapse
-    When Sentiment Falls Apart Correlations will Tighten and Momentum Increase
-    How Over Extended are the Market and What are Fair Fundamental Values?

Any doubts that the market has forged higher without the support of stable fundamentals should be completely dispelled after this week’s sharp reversal. Even if this recent slump in investor sentiment doesn’t ignite into a true reversal of capital flows; the simple fact that the markets retraced so aggressively and in tandem stands as testament to the fear that lies just beneath the surface. What’s more, there are plenty of fundamental reasons to be concerned about the state of the markets or more precisely the conviction of those participants that drove the supposed high-yield / high-return asset classes to their over inflated levels. Among the long line of fundamental concerns that have slowly eroded the foundation of the most aggressive influx of speculative capital in history, we have non-existent yields, government efforts to restrain capital interests and the withdrawal of vital stimulus among many other factors.

In gauging the threat of a significant retracement going forward, we need only pick our poison. Every major asset class has its own benchmark that is ready to suffer the ravages of risk aversion. In the Forex market, many prominent carry-based currency pairs have already marked critical breaks and reversals. The dollar has taken meaningful steps towards true recovery. Now, we await the clear break of the Carry Trade Index. The same conditions exist in more speculator-responsive markets. The Dow Jones Industrial Average broke out of a 300-point range for the first time in two months. In commodities, gold has overwhelmed a trend that has defined the metal’s bullish drive for more than five months now. These markets are at the very edge and require only the slightest gust of fundamental wind to transform a retracement into a true change of trend.

What could motivate investors to throw in the towel and either book profit or unwind failing positions? The most basic force at work will be fear itself. Should the more prominent benchmarks pitch into a clear downtrend, market participants will require little motivation to exit the market. Remember, it wasn’t long ago that the these markets suffered their worst crisis in modern history. While the collective memory of the markets is short; there is little doubt that traders will heed the warning signs and attempt to preserve any returns they have made over the past year. So, in these terms; all we need is a catalyst. There are plenty of sparks to push sentiment over the edge. The most recent threat to speculation comes in the form of government regulations and restrictions. These past two weeks, China has taken meaningful steps to limit leverage and aggressive speculation to prevent a potential bursting of an asset bubble.

There is no argument to be made against the overextended market. Raising the reserve ratios, tightening loan requirements and other steps are no doubt reasonable; but their effectiveness in this stage of the game is too little, too late. And, China (the objective of a sizable percentage of the market’s most speculative funds) isn’t the only country bearing down on the volatile capital markets. US President Obama recently announced proposals that would limit the size and risk profile of the nation’s largest banks. This is a reasonable and direct step for a country that has been rocked by the failure of ‘too-big-to-fail’ firms; but there is little doubt that the side effects of such policy would be to reduce leverage and liquidity. Furthermore, these steps are being taken at the exact same time that the world’s policy makers are withdrawing the stimulus that has been so essential to market’s recovery to this point. As it was, there were concerns that speculators would be able to stand on their own when stimulus and guarantees were removed. Now they are looking at restrictions.

Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? You can send them to John at jkicklighter@dailyfx.com.

Source: DailyFX – The Dollar Takes Off and Dow Falters – Risk Appetite is on the Verge of Collapse http://www.dailyfx.com/forex/fundamental/article/carry_trade_basket/2010-01-22-0657-The_Dollar_Takes_Off_and.html

Tags: asset class, Asset Classes, Capital Interests, China, Collapse, Commodities, Correlations, Currency Pairs, Currency Strategist, Emerging Markets, Falters, Forex Market, Fundamental Concerns, Fundamental Reasons, Fundamental Values, Gold, Government Efforts, Influx, Investor Sentiment, Retracement, Risk Appetite, Risk Aversion, Simple Fact, Speculative Capital, Vital Stimulus
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Words from the (investment) wise for the week that was (January 19 – 25, 2009)

Sunday, January 25th, 2009

Fears about the intensity of the global recession and renewed skepticism regarding the beleaguered financial sector fueled a flight to safety during the past holiday-shortened trading week. President Obama’s inauguration offered only a brief respite from the dreadful economic and earnings data and pounding of the stock markets.

Commentators were in agreement that Mr O commenced his tenure against the worst economic background in living memory and had his work cut out to resurrect America from its economic morass. I wish him well with this daunting task.

As investors piled into the perceived safety of gold (+6.9%), the US dollar (+1.8% in the case of the US Dollar Index) and the Japanese yen (+2.1% against the US dollar), global stock markets recorded a third straight week of losses. West Texas Intermediate Crude (+9.2%) also ended higher, joining a broader rally in commodities (+2.1% in the case of the Reuters/Jeffries CRB Index).

The MSCI World Index and the MSCI Emerging Markets Index declined by 4.7% (YTD -10.3%) and 5.7% (YTD -10.5%) respectively. Bucking the downtrend, the Shanghai Composite Index rose by 1.9% over the week and, with a gain of 9.3%, is also the best-performing global stock market since the start of 2009.

Elsewhere, the yields of long-dated government bonds in the US, UK and Eurozone rose sharply as large issuances of sovereign debt looms. For example, the yield of the US ten-year Treasury Note jumped by 28 basis points to 2.62% and that of the 30-year Treasury Bond by 40 basis points to 3.32% – the highest weekly points rise since April 1987. On the other hand, short-dated yields in a number of European countries declined as a result of expectations of further rate cuts.

The UK was a case in point with the two-year Gilt declining by 12 basis points to 1.0% on doubts about the government’s new rescue plan for the banking system and a deterioration in the country’s public finances. The pound crumbled to a 23-year low against the greenback and an all-time low against the yen.

The financial turmoil and the various actions by central banks reminded me of a quote from 1867 by Karl Marx: “Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.”

“TARP has been an abject failure,” said Thomas Barrack Jr, billionaire and founder of Colony Capital, in BusinessWeek. “I compare the situation to a fire on a Savannah plain: Let it rip and burn, and the market will rejuvenate so much faster – try to control or impede it, and there will be more and longer suffering before renewal. Japan experienced two decades of economic paralysis by experimenting with fire control of a similar unproductive sort.”

And here is Peter Schiff’s (Euro Pacific Capital) prescription for how the US can dig itself out of the current mess, as reported by Fortune Magazine: “Shrink the government radically, cancel all bailouts immediately, take plenty of tough medicine, and let the free market do its job – however harsh it may be for, say, autoworkers in the meantime.”

According to Sheila Bair of the FDIC, as reported by The Wall Street Journal, there will soon be a new government banking agency, the Aggregator Bank, to buy troubled assets from financial institutions. For a bit of fun, I tried to register this domain last week. Alas, another aspirant banker pipped me to the post. His reselling price? $100,000! Needless to say, I swiftly terminated the negotiations.

Next, a tag cloud of my week’s reading. This is a way of visualizing word frequencies at a glance. Key words such as “bank”, “government”, “economy”, “market”, “financial”, debt” and “crisis” topped the list.

The graph below shows the performance of various S&P sector SPDRs for the year to date. With Financials having declined by 28.2%, the market’s weakness was quite strongly concentrated in one sector. In addition to Financials, only Industrials (-11.9%) and Consumer Discretionary (-8.8%) have underperformed the S&P 500 Index (-7.9%) since the beginning of the year.

“During prior declines during this bear, losses were broad based and once they become more concentrated (as they are now), it’s a sign that the market is beginning to separate the eventual winners from the losers,” said Bespoke.

Considering the outlook for the stock market, Richard Russell, 84-year-old author of the Dow Theory Letters, said: “Recently, the Transports broke below their November 20 bear market low. The Industrials have refused (so far) to confirm the Transports. Will the Industrials break down and confirm?

“No one can possibly know. But the longer the time elapses that the Industrials refuse to confirm, the more hopeful the situation. As a rule, the closer in time the two Averages, Transports and Industrials, break through preceding levels, the more authoritative the signal. The Transports broke to new lows on January 20. The longer Industrials hold above their November 20 low of 7,552, the better the odds that they will not confirm.”

Key resistance and support levels for the major US indices are shown in the table below. The immediate upside target is the 50-day moving average, followed by the early January highs. On the downside, the December 1 and all-important November 20 lows must hold in order to prevent considerable technical damage.

A number of global stock markets – Germany, France, Belgium, Finland, Ireland and Venezuela – have actually already broken below their November 20 lows. Although a retest of the lows is often a feature of base formation development, it can also be a harbinger of the resumption of a downtrend.

Donning his customary bearish outfit, Albert Edwards of Société Générale, a favorite market strategist among Investment Postcards’ readers, said: “After increasing our equity exposure at the end of October we believe that the market is set to quickly slide sharply towards our 500 target for the S&P 500.

“While economic data in developed economies increasingly reflect depression rather than a deep recession, the real surprise in 2009 may lie elsewhere. It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the yuan. A subsequent trade war could see a re-run of the Great Depression.”

According to Jeffrey Hirsch (Stock Trader’s Almanac), the December Low Indicator says that should the Dow Jones Industrial Index close below its December low anytime during the first quarter, it is frequently an excellent warning sign. This came to pass on Tuesday when the Dow closed below its December low of 8,149 (recorded on December 1).

Also of concern to Hirsch is the January Barometer, stating “As January goes, so goes the year”. Every down January since 1950 has been followed by a new or continuing bear market or a flat year. On Friday the S&P 500 closed at 832, 7.9% lower than the December 31 close.

From across the pond David Fuller (Fullermoney) commented that one could not rule out an overcorrection by the S&P 500 to 600 (as suggested by Jeremy Grantham in his latest quarterly newsletter), “although the downside move to date is still quite overstretched relative to the 200-day moving average. Fundamentals will not determine the actual low, in my opinion, whether already seen or pending. That will be determined by sentiment and liquidity, as always. Currently, sentiment is diabolical but liquidity is increasingly abundant.

“From an investment perspective, my preferred strategy would be to nibble on high-quality equities with decent and well-covered yields.”

On the back of the bullion price increasing by 6.9%, the Gold Bugs Index (+10.6%) was one of the top-performing industry groups for the week. The venerable Richard Russell said: “The [gold] market always does what it’s supposed to, but never when. Is it ‘when time’ for gold? It looks like the long erratic correction in gold is over.

“Gold is pushing up consistently now – the first upside target is to better the 900 level which will take gold above the two preceding peaks. If gold can move above the 900 level (we’re close), I think there is a good chance it will test the highs. Up until now, gold’s progress has been halted, every advance corrected. Gold appears to advance more easily now and the gold stocks are going along with the bullion.”

According to US Global Investors – Weekly Investor Alert, David Rosenberg of Merrill Lynch on Friday sent out a research note titled “The case for gold”, explaining that gold’s value is enhanced by declining bullion supply and increasing money supply.

James Montier of Société Générale added: “Gold kind of scares me because very often the people involved with it seem to be slightly insane. My other problem is I don’t know how to value it. That said, I can certainly see why gold could be considered somewhat of an insurance policy, if not an investment in its own right. Any kind of systemic economic turmoil is likely to drive gold prices higher.”

For more discussion about the direction of stock markets, also see my post “Video-o-rama: Wishing you well, Mr O“.

Economy
“Global businesses remain darkly pessimistic. Sentiment was at its worst in mid-December, but has improved only marginally since then,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “European and South American businesses are most worried, followed by North America; Asian companies are negative but less so. Pricing power has collapsed, suggesting that deflation is increasingly likely.”

The latest US economic reports also indicate that the intensity of the economic downturn shows no sign of letting up. Homebuilding descended to an unprecedented post-war low, the National Association of Home Builders (NAHB) housing market index again reached a new low, and the ABC/Washington Post Consumer Confidence Index remained near its all-time lows. Interestingly, no president has entered office with such a poor level of consumer confidence since the beginning of the Survey in 1985.

Regarding the meeting of the Federal Open Market Committee (FOMC) on January 27 and 28, Asha Bangalore (Northern Trust) said: “The policy statement will be the first following the zero interest rate policy adopted at the last meeting. The explicit hint about the Fed’s future course of action in the December 16, 2008 policy statement read as follows:

‘The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.’

“We will be paying close attention to whether the Fed will retain or rephrase this part of the policy statement. With regard to the Fed’s views about economic growth and inflation … we do not expect radical modifications of the entire policy statement.”

Elsewhere in the world, evidence mounted that the recession was spreading and deepening.

- The UK’s real GDP contracted by 1.5% in the fourth quarter, following a 0.6% decline in the third quarter. The data confirmed the first UK recession since 1991.

- China’s real GDP declined by 6.8% year on year in the fourth quarter. However, when recalculating China’s growth rate on a quarter-on-quarter annualized basis, like most other countries do, commentators are of the opinion that the Chinese economy might already be contracting.

- Japan recorded a fifth consecutive monthly trade deficit in December, marking the worst year for exports on record. Exports contracted by 35% year on year, compared with a 16% expansion as recently as July.

Summarizing the economic situation, Nouriel Roubini (RGE Monitor) said: “The US economy is, at best, halfway through a recession that began in December 2007 and will prove the longest and most severe of the post-war period. Credit losses of close to $3 trillion are leaving the US banking and financial system insolvent. And the credit crunch will persist as households, financial firms and corporations with high debt ratios and solvency problems undergo a sharp deleveraging process.

“Worse, all of the world’s advanced economies are in recession. Many emerging markets, including China, face the threat of a hard landing. Some fear that these conditions will produce a dangerous spike in inflation, but the greater risk is for a kind of global ‘stag-deflation’. We’re likely to see vulnerable European markets (Hungary, Romania and Bulgaria), key Latin American markets (Argentina, Venezuela, Ecuador and Mexico), Asian countries (Pakistan, Indonesia and South Korea), and countries like Russia, Ukraine and the Baltic states facing severe financial pressure.

“The world’s first global recession is just getting started.”

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

Source: Yahoo Finance, January 23, 2009.

In addition to the interest rate announcement by the FOMC (Wednesday, January 28), the US economic highlights for the week, courtesy of Northern Trust, include the following:

1. Leading Indicators (January 26): Consensus: -0.3% versus -0.4% in November.

2. Existing Sales (January 26): Consensus: 4.40 million versus 4.49 million in November.

3. New Home Sales (January 29): Consensus: 400,000 versus 407,000 in November.

4. Durable Goods Orders (January 29): Consensus: -2.0% versus -1.5% in November.

5. Real GDP (January 30): Northern Trust: -4.5% Consensus: -5.4% versus -0.5 in Q3.

6. Other reports: Consumer Confidence (January 27); Consumer Sentiment Index and Employment Cost Index (January 30).

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

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

Source: Wall Street Journal Online, January 23, 2009.

Bernard Baruch said: “If you get all the facts, your judgment can be right; if you don’t get all the facts, it can’t be right.” Hopefully the “Words from the Wise” reviews offer assistance to Investment Postcards‘ readers in compiling the facts.

That’s the way it looks from Cape Town.

Bespoke: Interesting prediction market contracts
“Prediction market website Intrade has some interesting finance-related contracts trading at the moment, and below we highlight charts of them. The first contract is whether Apple CEO Steve Jobs will depart as CEO by the end of 2009. As shown, the contract peaked when the company announced Mr. Jobs’ leave of absence earlier this month, but it has since declined a bit to its current level of 60% (traders are putting the odds at 60%).

“The second contract is whether the unemployment rate in the US will be higher than 8.5% by December 2009. The unemployment rate is currently at 7.2%, and the odds for it to be higher than 8.5% by year end are at 55%.

“Intrade also has a contract on whether the US will default on its debt on or before 12/31/09. Traders are currently putting the odds of this occurring at 3.5% on Intrade, which seems low, but is actually pretty high considering what the implications would be if this happened.

“And back in early December, Intrade traders were putting the odds of a GM bankruptcy before the end of Q1 ‘09 at greater than 60%. After government intervention for the automakers happened a few weeks later, those odds dropped sharply and now stand at just 10%.

“Liquidity in these markets is low, so making big bets is hard to do, but analyzing these contracts gives some unique insight into what some people think will or will not happen in the near future.”

Source: Bespoke, January 22, 2009.

CNBC: Barack Obama will help the economy, but don’t expect miracles

Click here for the article.

Source: CNBC, January 18, 2009.

Reuters: Soros – US stimulus not enough, TARP bailout misused
“The stimulus plan the US government is currently considering is necessary to help American citizens, but it will likely not reverse the country’s economic decline, hedge fund manager and billionaire philanthropist George Soros said on Monday.

“‘It is not enough to turn the situation around,’ Soros told the US Conference of Mayors about the $850 billion proposal to increase spending and cut taxes.

“The plan, which was introduced in the US House of Representatives last week and will likely be passed by next month, will help state and local governments balance their budgets and preserve important social services, Soros said.

“At the same time, the $700 billion financial bailout known as TARP for Troubled Assets Relief Program had been carried out in a ‘haphazard and capricious way’ and ‘without proper planning’, he said.

“‘Unfortunately it was misused and the way it was done has poisoned the well. It has created tremendous ill will toward putting up more money,’ Soros said.”

Source: Lisa Lambert, Reuters, January 19, 2009.

Casey’s Charts: What the banks did with the latest bailout
“The red line in the graph below shows that, since August, banks have built their cash position in the form of Treasuries, agencies and deposits at the Fed by $865 billion, while their loans and leases have increased by only $325 billion.

“In other words, rather than lending the billions of dollars received from the Treasury’s Troubled Asset Relief Program (TARP), as was originally intended, the recipient banks have squirreled away the bailout funds in order to shore up their balance sheets.

“Concurrently, the Federal Reserve is exchanging its excess reserves for toxic waste from the financial institutions.

“The combined affect is a ‘circular bailout’ with the Treasury borrowing … in order to lend money to banks … that then lend it back by purchasing more Treasuries. Of course, the expense of this entire bailout scheme ultimately falls onto the back of the tax-paying public.”

Source: Casey’s Charts, January 20, 2009.

Reuters: US and UK on brink of debt disaster
“The United States and the United Kingdom stand on the brink of the largest debt crisis in history. While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt.

“To understand the scale of the problem, and why it leaves so few options for policymakers, take a look at the chart below which shows the growth in the real economy (measured by nominal GDP) and the financial sector (measured by total credit market instruments outstanding) since 1952.

“The solution must be some combination of policies to reduce the level of debt or raise nominal GDP. The simplest way to reduce debt is through bankruptcy, in which some or all of debts are deemed unrecoverable and are simply extinguished, ceasing to exist.

“But widespread bankruptcies are probably socially and politically unacceptable. The alternative is some mechanism for refinancing debt on terms which are more favorable to borrowers (replacing short term debt at higher rates with longer-dated paper at lower ones).

“The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalization, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population.”

Source: John Kemp, Reuters, January 21, 2009.

Financial Times: Winter bites in EU but with some bright spots
“Wintry conditions are gripping Europe’s economies as the biting winds caused by financial market storms lead to deep and protracted recessions, but regional variations are still distinguishable.

“The latest Financial Times economic weather map for Europe shows a further substantial deterioration since it was last published in October, when the devastating impact on the global economy of the collapse of Lehman Brothers, the investment bank, was only just becoming apparent.

“European industrial production collapsed in November, data this month have shown, and business confidence surveys suggest the bottom of the recession – set to be among the worst since the second world war – has not yet been reached.”

Source: Ralph Atkins and Ben Hall, Financial Times, January 19, 2009.

CNBC: Buffett & Brokaw
“Insight on the financial and economic turmoil, with Warren Buffett, Tom Brokaw, NBC News special correspondent, and CNBC’s Erin Burnett and Mark Haines.”

Source: CNBC, January 19, 2009.

RGE Monitor: Estimated $3.6 trillion loan and securities losses in US
“Nouriel Roubini and Elisa Parisi-Capone of RGE Monitor released new estimates for expected loan losses and writedowns on US originated securitizations.

“Loan losses on a total of $12.37 trillion unsecuritized loans are expected to reach $1.6 trillion. Of these, US banks and brokers are expected to incur $1.1 trillion.

“Mark-to-market writedowns based on derivatives prices and cash bond indices on a further $10.84 trillion in securities reached about $2 trillion. About 40% of these securities (and losses) are held abroad according to flow-of-funds data. US banks and broker dealers are assumed to incur a share of 30-35%, or $600-700 billion in securities writedowns.

“Total loan losses and securities writedowns on US originated assets are expected to reach about $3.6 trillion. The US banking sector is exposed to half of this figure, or $1.8 trillion (i.e. $1.1 trillion loan losses + $700 billion writedowns.)

“FDIC-insured banks’ capitalization is $1.3 trillion as of Q3 2008; investment banks had $110 billion in equity capital as of Q3 2008. Past recapitalization via TARP 1 funds of $230 billion and private capital of $200 billion still leaves the US banking system borderline insolvent if our loss estimates materialize.

“In order to restore safe lending, additional private and/or public capital in the order of $1 – 1.4 trillion is needed. This magnitude calls for a comprehensive solution along the lines of a ‘bad bank’ as proposed by policy makers or an outright restructuring through a new RTC.

“Back in September, Nouriel Roubini proposed a solution for the banking crisis that also addresses the root causes of the financial turmoil in the housing and the household sectors. The HOME (Home Owners’ Mortgage Enterprise) program combines a RTC to deal with toxic assets, a HOLC to reduce homeowers’ debt, and a RFC to recapitalize viable banks.”

Source: RGE Monitor, January 22, 2009.

Asha Bangalore (Northern Trust): Home building activity posts new low
“Starts of new homes fell 15.5% in December to an annual rate of 550,000. The annual average of new homes started in 2008 is 902,000, the lowest on record. Starts of new single-family homes dropped 13.5% to an annual rate of 398,000, the lowest on record.

“The peak-to-trough decline in housing starts, both total and single-family, is the largest on record since record keeping began for these series in 1959 (see table 1). The duration of the weakness in home construction (peak was in January 2006) is also the longest on record.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 22, 2009.

Asha Bangalore (Northern Trust): Housing Market Index spells more gloom
“The Housing Market Index (HMI) of the National Association of Home Builders fell to 8.0 in January 2009 from 9.0 in December 2008. Before the onset of the current recession, the record low for the HMI was 20.0 during the 1990-91 recession. The question now is: What is the low for the HMI? The answer is unknown, but we can say that the severity of the housing market situation grows in leaps and bounds everyday.

“The HMI is strongly correlated with sales of new single-family homes. Based on this historical relationship, it appears that a pickup in new sales in the near term is unlikely.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 21, 2009.

Shadowstats: Decline in retail sales worst since World War II
“Annual real retail sales fell by 9.09% in December, versus a 9.11% contraction in November, the steepest annual declines since 1952. On a three-month moving-average basis the December and November declines were 8.88% and 7.87%, respectively. The December annual moving-average decline was the deepest in the history of the two most recent retail series, making the results the worst of the post-World War II era. The annualized real contraction for fourth-quarter 2008 retail sales was 17.1%.”

Source: Shadowstats, January 2009.

BCA Research: US deflation – this time it’s for real
“Annual US headline CPI dipped to zero in December. Core CPI is still positive (1.7% annual growth), albeit is falling steadily.

“The decline in headline inflation is due largely to sharply falling energy (and food) prices. Underlying inflation moves with the business cycle, though it lags economic growth by several quarters. The economy decelerated steadily last year before imploding in the autumn. Thus, core CPI is on track to fall further as economic slack builds. Already, retail prices are falling.

“The current deflationary threat is much more serious than the previous episode in 2002, given the speed and magnitude of the credit and economic crunch. Thus, policymakers will need to work hard to anchor inflation expectations in positive territory, and ensure that a deflationary mindset among consumers and businesses does not set in.”

Source: BCA Research, January 19, 2009.

Paul Kedrosky (Infectious Greed): Banks are just a circle of their former selves
“Nice graphic of how the major banks are just a fraction of their former selves, at least as measured by market value.”

Click on the image below for a larger graph.

Source: Paul Kedrosky, Infectious Greed, January 21, 2009

Bespoke: Long-term charts of the financial sector
“A look at long-term charts of the S&P 500 Financial sector is downright depressing. The first chart below dates back to 1990, and as shown, the sector closed at its lowest level since March 1995 yesterday. The sector is now down 79% from its highs in 2007. A chart of the sector all the way back to 1940 shows just how much the sector has fallen in such a short period of time.”

Source: Bespoke, January 21, 2009.

Eoin Treacy (Fullermoney): Will bank indices be leading indicators?
“The downward breaks experienced by a number of Western banking indices over the last week are significant and suggest we can expect further moves by the respective governments to shore up their financial sectors. This relative weakness poses a headwind for their wider markets.

“When bank indices began to underperform in 2007, they had an incredibly large weighting in most country indices. The performance of bank shares was important both in terms of their high relative weightings and because of their status as lead indicators. However, bank sectors are now a considerably smaller weighting in most indices. This lessens the intrinsic importance of the banks sector to the performance of the wider market, but the psychological impact is undiminished.

“The performance of bank sectors is a major drag on sentiment. Dividends are being eliminated and a process of nationalisation is underway in a number of Western countries. However, one should not forget that many other companies will not need government support, will not eliminate their dividend and as such are likely to be relative performers in this environment.

“In addition, an interesting dichotomy exists between markets where banks are underperforming and where they are outperforming. Bank indices in the USA (S&P500 Banks, Philadelphia Banks, Regional Banks), Europe (DJ Euro Stoxx Banks), the UK, France, Germany, Norway, Finland, Sweden, Italy and Ireland all made new lows in the last week. Internationally, the Chinese bank index is closest to the upper side of its range. No other bank index, I know of, is showing such relative strength. All Asian bank indices remain within their ranges. The marked underperformance of the USA and much of Europe is a clear indication that this is where the bulk of financial risk is focused.”

Source: Eoin Treacy, Fullermoney, January 20, 2009.

Brian Belski (Banc of America Securities-Merrill Lynch): Liquidity is key
“US equity investors should concentrate on companies, industries and sectors that have the means to fund themselves, says Brian Belski, strategist at Banc of America Securities-Merrill Lynch.

“He notes that areas in the market exhibiting strength recently have been dominated by low-quality companies with higher debt levels. But he says fundamental conditions do not support a move to low quality. ‘If 2008 taught us anything, attempts to get ahead of an eventual stock market and economic recovery were premature and misguided.’

“He acknowledges that credit market conditions have improved but is not convinced the worst is over. ‘Remember, even though credit spreads have narrowed, they still remain considerably above the peaks exhibited during prior credit cycles which we believe is a consequence of the loss of confidence both from investors and lenders.

“‘This is particularly troubling to us because we expect US corporate bond issuance to decline in 2009, yet a significant amount of bonds are expected to mature for S&P 500 companies. As a result, areas within the market that rely on leverage to fund operations are likely to struggle in the coming year and the trajectory of corporate bankruptcy filings over the past several years certainly appears to support this notion. Therefore, investors should continue to focus on areas demonstrating strong liquidity in the form of high cash balances and free cash flow.’”

Source: Brian Belski, Banc of America Securities-Merrill Lynch (via Financial Times), January 20, 2009.

Bespoke: Volatility Index shows more complacency
“Below we highlight a chart of the VIX volatility index along with the S&P 500. One difference between the current decline and the declines in October and November is that the VIX has not spiked nearly as much. Many think of the VIX as an indication of fear in the market, and whether it’s good or bad, there seems to be more complacency during the most recent downturn.”

Source: Bespoke, January 23, 2008.

Bloomberg: Roubini, Edwards predict slump in S&P 500 on China
“Stocks will retreat around the world because of shrinking demand from China as growth in the third- biggest economy slows, said Nouriel Roubini, the New York University professor who predicted last year’s financial crisis.

“Global equities will fall 20% this year from current levels as China, which contributed 19.5% to total growth in 2007, contends with its slowest expansion in seven years, he said. Wall Street strategists predict the Standard & Poor’s 500 Index, down 8.4% so far, will rise 17% in 2009.

“Roubini, an economics professor at NYU’s Stern School of Business, said China already is in a ‘recession’ despite government data showing a 6.8% fourth-quarter growth rate, as power output declines and manufacturing shrinks.

“‘Demand is falling in China, they’re over-invested in capacity and there’s a global supply glut,’ Roubini said in a telephone interview. ‘It has very, very important implications.’

“Roubini’s view is shared by Societe Generale global strategist Albert Edwards, who was correct in forecasting in March that a US contraction would spur a bear market in equities. Edwards says the China slowdown will reduce earnings at industrial, energy and raw-materials companies, sparking a selloff in emerging and developed-market stocks that may send the S&P 500 down 40% to 500.

“‘People should be thinking really hard about this rather than sticking their heads in the sand,’ said Edwards, a London-based strategist and member of the top-ranked global investment strategy team in Thomson Extel’s surveys the past three years. ‘We’re just pointing out when the emperor doesn’t have any clothes on.’”

Source: Michael Patterson and Adam Haigh, Bloomberg, January 23 2009.

Bloomberg: Mobius to invest more in China, emerging markets
“Mark Mobius, who oversees about $26 billion in emerging-market stocks at Templeton Asset Management, said he plans to buy more shares of consumer and commodities companies in emerging markets.

“‘Valuations are attractive,’ Mobius, Templeton’s executive chairman, said at a briefing in Kuala Lumpur today. ‘We feel that this year would be a year of recovery of the stock markets in the emerging markets.’

“Mobius said rising income in China, India and other parts of Asia will spur spending on consumer goods, while commodity prices are now ‘too low’. The two nations, Brazil, South Africa and Turkey offer best investment opportunities, he said.

“‘There is an incredible build-up of foreign reserves in the emerging markets, and the increase in money supply is quite dramatic,’ the executive chairman said. ‘We’ve seen a very big increase of money coming into markets.’

“The emerging-markets gauge trades at 8.2 times its companies’ reported earnings, 36% cheaper than its average valuation last year, according to data compiled by Bloomberg. The developed measure trades for 10.8 times profit.

“The US economy and other economies will rebound in 2010, said Mobius, whose biggest holdings are in Asia.”

Source: Soraya Permatasari, Bloomberg, January 17, 2009.

Bespoke: S&P 500 Q4 ‘08 earnings now expected to fall 28.2%
“At the start of the fourth quarter, analysts were expecting S&P 500 earnings to grow by 30% versus Q4 ‘07. While this seems outlandish now, remember that growth in Q4 ‘07 was extremely poor as well, and analysts thought many companies would begin to turn the corner by Q4 ‘08. As we all know, the economy pretty much came to a halt last October. As a result, analysts quickly began to cut growth estimates for the fourth quarter after it became apparent that things weren’t going to get better anytime soon.

“Fast forward a few months, and now analysts are expecting those same Q4 ‘08 earnings to be 28% weaker than the fourth quarter of 2007. With the direction that these estimates have been heading, when all is said and done, it’s likely that this number will get even worse.”

Source: Bespoke, January 21 2009.

Bespoke: Pick your poison – stocks or bonds
“While we all know that investing in stocks has been painful, some readers may be surprised to learn that Treasuries haven’t provided a much better alternative. While the S&P 500 is down 8% so far this year, long-term Treasuries (as measured by the US Long Bond future) are down almost 6%. With the recent break below their 50-day moving average, bonds are hardly looking like a ‘safe’ alternative in the current environment.”

Source: Bespoke, January 22, 2009.

Financial Times: Barclays Capital’s Larry Kantor says keep assets liquid
“The situation in many markets and economies is so tenuous now because we don’t know what the policies are going to be. The next month or two are critical. Investors should keep an ‘arsenal of liquid assets to deploy’, at some point it is possible that there could be a very big upswing in the economy and in equities, which investors should be ready for.

“In the meantime, debt of strong companies appears to be a good investment, especially as the Federal Reserve is considering buying corporate debt, together with other assets it is already buying, such as commercial real-estate backed bonds.”

Source: Financial Times, January 18, 2009.

Bloomberg: “Time to sell” Treasuries, biggest Korean fund says
“A rally that sent US Treasuries to their best year since 1995 is coming to an end, South Korea’s National Pension Service, the country’s biggest investor, said.

“US government efforts to combat the recession will prompt the Federal Reserve to raise interest rates this year, said Kim Heeseok, who oversees $160 billion as head of global investments for the service in Seoul. The decline would snap a surge that sent the securities up 14% last year, according to Merrill Lynch & Co.’s US Treasury Master index, as investors sought the relative safety of debt.

“‘It’s time to sell US Treasuries,’ said Kim, who took over as head of investments at the start of the year. ‘The stimulus plan may cause inflation. The US will raise the benchmark interest rate.’”

Source: Wes Goodman, Bloomberg, January 19, 2009.

John Hussman (Hussman Funds): The case for TIPS
“The way to think about the relationship between TIPS yields and straight Treasury yields is that the nominal yield on a security is equal to the ‘real’ yield plus expected inflation. At present, we have extraordinarily depressed nominal yields, but relatively high real yields, which means that the inflation rate implied in TIPS is extraordinarily low. Indeed, in order for TIPS to achieve the same total return as straight Treasuries over the next decade, we would need to observe a slight but sustained deflation over that period.

“My impression is that we are not near the point where there is any real risk of inflation, and we may very well observe negative near-term inflation rates (which is why it is important to be careful with TIPS that trade at a substantial premium to par, since the apparently high ‘real’ yields on near-term TIPS can be eroded by deflation). TIPS can’t mature at less than par, but if there is a deflation, the accrued inflation adjustment on these securities can be whittled down.

“Suffice it to say that we are holding TIPS not because we anticipate a near-term resurgence of inflation, but because the real, inflation-adjusted yields available over the next decade are quite high on a historical basis, and will adequately provide for the maintenance and growth of purchasing power over time, regardless of the near-term course of consumer prices.”

Source: John Hussman, Hussman Funds, January 19, 2009.

Steve Barrow (Standard Bank): Dollar honeymoon won’t last
“The arrival of a new US president often sees an initial rise in the dollar – although the honeymoon does not always last long and it is doubtful whether this time will be different, says Steve Barrow, currency strategist at Standard Bank.

“He says it is possible that the market might buy into new hope offered by an incoming president.

“‘There’s little doubt that Barack Obama campaigned on a pledge to bring new hope to the American people. It is also possible that the Democrats’ strong position in Congress will give Mr Obama more scope to impose his will than President Bush did.’

“But Mr Barrow doubts any early dollar strength in Mr Obama’s presidency will last. He says the US budget deficit is set to balloon due to the recession and likely $775 billion stimulus plan and notes that the last president to oversee such huge deficit expansion was Ronald Reagan in 1980-1988.

“‘Dollar strength at the start of Mr Reagan’s term gave way to a downtrend that lasted until 1995. The Reagan camp initiated this weakness with dollar sales in 1985. We doubt Mr Obama will do the same, but in one respect, the new president will be seeking a weaker dollar.

“‘The Chinese renminbi remains a thorn in the side of the US trade balance. Mr Obama has vowed to continue the fight for flexibility – and hence strength – in the renminbi as initiated by President Bush. In order to see the dollar weaken against the renminbi, the dollar may have to fall elsewhere.’”

Source: Steve Barrow, Standard Bank (via Financial Times), January 19, 2009.

Jim Rogers: Sterling in peril
“The pound is a currency with no underpinning and should fall against the dollar and the euro, says Jim Rogers, chairman of Rogers Holdings and co-founder of the Quantum Fund with George Soros.

“He says his view reflects the UK’s dire economic situation: ‘It’s simple, the UK has nothing to sell.’

“Mr Rogers says the two main pillars of support for sterling have been North Sea oil and the strength of the UK financial services sector, in particular, the City of London’s role.

“But Mr Rogers says just as North Sea oil is running out, so London’s standing as a major financial centre is set to suffer.

“‘I don’t think there is a sound UK bank now, at least, if there is one I don’t know about it,’ he says.

“‘The City of London is finished, the financial centre of the world is moving east. All the money is in Asia. Why would it go back to the West? You don’t need London,’ says Mr Rogers.

“Mr Rogers thinks the pound is more vulnerable than the dollar or the euro. He says the UK housing market is arguably in a worse state than that of the US, given pockets of strength in the US and prices that are sliding across the board in the UK.

“Meanwhile, he says, the UK is in worse shape economically than the eurozone, where most countries are not big debtors and do not run huge trade deficits. ‘If the UK discovers more North Sea oil, I might change this view,’ he says. ‘But I don’t see that happening.’”

Source: Jim Rogers (via Financial Times), January 21, 2009.

Bespoke: British pound crumbles
“The US dollar is clearly back in rally mode after suffering a setback in December. As shown in the first chart below, the Dollar Index has now broken well above its 50-day moving average and appears to be heading back to its November highs. Unfortunately, rallies in the dollar have recently coincided with declines in riskier assets like equities.

“But the bigger news in currencies is the dramatic fall that the British pound has recently experienced. Today the pound is suffering another big drop, and as shown in the first chart below, the currency broke below recent support levels as well as the $1.40 mark. And the bottom chart shows just how much the pound has fallen in such a short period of time. In late 2007, the pound was trading at record highs versus the US dollar. Now it is trading very close to its lowest level since 1991. Anyone in the US that has the money to go to England can stay there on the cheapest tab in decades.”

Source: Bespoke, January 20, 2009.

Eoin Treacy (Fullermoney): Testing times for euro
“All countries in the Eurozone are now seeing their government bond spreads widen relative to German yields. This is an indication that all countries took part in the access to abundant credit made possible by the launch of the Euro and are now suffering the consequences.

“Some are being more affected than others. Spreads for Spain, Greece, Italy and Ireland have expanded most. These were some of the countries where borrowing costs had fallen most in order to join the Euro and where most use was made of the ability to access cheap credit. Without the single currency they would never have been able to borrow at such low rates, but they are now constricted by being unable to devalue their currencies in order to help them through the crisis.

“This is the first real test for the single currency. If it can survive the credit / solvency crisis without seeing some countries dropping out or its efficacy being called into question; then it stands a good chance of surviving for the longer-term as a viable entity. This may well depend on how long the crisis drags on.

“Spreads of more than 250 basis points over Bunds, for Greek government bonds are not encouraging for its long-term participation. Investors will no doubt remember there were significant questions about the Greek government’s financial probity in the figures submitted to the European Commission prior to its entry into the single currency. Time will tell, but it will be a worthwhile exercise to monitor these spreads going forward.

“It is also interesting to see that in the UK, where control of interest rates is maintained by the BOE, that the brunt of the country’s risk reassessment has been borne by the pound rather than government bonds. The spread over Bunds has been in a volatile downtrend since late 2005 and tested parity recently. The government bond spread has been contracting in line with the pound’s decline against the Euro; both appear to have turned around the same time.”

Source: Eoin Treacy, Fullermoney, January 19, 2009.

CEP News: Treasury Secretary Geithner takes hardline stance on China
“In tune with the ‘change’ mantra heard throughout the US Presidential campaign, the Obama administration signalled a new stance on China. But given the economic climate, analysts question the strategy of adopting a hardline position with the biggest purchaser of US debt.

“In comments to the Senate Finance Committee released Thursday, newly-confirmed Treasury Secretary Timothy Geithner said, ‘President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency.’ He added later that Obama will aggressively push the Asian country to change its policies on foreign exchange.

“‘The comments from the new administration suggest a more robust position on China than the former administration,’ said Shaun Osborne, chief currency strategist at TD Securities. ‘It remains to be seen what China’s response will be, but the US is in a very delicate position at the moment.’

“In September, China overtook Japan as the largest foreign holder of US debt, but that appetite may shrink as China’s growth has slowed dramatically in the global recession.”

Source: Patrick McGee, CEP News, January 22, 2009.

John Authers (Financial Times): Currency interventions looming
“Unprecendented shifts in forex markets last year is fueling rumors of currency interventions in the coming weeks.”

Click here for the article.

Source: John Authers, Financial Times, January 22, 2009.

US Global Investors: Rosenberg – the case for gold
“Gold was, of course, one of the investment world’s few bright spots in 2008, and after a slow start in 2009, it began a rally that climbed above $900 an ounce on Friday. This is gold’s highest price since early October.

“David Rosenberg at Merrill Lynch sent out a short but useful research note Friday titled ‘The Case for Gold’ that explains that gold’s value is enhanced by declining bullion supply and increasing money supply.

“‘It’s the only currency not going up in supply. Pretty simple. South African gold output declined 14% last year in the steepest decline since 1901. US production was down 2%. The leading producer in terms of growth last year was China at +3% (and global central bank selling activity dropped 42% in 2008 to 279+ tons, the lowest since 1996).

“‘Meanwhile, money supply is up more than 10% YoY in the USA (M2); +16% in Australia (M3); almost 11% in Germany (M2); 18% in the UK (M2); almost 9% in Italy (M2); 13% in Canada (M2); 14% in Korea (M2); 18% in India (M2); 12% in Singapore; and 18% in China (M2).

“‘Outside of gold, the only country where money is not being poured into the financial system as if it was water from the tap is Japan, where trends in the monetary aggregates are flat-to-negative. Be that as it may, and in view of all the problems in the US banking sector, we think the dollar is unlikely to lose its reserve currency status any time soon … Confidence in the ability of European governments to service their sovereign debt is being called into question in the debt markets (‘in the land of the blind …’ ).’”

Source: US Global Investors – Weekly Investor Alert, January 23, 2009.

Richard Russell (Dow Theory Letters): Gold – very bullish action
“During the great gold bull markets of the 1970s to 1980, gold topped out at a price of 850 per ounce. For months now, gold has been ‘testing’ the 850 level, first rallying above 850 and then sliding below 850. Currently, February gold is trading at 891. I consider this to be very bullish action. The current gold action is taking place in the second phase of the new gold bull market. The second phase has seen many hedge funds and a small segments of the public become interested in gold.
“I believe the third speculative phase of the current gold bull market lies ahead. This is the phase where the public jumps wholesale into the market. It’s the phase where I expect to see a much higher, even frenzied, gold price. This final phase of the gold bull market will be accompanied by international doubt regarding the value and viability of fiat currency.
“Fiat money is being created in great quantities by almost every central bank in the world. Imagine, the foolishness of trying to ward off insolvency by creating ever-larger quantities of paper money. The worse off the economies of the world, the more fiat currency will be created.”

Source: Richard Russell, Dow Theory Letters, January 23, 2009.

Financial Times: UK move to boost cash supply
“Britain paved the way towards unconventional monetary policy in Europe on Monday when the government gave the Bank of England authority to create money and buy a variety of private sector assets.

“Although there is no sign the Bank’s monetary policy committee wants to introduce US-style quantitative easing immediately, it now has the power to buy assets ranging from corporate bonds to asset-backed securities with newly created money.

“The policy, if introduced, seeks to ease the flow of finance to companies, driving down company borrowing costs and boosting the supply of cash in the economy. The Federal Reserve prefers the term ‘credit easing’ to describe similar moves.

“The decision comes as part of a package designed to ease pressure on lending in the UK economy and put a brake on deepening recession. On Monday, the European Commission said Britain had one of the most exposed economies in the world to the global recession, predicting its economy would contract by 2.8% this year with stagnation continuing in 2010.

“Other elements of the package were heavily trailed. An insurance scheme stands at its heart, designed to restore some certainty to banks’ finances by providing cover against catastrophic losses. This will be implemented from February on a case-by-case basis.

“From April, the government will provide guarantees to wrap around simple asset-backed securities issued by banks containing high-quality mortgage and corporate assets. Subject to state aid approval from the European Commission, it is also planning to extend its current guarantee of short-term funding for banks to the end of the year.

“For the first time since the crisis began, the Bank of England will also explicitly accept corporate credit risk when it begins a $74 billion programme of asset purchases from the private sector in return for government paper in February.”

Source: Chris Giles, Financial Times, January 19, 2009.

Financial Times: UK tries to break recessionary dynamic
“The government on Monday launched its second bank rescue package, injecting billions of pounds more of the taxpayer’s money into saving Britain’s banks. Chris Giles, FT’s economics editor, tells Daniel Garrahan that the new bank rescue package is designed to rescue the economy as well as the banks.”

Source: Financial Times, January 19, 2009.

BCA Research: Last chance for UK banks
“Measures by UK authorities to shore up the banking system brings the prospect of full scale nationalization one step closer if they fail to re-ignite lending.

“The BoE’s ability to purchase assets outright will effectively help in recapitalizing the banking system and should also provide a valuable fillip to the corporate debt market. For now, the Treasury has stopped short of setting up a ‘bad bank’ to coral all the poor quality assets, probably for fear of what this might mean for the UK’s beleaguered public finances in the event of default. Based on current government estimates the deficit will stay above 3% of GDP until the middle of the next decade.

“Bottom line: At this stage, policymakers are limiting their actions to ‘quality assets’. However, it is probable that the next step is a ‘bad bank’ and full scale nationalization, given that output is forecast to fall this year at the fastest pace since 1946 and lending is likely to stay weak for a prolonged period.”

Source: BCA Research, January 21, 2009.

James Pressler (Northern Trust): Japan – no sale!
“Two items of significance regarding the Japanese market hit the wire this morning – the end-year trade balance and the Bank of Japan (BoJ) policy meeting announcement. With the overnight call rate already down to 0.10%, another rate cut would hardly be a news-maker, but the state of Japan’s exports usually makes the front page. And unfortunately, the news was not good.

“Nobody expected the export market to make a miraculous turnaround, but some hope existed for less erosion in overseas sales or fewer imports, thereby supporting net exports. Neither occurred. December imports contracted by 21.5% on the year and were up by 7.9% for 2008 as a whole, but exports fared much worse, posting respective changes of -35.0% and -3.4%. This dragged the annual trade balance down to $20.4 billion, a level not seen since 1983 and a far cry from the 2007 tally of $92.1 billion.

“We have said it before and we will say it again – our official forecast for Q4 GDP in Japan is ‘abysmal’.”

Source: James Pressler, Northern Trust – Daily Global Commentary, January 22, 2009.

Societe Generale: Japanese exports fall 35%
“Strikingly, Japanese exports to the US were down some 37% yoy. But we cannot highlight strongly enough how truly mindboggling Japan’s collapse in exports to China are. Last July they were expanding at a 16% yoy pace. Now they are contracting at a 35% yoy rate! This is a phenomenon throughout the region. Hence despite the notoriously manipulated Chinese GDP data showing a shocking slowdown in GDP growth to 6.8% yoy. I would eat my hat if the Chinese economy was doing anything other than contracting right now.”

Source: Societe Generale, January 2009.

Nouriel Roubini (RGE Monitor): China – why 0% growth is the new size 6.8%
“The Chinese came out today with their 6.8% estimate of Q4 2008 growth. China publishes its quarterly GDP figure on a year over year basis, differently from the US and most other countries that publish their GDP growth figure on a quarter on quarter annualized seasonally adjusted (SAAR) basis.

“When growth is slowing down sharply the Chinese way to measure GDP is highly misleading as quarter on quarter growth may be negative while the year over year figure is positive and high because of the momentum of the previous quarters’ positive growth.

“Indeed if one were to convert the 6.8% y-o-y figure in the more standard quarter over quarter annualized figure Chinese growth in Q4 would be close to zero if not negative.

“Other data confirm that China was in a borderline recession in Q4 and that it may be in an outright recession in Q1: production of electricity plunged 7.9% in y-o-y basis; the Chinese PMI has been below 50 and close to 40 for five months now.

“And with manufacturing being about 40% of GDP , manufacturing is certainly in a sharp recession (negative growth) and the overall economy may be close to a recession

“So the 6.8% growth was actually a 0% growth – or possibly negative growth – in Q4; and the Q1 figures look even worse. So China is in a recession regardless of what the highly massaged official numbers claim.”

Source: Nouriel Roubini, RGE Monitor, January 22, 2009.

Bryan Crowe (Northern Trust): Brazil – 100 is the new 75
“In a surprise to the majority of forecasters, Brazil’s central bank lowered its benchmark rate by a larger-than-expected 100bps on Wednesday after an official vote of 5-3 (the three voted for a 75 bp cut), bringing the overnight Selic rate down to 12.75%. This move was justified after a subdued inflation reading for December, but the committee’s main reason for the move was a significant deterioration in domestic conditions.”

Source: Bryan Crowe, Northern Trust – Daily Global Commentary, January 22, 2009.

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Words from the (investment) wise for the week that was (Dec 22 – 28, 2008)

Sunday, December 28th, 2008

Investors spent the holiday-shortened Christmas week in an un-merry mood, digesting more gloomy economic data and taking stock of a tumultuous 2008.

With the S&P 500 Index and the Dow Jones Industrial Index down by 35.8% and 40.6% respectively for the year to date, many investors would be anxious to wave the old year goodbye. But changing the calendar digits from ’08 to ’09 will regrettably not make an iota’s difference to the perilous nature of the investment environment facing investors as we usher in the New Year.

Come January 1, investors will not only be hung over from 2008’s market rout (and possibly the previous night’s exuberance), but also still be battling with the implications of the credit crisis for the global economy and financial markets, and in particular with the question of where to invest for decent returns during 2009. (Also see my post “Video-o-rama: Will markets bail you out in ’09?”.)

“2008 was the year of the crisis of the financial system. 2009, unfortunately, will be the crisis of the economic system,” said Mohamed El-Erian, co-CEO of Pimco in a CNBC interview. “So the news is going to be full of unemployment, defaults, etc.”

Most markets were down during the past week (albeit on light holiday volume), with the MSCI World Index (-1.5%), the MSCI Emerging Markets Index (-5.2%), the US Dollar Index (-0.3%), the Reuters/Jeffries CRB Index (-1.6%), West Texas Intermediate crude (-11.0%) and US government bonds all closing in the red.

Source: Daryl Cagle

However, not all the Christmas stockings were left empty. On the equities side, the Japanese Nikkei 225 Average (+1.8%) and the Russian Trading System Index (+5.8%) confounded the bears as both countries are faced with a particularly grim economic situation. Among fixed-income instruments, emerging-market government debt and corporate bonds were in demand. Gold (+4.0%) and platinum (+4.5%) also fared excellently – for the third week running – on the back of a solid supply/demand situation, store-of-value considerations and upbeat charting patterns.

But if Santa has not yet made his way to your investment portfolio, don’t despair. According to Jeffrey Hirsch (Stock Trader’s Almanac), the “Santa Claus Rally” normally occurs during the last five trading days of a year and the ensuing first two trading sessions of the new year. During this seven-day period stocks historically tended to advance (by 1.5% on average since 1950), but when recording a loss, they frequently traded much lower in the new year.

Christmas Eve trading on Wednesday marked the start of this year’s Santa Claus Rally period, which ends on Monday, January 5. So far so good, as the combined gain for the S&P 500 Index for the first two days (Wednesday and Friday) was 1.1%.

Given the extreme turbulence that characterized stock markets during 2008, most investors would be wishing for a calmer 2009. The red line in the chart below shows the daily percentage change in the S&P 500 Index (green line), illustrating how the volatility has been declining since the panic levels of October.

Still on the topic of volatility, the CBOE Volatility Index (VIX) has declined from 80.9 in November to 43.4 on Friday. It is not uncommon for short-term volatility to be at extreme levels at bottom turning points, and for stocks to improve as the “storm” grows quieter.

Heading into the new year, President-elect Barack Obama’s transition team is still negotiating the nuts and bolts of its economic stimulus plan with Congress, but the two-year jobs target has in the meantime been raised by 500,000 to 3 million. The planning is to have legislation for the package ready by the time Obama takes office on January 20.

As far as bailout news goes, on Christmas Eve the Fed accepted GMAC’s application to become a bank holding company. The lending unit thereby qualifies for TARP funds and hopefully won’t have to cut off credit to the General Motors (GM) dealerships.

Next, a tag cloud from the dozens of articles I have read during the past week between Yule-tide activities. This is a way of visualizing word frequencies at a glance. As expected, keywords such as “bank”, “economy”, “financial”, “government”, “market”, “mortgage”, “prices” and “rates” feature prominently.

The debate regarding the outlook for the stock market is still concerned with what represents good value. Comstock Partners commented that the S&P 500’s reported (GAAP) earnings estimate for 2009 had dropped to just over $42. “In the past, secular bear markets troughed at 8 to 10 times reported earnings, NOT operating earnings, which didn’t even exist until 1984. In terms of timing, on average the market bottomed five months before the end of the recession. Therefore the odds are that unless the economy starts to recover five months from the November 2008 bottom, the market decline is not over, although a bear market rally is always a possibility between now and the eventual low,” said Comstock.

Richard Russell (Dow Theory Letters) said: “Lowry’s Selling Pressure Index is now down substantially from its recent high. With the urge to sell subsiding, all that’s needed now is an increase in the demand for stocks, an increase in the urge to buy … will buyers come in? I suspect we’ll get the answer to that question next week.”

Bespoke draws the attention to the Yale Crash Confidence survey – a survey that measures investor confidence on a monthly basis, asking investors how confident they are that there won’t be a market crash in the next six months.

“In November, the individual Crash Confidence reading reached its lowest level ever at 22.7%. As the green line in the chart shows, the prior low in Crash Confidence was in October 2002, which was the ultimate market low during the 2000 to 2002 bear market. This negativity is actually a positive for the market going forward,” said Bespoke.

Although the Fed and other central bank actions have resulted in some progress being made to fix the broken credit machine, the thawing of the credit markets still has a considerable way to go before liquidity starts to move freely and the world’s financial system functions normally again (see “Credit Crisis Watch – Signs of Progress”). In the meantime, stock markets stay caught between the actions of central banks and a worsening economic and corporate picture.

It is too early to tell whether a secular stock market low was recorded on November 20 and, failing further technical and fundamental evidence, I remain distrustful of rallies. As said before, we are in a wait-and-see mode.

Economy
“Another week and another new record low for global business confidence. Businesses are equally pessimistic in North America, South America and Europe, and while Asian business confidence is not quite as dark, it is weakening rapidly,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. The Survey results indicate that the entire global economy is mired in recession.

Data reports released in the US during the past week confirmed an increasingly dire economic situation.

- The contraction in real GDP in the third quarter – an annualized decline of 0.5% – was unrevised in the final report. Real consumer spending expenditure declined by 3.8%, knocking 2.8% off real GDP growth.

- Personal income fell by 0.2% in November, more than expected, after increasing by 0.1% in October. Wage income fell for the second time in the last three months, driven by large job losses. The saving rate rose to 2.8% from 2.4% in October.

- Initial jobless benefit claims increased by 30,000 to a 26-year high of 586,000 for the week ended December 20. Initial claims are elevated from trends earlier in the year, indicating persistent weakening in the labor market.

- New orders for manufactured durable goods fell by 1% in November, following an 8.4% decline in October. This was the fourth monthly decline in new orders, but was a smaller than expected drop.

- Existing home sales dropped by 8.6% month-on-month in November, a reading well below expectations and a new cycle low. New home sales hit a 17-year low of 407,000 annualized units. Inventory remains elevated at more than 11 months.

- In the week ended December 19, the Mortgage Refinance Index gained 62.6% on the back of sharply lower mortgage rates.

A further indication of the severe pullback in discretionary buying came from CNNMoney.com’s report on MasterCard’s SpendingPulse Data which estimates that total store sales fell about 3% in November and December combined – the worst holiday sales season for retailers in decades.

Elsewhere in the world, the economies continued to accelerate to the downside. A case in point is China and Japan that witnessed a number of particularly ugly economic reports during the past week.

- On the back of a sharp decline in Chinese exports, one of the main engines of its economic growth, the People’s Bank of China on Monday lowered its one-year lending rate by 27 basis points to 5.31% – the fifth move in three months – and also reduced the proportion of deposits lenders must set aside as reserves by 0.5 percentage points, according to Bloomberg. Additional steps to spur consumer spending may follow the interest-rate cut. (Also see the Vitaliy Katsenelson’s guest post “A Far-east Fiasco?”.)

- Japan’s exports also plunged at a record annual pace of 26.7% year-on-year in November. The global economic slump and surging yen slashed demand for Japanese products across the board. “The grim outlook could push the Bank of Japan to implement unorthodox monetary easing measures as it has little room left to cut interest rates after reducing them to 0.10% last week,” reported Reuters.

Source: Bespoke, December 22, 2008.

Summarizing the economic situation, Nouriel Roubini, professor at New York University and chairman of RGE Monitor, said: “It is going to be a year of economic stagnation and recession for most of the global economy with deflationary pressures … I expect a global recession and a severe one. I see a recession throughout 2009 … and maybe there will be a return to positive economic growth by 2010.”

Whether or not the recession persists into 2010 will depend on how aggressive and effective policy actions are, i.e. monetary and fiscal policy and efforts to recapitalize financial institutions in the US and elsewhere.

Still on the topic of the “Bini” – as probably the most prolific credit-crunch economist, it comes as no surprise that he was included as one of Prospect’s Public Intellectuals of 2008.

Week’s economic reports

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

Source: Yahoo Finance, December 26, 2008.

In addition to the Federal Open Market Committee (FOMC) releasing the minutes of its December 16 meeting (Tuesday, January 6) and the Bank of England’s interest rate announcement (Thursday, January 8), the US economic highlights for the next two weeks, courtesy of Northern Trust, include the following:

1. ISM Manufacturing Survey (January 2): The consensus for the ISM Manufacturing Index is 35.5 versus 36.2 in November.

2. Employment Situation (January 9): Payroll employment is predicted to have dropped by 450,000 in December after a loss of 533,000 jobs in the prior month. The unemployment rate is expected to have risen to 7.0% during December from 6.7% in November. Consensus: Payrolls – -478,000 versus -533,000 in November, unemployment rate – 7.0% versus 6.7% in November.

3. Other reports: Consumer Confidence (December 30), Construction Spending, Auto Sales (January 5), Factory Orders, ISM Non-manufacturing, Pending Home Sales Index (January 6).

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

Source: Wall Street Journal Online, December 26, 2008.

This is another week of a “holiday-shortened” version of “Words” as I am again skipping the customary review of the ups and downs of the various asset classes, taking to heart Bill King’s words: “’Tis the time of the year to not overthink …”

Here’s wishing you a festive season full of fun, laughter and joy. Let’s remain positive and stay focussed on steering our portfolios profitably through the sometimes murky investment waters. May you have a wonderful and calm 2009 (after a calamitous 2008).

Source: Daryl Cagle

CNBC: Pimco’s El-Erian – back to basics for investors in 2009
“As the meltdown in the economy gains steam, investors in 2009 will need to return to the basics of investing such as diversification and risk management, said Pimco co-CEO Mohamed El-Erian.

“Even though those same principles did not serve investors well in 2008, the coming year will present a different set of obstacles that will require a different strategy, he said.

“‘2008 was the year of the crisis of the financial system. 2009, unfortunately, will be the crisis of the economic system,’ El-Erian said on CNBC. ‘So the news is going to be full of unemployment, defaults, companies defaulting, etc.

“’For investors, it’s going to be going back to the three things that work well and that haven’t worked well in 2008.’

“Those three things are diversified asset allocation, good implementation vehicles, and solid risk management.

“’For 2009, every investor should go back to the basics and recognize that there will be a lot of government initiatives,’ El-Erian said. ‘We’re going to see fiscal stimulus packages going into the trillions of dollars. We’re going to see support for various sectors, and despite that the economy will be bumpy.’

“As far as specific bond investment vehicles, he identified mortgages, banks, municipal bonds, and high-quality investment grade corporate debt as well as the top emerging markets.

“Investment in stocks will lag, he said, until there’s an increase in confidence that equities will provide solid rewards without all the risk, and the economy shows signs of stability.

“‘What 2008 has told you and what 2009 is telling you is that for the average investor conditions have changed and therefore the game plan has got to change, which means don’t go and chase what are very attractive valuations from a historical standpoint,’ El-Erian said.

“With the exception of Treasurys, which are offering historically low yields, a multitude of other investment vehicles are likely to be attractive – and possibly a trap for investors.

“‘But don’t fall into that trap,’ El-Erian said. ‘Rather, go for those assets that are not only dislocated but where there’s a catalyst for normalization, where you can actually identify what it is that’s going to bring valuations back to somewhat more reasonable levels. If you do that you will get both the upside and protection against the downside. That’s going to be the key issue in 2009.’”

Source: CNBC, December 22, 2008.

BNN: Conversation with BMO’s strategist Don Coxe

Source: BNN, December 23, 2008.

Bloomberg: Marc Faber predicts 2009 going to be “a catastrophe”
“Marc Faber, publisher of the Gloom, Boom & Doom Report, talks with Bloomberg about the outlook for the global economy in 2009 and his investment strategy.”

Click here for Business Intelligence article on Faber’s views.

Source: Bloomberg (via YouTube), December 22, 2008.

CNBC: Your edge for 2009
“The market could look a lot different next year, says David Kotok, Cumberland Advisors chairman/CIO.”

Source: CNBC, December 26, 2008

Financial Times: Obama expands goals of stimulus
“Barack Obama has expanded the goals of his proposed economic stimulus, with a plan to create or save an additional 500,000 jobs.

“The president-elect raised his jobs target over the next two years to 3 million – up from the 2.5 million goal set last month – after US unemployment hit its highest level for 15 years in November.

“Transition officials said Mr Obama had agreed the outlines of a $675 billion to $775 billion two-year recovery plan last week. But the price tag is likely to rise above $800 billion as Congress makes its own demands during the legislative process.

“The moves come amid a warning on Sunday, from the International Monetary Fund, that governments must act more aggressively to prevent a deeper slump.

“Dominique Strauss-Kahn, IMF managing director, told BBC radio that inadequate stimulus measures risked making the slowdown worse than expected next year. ‘I’m specially concerned by the fact that our forecast, already very dark … will be even darker if not enough fiscal stimulus is implemented,’ he said.

“The IMF has called for combined stimulus measures in 2009 of $1,200 billion – or 2% of global annual economic output – amid fears of the deepest slump since the Great Depression.

“Under Mr Obama’s proposals, most of the cash would be spent on tax cuts for the middle class, aid to cash-strapped state governments and investments in infrastructure, ‘green’ energy and other policy priorities.

“Detailed talks have been under way with congressional leaders for the past few days, with a view to legislation being ready for Mr Obama to sign soon after taking office on January 20.”

Source: Andrew Ward, Financial Times, December 21, 2008.

Bloomberg: US banks may turn to Asia bonds to plug funding gap
“US banks including Citigroup, Goldman Sachs and Morgan Stanley may sell government-guaranteed bonds in Asia next year, tapping growing demand for the region’s local-currency debt to bolster their balance sheets.

“US financial institutions sold more than $100 billion of government-backed notes in dollars, euros and British pounds since October 14, when the Federal Deposit Insurance Corp. agreed to guarantee their bonds to help them cope with $678 billion of losses and writedowns amid the global credit crunch.

“‘Banks like Morgan Stanley and Goldman will have to tap Asian currencies because the potential supply is too big for dollars, euros and pounds to take on,’ said Arthur Lau, a fund manager at JF Asset Management in Hong Kong, which oversees $128 billion. ‘It’s a perfect product for insurance companies in Asia. The bonds offer good yield pick-up, high credit ratings, good liquidity and no currency mismatch.’

“US banks may be forced to follow European and Australian banks, which lured fund managers to $6.6 billion of government-backed securities in Asia-Pacific since September with yields of as much as double those on sovereign debt, data compiled by Bloomberg show. Sales of FDIC-backed notes maturing in more than a year may reach $450 billion by the end of June, Barclays Capital analysts said.”

Source: Patricia Kua, Bloomberg, December 23, 2008.

Financial Times: S&P downgrades 11 of world’s top banks
“Eleven of the world’s biggest banks were downgraded Friday by Standard & Poor’s after the ratings agency said the current downturn could be longer and deeper than previously thought.

“Six major US banks were downgraded, including JPMorgan Chase, Bank of America and Wells Fargo, as well as five banks in Europe. The agency cut its ratings on Citigroup, Morgan Stanley, and Goldman Sachs by two notches each. In Europe, S&P shaved one notch off the ratings of Barclays, Credit Suisse, Deutsche Bank, Royal Bank of Scotland and UBS.

“S&P analyst Tanya Azarchs said that, in addition to the economic woes, the banking sector’s ‘lax underwriting standards due to excess competition mean this cycle will be worse than prior cycles’.”

Source: Jane Croft and Greg Farrell, Financial Times, December 19, 2008.

Washington Post: Paulson asks Congress for second $350 billion of rescue package
“Treasury Secretary Henry M. Paulson said yesterday that Congress must release the second half of the $700 billion financial rescue package, warning that emergency loans to the nation’s automakers have all but depleted the funds available to stabilize the still-fragile financial markets.

“Without fast action to replenish the fund that serves as the primary safety net for the financial system, Treasury officials and others said, the government would be hampered in its ability to respond to a fresh round of market turmoil.

“Treasury officials are also facing a hard deadline. Although they had enough to give the car companies $13.4 billion yesterday, they need the second installment of the rescue package to help General Motors make another $4 billion debt payment in mid-February.

“Paulson said the Treasury and the Federal Reserve have enough resources to handle a crisis for the time being. ‘It is clear, however, that Congress will need to release the remainder of the TARP to support financial market stability,’ he said in a statement.”

Source: David Cho and Lori Montgomery, Washington Post, December 20, 2008.

Editor’s note: Paulson’s decision represents another policy reversal, having said just days ago “we’ve got what we need right now.” See excerpt from Fox News below.

Fox News: Paulson – financial firms should be stabilized
“Treasury Secretary Henry Paulson says he does not expect any more major financial institutions to fail during the current credit crisis. Paulson also says that he has no plans to ask Congress to make the second half of the $700 billion financial rescue fund available before the Bush administration leaves office.”

Source: Fox News, December 16, 2008.

The Wall Street Journal: US developers ask for bailout as massive debt looms
“With a record amount of commercial real-estate debt coming due, some of the country’s biggest property developers have become the latest to go hat-in-hand to the government for assistance.

“They’re warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics, $530 billion of commercial mortgages will be coming due for refinancing in the next three years – with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.”

Source: The Wall Street Journal, December 23, 2008.

SafeHaven: Ron Paul – government and fraud
“Billions of dollars were recently lost in the collapse of Bernie Madoff’s self-described Ponzi scheme, in which too-good-to-be-true returns on investments were not really returns at all, but the funds of defrauded new investors. The pyramid scheme collapsed dramatically when too many clients called in their accounts, and not enough new victims could be found to support these withdrawals. Bernie Madoff was running a blatant fraud operation. Fraud is already illegal, and he will be facing criminal consequences, which is as it should be, and should act as an appropriate deterrent to potential future criminals. But it seems every time someone breaks the law, politicians and pundits decide we need more laws, even though lack of laws was not the problem.

“The government itself runs a fraud much bigger than Madoff’s. Our Social Security system is the very definition of a Ponzi, or pyramid scheme. If the government truly had an interest in protecting people’s savings, they would allow people to opt out of Social Security altogether. We would cut wasteful spending, such as our overseas empire, to honor current obligations to seniors, and eventually phase the program out. Instead, as with Enron and Sarbanes Oxley, I expect new, unrelated legislation to be proposed that further damages freedom in the name of protecting us, amidst loud proclamations that they have made the world safe.”

Click here for the full article.

Source: Ron Paul, SafeHaven, December 22, 2008.

APF: Bank of Spain chief – world faces “total” financial meltdown
“The governor of the Bank of Spain on Sunday issued a bleak assessment of the economic crisis, warning that the world faced a ‘total’ financial meltdown unseen since the Great Depression.

“‘The lack of confidence is total,’ Miguel Angel Fernandez Ordonez said in an interview with Spain’s El Pais daily.

“‘The inter-bank (lending) market is not functioning and this is generating vicious cycles: consumers are not consuming, businessmen are not taking on workers, investors are not investing and the banks are not lending.

“‘There is an almost total paralysis from which no-one is escaping,’ he said, adding that any recovery – pencilled in by optimists for the end of 2009 and the start of 2010 – could be delayed if confidence is not restored.

“Ordonez recognised that falling oil prices and lower taxes could kick-start a faster-than-anticipated recovery, but warned that a deepening cycle of falling consumer demand, rising unemployment and an ongoing lending squeeze could not be ruled out.

“‘This is the worst financial crisis since the Great Depression’ of 1929, he added.”

Source: APF (via Breitbart.com), December 21, 2008.

Ambrose Evans-Pritchard (The Telegraph): Protectionist dominoes are beginning to tumble across the world
“Greece has been in turmoil for 11 days. The mood seems to have turned – pre-insurrectionary’ in parts of Athens – to borrow from the Marxist handbook.

“This is a foretaste of what the world may face as the ‘crisis of capitalism’ – another Marxist phase making a comeback – starts to turn two hundred million lives upside down.

“We are advancing to the political stage of this global train wreck. Regimes are being tested. Those relying on perma-boom to mask a lack of democratic or ancestral legitimacy may try to gain time by the usual methods: trade barriers, sabre-rattling, and barbed wire.

“Dominique Strauss-Kahn, the head of the International Monetary Fund, is worried enough to ditch a half-century of IMF orthodoxy, calling for a fiscal boost worth 2% of world GDP to ‘prevent global depression’.

“‘If we are not able to do that, then social unrest may happen in many countries, including advanced economies. We are facing an unprecedented decline in output. All around the planet, the people have reacted with feelings going from surprise to anger, and from anger to fear,’ he said.”

Source: Ambrose Evans-Pritchard, The Telegraph, December 22, 2008.

Marketplace: Quantitative easing
“Now the Federal Reserve has effectively cut the target lending rate to zero, it only has one more weapon in its arsenal. Quantitative easing. Senior Editor Paddy Hirsch explains what this ‘nuclear option’ is, and what the Fed hopes it’ll do.”

Source: Marketplace, December 2008.

Asha Bangalore (Northern Trust): US Q3 real GDP remains unchanged
“The final estimate of third quarter GDP was unchanged at a 0.5% drop. The minor revisions show consumer spending and non-residential investment slightly weaker than the preliminary report, government spending was marginally stronger, and residential investment expenditures fell less rapidly.

“Going forward, the fourth quarter (-5.0%) and first quarter of 2009 are likely to be the weakest in the current downturn. The shutdown of production at Chrysler, GM, and Ford has increased the risk of a weaker-than-expected drop in GDP in the first quarter. Weak business conditions should translate into a further moderation of prices.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 23, 2008.

Asha Bangalore (Northern Trust): Chicago Fed National Activity Index shows further decline
“The Chicago Fed National Activity Index (CFNAI) declined to -2.47 in November from a revised -1.27 reading in October. The data used to compute this index have been published earlier. In November, all four major categories of the index – employment, production, income, consumer spending and housing – posted declines. The intensity of weakness in economic conditions suggested by the November reading is consistent with other economic reports which have indicated that the current recession matches the situation seen in the 1980 and 1981-82 recessions.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 22, 2008.

Asha Bangalore (Northern Trust): Consumer spending – weakness will persist
Nominal consumer spending fell 0.6% in November, the fifth monthly decline. However, the personal consumption expenditure price index fell 1.1% and raised real consumer spending 0.6%, following five monthly declines. Effectively, consumer spending in the fourth quarter will post a reduction but probably slightly smaller than the 3.8% drop seen in the third quarter.

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 24, 2008.

CNNMoney.com: For stores, a very un-merry holiday
“The 2008 holiday sales season is one of the worst for retailers in decades, as consumers’ concerns about the economy and job losses crushed the typical year-end shopping exuberance.

“‘I don’t see any reason for retailers to be rejoicing at all,’ said Britt Beemer, chairman and founder of America’s Research Group.

“Among the early sales tallies, new estimates from MasterCard’s SpendingPulse Data service indicated that total store sales fell about 3% in November and December combined.

“That would be significantly worse than the original forecast from the National Retail Federation (NRF), which anticipated a 2.2% gain for the period.

“‘It’s really three things that hammered retailers,’ he said. ‘There were fewer holiday shopping days versus last year. We had bad winter weather in the final week before Christmas.’

“The third thing that hurt retailers, according to Krugman, was deep discounting. Even though the big sales were designed to boost store traffic and sales, and ‘minimize the damage’, he said that level of discounting will ultimately hurt merchants’ bottom line.

“The fourth-quarter shopping period is critical for merchants since it can account for as much as 50% of their annual profit and sales. And since consumer spending also fuels two-thirds of economic activity, any signals of a severe pullback in discretionary buying also doesn’t bode well for the overall economy.”

Source: CNNMoney.com, December 26, 2008.

Reuters: US homeowners in desperate straits
“The desperate straits of many US homeowners showed in new data released on Monday, suggesting efforts to help them are having limited success.

“As the recession throws more people out of work, the rate of re-default on modified mortgages is rising and may worsen as the economy deteriorates, banking regulators said.

“After much browbeating from Congress, banks and other mortgage lenders are beginning to do more, to modify home loans so that distressed borrowers can avoid foreclosure.

“But the latest figures from regulators raise questions about how modifications are being done and how much they help, even as foreclosure rates hit record-setting levels.

“‘You have to think that it will get worse before it gets better,’ John Dugan, the US Comptroller of the Currency, said in an interview with Reuters.

“Critics say most loan modifications up until a few months ago were temporary and not aimed at providing for sustainable payment plans, so it comes as no surprise that homeowners are defaulting.

“At the same time, a lenders’ group known as Hope Now warned on Monday that the number of US homeowners seeking help to avoid foreclosure would double next year to 2 million.”

Source: Kim Dixon and Kevin Drawbaugh, Reuters, December 22, 2008.

Asha Bangalore (Northern Trust): Home sales and prices continue to decline
“Sales and prices of new and existing homes fell in November and inventories are at elevated levels. The 8.6% drop in November to an annual rate of 4.49 million is the beginning of a new trajectory. Sales of both multi-family (-13.0%) and single-family (-8.0%) homes fell in November.

The median price of an existing single-family home fell 2.8% from the prior month to $181,300, but down 12.8% from a year ago – a new record.

“The inventory of unsold existing homes rose to an 11.2-month supply in November from 10.3-months in October. The inventory situation of existing homes suggests that additional declines in home prices are nearly certain.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 23, 2008.

MarketWatch: Fixed-rate mortgages continue to fall
“Fixed-rate mortgage rates fell again this week, with the 30-year fixed-rate mortgage setting another record low, at least since Freddie Mac began doing its weekly survey in the early 1970s.

“The 30-year averaged 5.14% for the week ending December 24, down from last week’s 5.19% average, according to the survey, released on Wednesday. It was more than a full percentage point below its 6.17% average a year ago, and hasn’t been lower since Freddie started doing its rate survey in 1971.

“One-year Treasury-indexed ARMs averaged 4.95%, up slightly from 4.94% last week yet still down from 5.53% a year ago.

“To obtain the rates, the 30-year fixed-rate mortgage required payment of an average 0.8 point, the 15-year fixed-rate mortgage required an average 0.7 point and the ARMs required an average 0.6 point. A point is 1% of the mortgage amount, charged as prepaid interest.

“‘Interest rates on 30-year fixed-rate mortgages eased for the eighth straight week and set another record low since Freddie Mac’s survey began in 1971,’ said Frank Nothaft, Freddie Mac chief economist, in a news release.”

Source: Amy Hoak, MarketWatch, December 24, 2008.

Asha Bangalore (Northern Trust): Lower mortgage rates boost refinance activity
“There is some good news from the housing market. The Mortgage Purchase Index of the Mortgage Bankers Association rose to 316.5 for the week ended December 19 from 286.1 in the prior week. Also, sharply lower mortgage rates have initiated a boom in refinancing of mortgages. The Mortgage Refinance Index rose to 6,758.6 during the week ended December 19 versus 1,254.0 a month ago.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 23, 2008.

Richard Russell (Dow Theory Letters): Unemployment could be surprise of bear market
“Russell thoughts: The truth – the market action isn’t turning me any more optimistic, but (sigh) here goes. Every primary bear market produces its own surprises. What was the surprise of the Great Depression? I think it was this – between 1929 and 1932, 5,000 banks went out of business. This rocked the foundation of American confidence. It frightened hell out of the nation.

“And I ask myself, what could be the surprise of this bear market? My guess is unemployment. I’ve warned all along that high and rising unemployment is devastating (and with unemployment comes loss of income and an inability to carry one’s debt).

“In the 1930s people cut back severely on their spending. Nothing was considered ‘cheap enough to be considered a bargain’. But during the Great Depression, the nation and the American people were not as indebted as they are today. In the ’30s mortgages were hated and avoided. During the 1930s, the US was still largely agrarian. A huge percentage of the population lived on farms. Today most Americans live in cities. Today, more Americans work in the service industries. Living in hard times in a city can be a raw and a discouraging experience. News is more available and life is meaner and more competitive in the cities.

“The world is far more integrated today. Today, the US is competing with labor and technology with nations all over the world. The dollar is less stable today, and competitive devaluations are rampant as each nation seeks to export more of its own. It’s a much more competitive world today than it was during the Great Depression. In the 1930s Japan manufactured ‘junk’ items and China wasn’t even a factor nor was India or Brazil. This bear market will be far more difficult for business than was the case during the 1930s.”

Source: Richard Russell, Dow Theory Letters, December 23, 2008.

The New York Times: More firms cut labor costs without layoffs
“Even as layoffs are reaching historic levels, some employers have found an alternative to slashing their work force. They’re nipping and tucking it instead.

“A growing number of employers, hoping to avoid or limit layoffs, are introducing four-day workweeks, unpaid vacations and voluntary or enforced furloughs, along with wage freezes, pension cuts and flexible work schedules. These employers are still cutting labor costs, but hanging onto the labor.

“And in some cases, workers are even buying in. Witness the unusual suggestion made in early December by the chairman of the faculty senate at Brandeis University, who proposed that the school’s 300 professors and instructors give up 1% of their pay.

“‘What we are doing is a symbolic gesture that has real consequences – it can save a few jobs,’ said William Flesch, the senate chairman and an English professor.

“Some of these cooperative cost-cutting tactics are not entirely unique to this downturn. But the reasons behind the steps – and the rationale for the sharp growth in their popularity in just the last month – reflect the peculiarities of this recession, its sudden deepening and the changing dynamics of the global economy.

“Companies taking nips and tucks to their work force say this economy plunged so quickly in October that they do not want to prune too much should it just as suddenly roar back. They also say they have been so careful about hiring and spending in recent years – particularly in the last 12 months when nearly everyone sensed the country was in a recession – that highly productive workers, not slackers, remain on the payroll.”

Source: Matt Richtel, The New York Times, December 21, 2008.

Asha Bangalore (Northern Trust): Savings rate on the up
“Personal income fell 0.2% in November due to significant weakness in the labor market. The personal saving rate moved up to 2.8% in November, putting the average of the first eleven months of the year at 1.5%, partly boosted by tax rebates of 2008. Assuming the December saving rate does not alter this average too much, the 2008 saving rate will be the first reading above 1.0% since 2004 when the saving rate was 2.1%. The saving rates in 2005, 2006, and 2007 were 0.3%, 0.7%, and 0.5%, respectively.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 24, 2008.

Asha Bangalore (Northern Trust): Initial jobless claims post new cycle high
Initial jobless claims for the week ended December 19 rose 30,000 to 586,000 , a new cycle high. Continuing claims, which lag initial claims by one week, moved down 17,000 to 4.37 million and the insured unemployment rate held steady at 3.3%. The main message is that labor market conditions remain significantly weak but it should be noted that the level of these claims should be seen in the context of a large labor force today compared with the 1980s.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 24, 2008.

Asha Bangalore (Northern Trust): Temporary bounce in non-defense capital goods orders
“Durable goods orders fell 1.0% in November following a 8.4% drop in October. A nearly 38% drop in orders of aircraft, a volatile component of this report, accounted for the weakness in the headline number. Excluding transportation, durable goods orders were up 1.2% in November. Also, orders of non-defense capital goods excluding aircraft rose 4.7% in November and bookings of non-defense capital goods increased 5.9%. In light of the weakness of consumer spending and overall weakness of the economy, the strength of these orders appears to be temporary.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 24, 2008.

Hal Weitzman (Financial Times): Citadel and CME win CDS clearing consent“The Chicago Mercantile Exchange (CME), the world’s largest futures exchange, and Citadel, the hedge fund, were Tuesday given the green light by Washington regulators to launch a clearing house for credit default swaps.

“The CME’s clearing solution was given the go-ahead by the Federal Reserve Bank of New York and the Commodity Futures Trading Commission, while the exchange said it had had ‘extensive discussions’ with the Securities and Exchange Commission and was ‘well along in the SEC review process’.

“Regulators on both sides of the Atlantic have been pushing for a central clearing counterparty to be established for credit default swaps, which offer insurance against the default of banks, companies and government debt.

“The near-collapse of Bear Stearns in March and the bankruptcy of Lehman Brothers in September highlighted the counterparty risks associated with these types of derivatives. Regulators remain concerned about the effects that further counterparty failures could have on the financial system – but centralised clearing would reduce those risks.”

Source: Hal Weitzman, Financial Times, December 24, 2008.

Bespoke: International long-term interest rates in downtrends
“As shown in the charts below, long-term government interest rates are in steady downtrends across the globe. While long-term interest rates with a ‘one’ handle have been exclusive to Japan for several years, other countries, especially the US, are close to joining the club.”

Source: Bespoke, December 24, 2008.

Richard Russell (Dow Theory Letters): US bonds are grossly overbought
“With the bonds now overbought and overvalued, it seems to me that this could be the next trouble area. If the bonds start heading down, interest rates will head up, and this is the last thing the Fed wants to see. The Fed has insinuated that if the bonds start falling, they will buy Treasury bonds to stem the decline. Buying bonds will inject even more money into the banking system.

“So I’m going to keep a sharp eye on the bonds. Trouble in the bond market could wreak havoc with the fragile US economy. By the way, Barron’s Confidence Index (CI) just dropped to a new low for the year. Thus, the bond market continues to move towards the highest-grade bonds, meaning that the bond market is continuing its trend toward safety (this tells us why the 30 year T-bond is yielding such an outrageously low number). As you know the 91-day T-bills yield nothing – in effect, the T-bills are simply a way for nervous investors to ‘warehouse’ their money with safety while receiving no return.”

Source: Richard Russell, Dow Theory Letters, December 23, 2008.

Bespoke: Corporate bonds are staging recovery
“While the S&P 500 and Nasdaq were both notoriously weak yesterday [Monday] given the usual positive bias during the Christmas week, not everything was down. In the credit markets, corporate bonds had a strong day, and if these trends continue, it will bode well for stocks.

“As shown below, using the iBoxx ETFs as a proxy, both investment grade (LQD) and high yield (HYG) corporate bonds had decent gains yesterday after rallying nicely over the past week as well.

“The stock market has really played second fiddle to the credit markets during this downturn. Many investors have been waiting for the corporate bond market to show signs of life before getting back into more risky assets. From the looks of these two ETFs, the credit markets are finally gaining some positive traction.”

Source: Bespoke, December 23, 2008.

US Global Investors: Opportunity in municipal bonds
“We all know that 2008 has been a rough year for virtually all investors, and the municipal market has not been immune. Municipals, however, have weathered the storm better than most asset classes.

“Over the long term, municipals have ‘provided strong taxable-equivalent returns with lower volatility relative to their taxable counterparts,’ according to Barclays Capital. The chart below shows the relative risk and after-tax performance of major equity and fixed income asset classes.

“Tax-exempt municipals (marked as ‘TE Muni’ on the chart) have provided higher levels of after-tax returns than Treasuries or corporate bonds over the past 10 years, and these returns have come with lower volatility, as measured by annual standard deviation of returns.”

Source: John Derrick, US Global Investors – Weekly Investor Alert, December 26, 2008.

Bespoke: The few, the proud, the winners in 2008
“Below we highlight the year to date performance of the 10 S&P 500 sectors with just 6 trading days left in 2008. As shown, Financials are by far the worst with a decline of 57.9% this year. Financials are followed by Materials (-47%), Technology (-44%), and Industrials (-43%). The other 6 sectors are actually outperforming the S&P 500 as a whole, which is currently down 39.8% this year. The Consumer Staples sector has held up the best this year with a decline of 19.4%.”

Source: Bespoke, December 22, 2008.

Bloomberg: BlackRock’s Robert Doll says 2009 to be “year of repair” for stocks
“Robert Doll, chief investment officer of global equities at BlackRock, talks with Bloomberg about the outlook for the equity market in 2009.”

Source: Robert Doll, Bloomberg (via YouTube), December 23, 2008.

Eoin Treacy (Fullermoney): Keep an eye on divergence from 200-day moving averages
“S&P 500 and Dow Jones Industrial Average divergence from their 200-day moving averages – We first posted this indicator on October 10. The indicator hit historically oversold levels in early October as the S&P 500 and Dow Jones Industrials hit important lows. The indices and indicator both continue to consolidate above their October lows and mean reversion is certainly occurring.

“Although both indices are likely to be well off their lows by the time it occurs; sustained moves above their moving averages will indicate that a new uptrend has commenced.”

Source: Eoin Tracy, Fullermoney, December 22, 2008.

Financial Times: Tokyo talks tough on yen intervention
“In a marked sharpening of Tokyo’s language on the yen, senior government officials highlighted the possibility of intervention to stem the Japanese currency’s rise against the dollar.

“Takeo Kawamura, the cabinet chief secretary, told a news conference that the government was closely watching the yen’s movements, saying: ‘We have conducted currency intervention in the past, and we will take appropriate measures, which include [intervention].’”

Source: Mure Dickie and Lindsay Whipp, Financial Times, December 18, 2008.

Richard Russell (Dow Theory Letters): How much is US dollar worth?
“I’m reading more and more about the viability of the dollar, if you can produce an item at no cost through a computer, what’s that item worth? Why is the dollar worth anything at all? Because the US government mandates that the dollar is legal tender and can be used to settle all debt. Can the government back its fiat money? The dollar is worth something only because the US government says it is. ‘I’m from the government and I’m here to help you.’ That sentence is now considered a joke, but then why should anyone take the government’s pronouncement that the dollar is ‘legal tender’ seriously?

“Then why do people trust Federal Reserve Notes or fiat dollars? Why do people work for, and save fiat dollar? The answer is that many generations (since 1971) have grown up with fiat dollars – they don’t know anything else. It never occurs to them that Federal Reserve Notes have absolutely nothing behind them but a government decree.”

Source: Richard Russell, Dow Theory Letters, December 23 & 26, 2008.

Business Report: Don’t bet on decline of SA rand
“UBS withdrew its recommendation that investors hedge against further declines in the South African rand versus the dollar, euro and yen as a lift in ‘risk appetite’ shores up emerging-market assets.

“The Zurich-based bank is closing bets that the rand may weaken further at the ‘start’ of 2009, as policy makers in the world’s major economies lower borrowing costs to ease the effects of a global recession, Roderick Ngotho, UBS’s currency strategist for emerging Europe, the Middle East and Africa, said in a report last week.

“‘We feel there could be a short-term pick-up in risk appetite at the start of next year due to the central bank actions we’ve seen,’ Ngotho said.

“‘In an environment where liquidity is relatively thin, the rand could appreciate along with other currencies in emerging Europe, the Middle East and Africa in the short term.’

“The deficit on South Africa’s current account, which widened to 7.9% of GDP in the third quarter, remained a ‘persistent vulnerability’ for the rand, Ngotho said. South Africa relies on foreign purchases of its stocks and bonds to fund the shortfall, inflows that reversed this year as investors sold emerging market assets amid the worst financial crisis since the Great Depression.

“Foreign investors have sold almost R67 billion more than they bought of South African assets this year, data from its stock and bond exchanges show.

“‘Inflows into South Africa’s capital account may fall short of the financing required for the current account deficit in 2009,’ Ngotho said. ‘The deficit would then need to be corrected by a sharply weaker currency.’

“The government may need to access some other source of multilateral financing to fund the deficit and prevent the rand from weakening further, according to UBS. South Africa would qualify to borrow more than $13 billion under the International Monetary Fund’s short-term loan facility, the report said.”

Source: Garth Theunissen, Business Report, December 22, 2008.

Javier Blas (Financial Times): Has Opec stopped the slide?
“Was Opec successful in stopping the slide in oil prices? It depends on how you analyse the numbers.

“A look at the Nymex front-month West Texas Intermediate contract, the oil market’s main benchmark, gives the impression of Opec failure. It plunged from $43.60 a barrel ahead of the meeting to close at a 4½-year low of $33.87 at the end of last week. A drop of $10 sounds very much like a vote of no confidence in the cartel.

“This view is, however, misleading. The Nymex WTI front-month benchmark – in this case, the January contract – expired last Friday, distorting prices. The February contract, which on Monday became the market’s benchmark, was far more stable, losing $2 to $42.36.

“But even this measure is incomplete. To attain a fairer view, it is necessary to dig deeper into the world of physical crude oil contracts.

“As the cartel pumps mostly lower quality, heavy sour crude, the cuts will affect those grades first. It is there where the market should look for clues about the impact.

“It seems to be working. The price difference between lower quality, heavy sour crude, such as Dubai – the Middle East benchmark – and higher quality, light, sweet oil, such as WTI, has narrowed sharply, pointing to a tighter market.

“Opec still faces a daunting job delivering its promised cuts amid fast-weakening demand, but investors should not disregard the cartel because the WTI January contract was weak.

“For the time being, the physical market is giving Opec a cautious thumbs up.”

Source: Javier Blas, Financial Times, December 21, 2008.

CNBC: Dennis Gartman – downward barrel
Discussing oil droppping below $40, with Dennis Gartman of The Gartman Letter.

Source: CNBC, December 23, 2008.

Richard Russell (Dow Theory Letters): Finally, gold shares showing outperformance
“I’ve been saying all along that somewhere the gold shares will believe in rising gold rather than a sinking stock market. The evidence is seen on the chart below. Here we see GDX divided by Gold, the ratio is finally surging in favor of GDX the gold shares. You can see that the downtrend has been reversed and I expect the gold shares to move with gold from now on. Relative strength trends tend to last a long time.”

Source: Richard Russell, Dow Theory Letters, December 26, 2008.

Commodity Online: NCDEX to launch global contracts in gold & silver
“NCDEX is all to launch Gold & Silver International futures contracts on the exchange on Monday, December 29, 2008.

“A press statement issued from NCDEX said that these contracts named Gold International and Silver International can be bought and sold in lots of one kg and 30 kg respectively.

“The contract size has been defined keeping in view the Indian consumer and the recent price trends. These contracts will be physically settled at Ahmedabad. Contracts would be settled on the basis of international prices in rupee denomination.

“On account of persistent market demand and keeping in mind the fact that India is a big importer of bullion, NCDEX has now introduced these new contracts, the statement said.”

Source: Commodity Online, December 27, 2008.

David Fuller (Fullermoney): Planinum is best value precious metal
“Markets are only efficient to the extent that they reflect sentiment. Today, many savvy investors want some gold in their portfolios. We agree and this site has previously discussed at length the reasons for doing so. A minority of precious metal enthusiasts also want silver, which Fullermoney has long argued, performs like high-beta gold. We too like silver.

“Some of us also think that platinum is the best value precious metal today. I will let this ratio chart do the talking.

“Today, the price of platinum is only slightly higher than that of gold. Consequently, platinum is trading near its lowest level relative to gold for at least 22 years. (Bloomberg does not have earlier data on platinum prices.) In this decade to date, platinum has traded at more than 2.2 times the price of gold on three occasions. Therefore in terms of relative values, we especially like platinum today.

“Inevitably, there are reasons for such wide price swings. Almost all of the platinum produced today comes from South Africa. Supply disruptions, most recently due to power outages, caused the earlier scrambles for scarce supplies of platinum. This is not a problem today, at least not at the moment. Instead, people have shunned platinum because the global automobile industry is in a slump. This reduces demand for platinum used in the manufacturing of catalytic converters.

“That factor is certainly reflected by today’s low price for platinum relative to gold. I believe investors are overlooking the possibility of supply disruptions in South Africa. Meanwhile, the white metal’s price has flat lined in probable base formation development.”

Source: David Fuller, Fullermoney, December 24, 2008.

Financial Times: China battles unemployment to deter unrest
“Tackling unemployment among university graduates will be China’s priority next year as the economy falters, Wen Jiabao, the prime minister, said at the weekend.

“The attention given by state media to Mr Wen’s visit to a Beijing university was the latest sign of the government’s increasing fear of widespread unrest as growth declines much faster than expected.

“‘We have made finding jobs for university students our top priority and will come out with some measures to make sure all graduates have somewhere constructive to direct their energy,’ Mr Wen told students at the Beijing University of Aeronautics and Astronautics.

“He said the government was also extremely concerned about migrant workers who had been laid off in the cities. By the end of November, 10 million migrant workers had lost their jobs nationwide and 4.85 million of those had returned home, according to government figures.

“A survey last week by a government think tank estimated the number of recent graduates who have been unable to find work at 1.5 million. Tertiary institutions are expected to churn out another 6.5 million graduates next year.

“In recent weeks, a growing chorus of official voices has raised the spectre of unrest. ‘If growth falls below 8% then that will create enormous problems in terms of unemployment,’ according to Zhang Xiaojing, director of the Macroeconomy Office of the Institute of Economics at the Chinese Academy of Social Sciences.

“‘There will be lots of laid-off migrant workers returning to the villages, not to mention the many college graduates and this will affect social stability.’

“Mr Zhang linked the continuing riots in Greece directly to the global economic crisis and said that Beijing was wary of a similar situation erupting in China.”

Source: Jamil Anderlini, Financial Times, December 21, 2008.

Bloomberg: China may spur consumer spending after lowering rates
“China may follow its latest interest-rate cut with steps to spur consumer spending as deepening recessions in the US and Europe pummel exports, one of the main engines of the world’s fourth-largest economy.

“The People’s Bank of China yesterday lowered its one-year lending rate by 0.27 percentage point to 5.31% and the deposit rate by the same amount to 2.25%. The central bank also reduced the proportion of deposits lenders must set aside as reserves by 0.5 percentage point.

“Chinese stocks fell on concern the cut was too small to shore up the economy, which may grow at the slowest pace in two decades next year. Premier Wen Jiabao, who unveiled a $583 billion stimulus package for roads and bridges last month, may also reduce taxes and try to prop up the housing market, economists said.

“Officials ‘will continue to ease monetary policy and introduce additional fiscal stimulus measures, particularly in support of domestic consumption,’ said Jing Ulrich, head of China equities at JPMorgan Chase & Co. in Hong Kong.”

Source: Li Yanping and Kevin Hamlin, Bloomberg, December 23, 2008.

US Global Investors: China’s fiscal stimulus represents long-term opportunity
“China’s infrastructure stimulus represents a 23% increase in total construction spending, compared with 4 percent in the US and 2% in Europe. While the impact may not be immediate, this fiscal initiative continues to be a long term opportunity for the market overall.”

Source: US Global Investors – Weekly Investor Alert, December 26, 2008.

Financial Times: Japanese exports in record 27% fall
“Japan’s exports plunged at a record annual pace in November with shipments to Asia dropping the most since 1986 as a global economic slump and a surging yen slashed demand for everything from autos to electronics.

“While imports fell 14.4% as the Japanese economy languished in recession, the 26.7% plunge in exports was large enough to keep the trade balance in deficit for a second month running. Japan last logged trade deficits two months in a row during a previous spell of yen strength in 1980.

“The Japanese currency has surged around 20% against the dollar this year as investors spooked by the global financial crisis bailed out of risky assets and brought funds home.

“Shipments to the United States sank a record 33.8 per cent on slack demand for automobiles. The United States is in recession and American demand for Japanese goods has been falling for 15 months, ever since US mortgage defaults started to squeeze global credit markets.

“By contrast Asian markets held up for much of the crisis, but are now crumbling at dizzying speed. Exports to Asia fell 26.7% in November. Shipments to China dropped 24.5%, the biggest fall since 1995, on weak demand for semiconductors, digital cameras and other electronic goods, the Ministry of Finance said.

“‘The drop shows that domestic demand in China for Japanese goods is not that strong,’ said Kaori Yamato, an economist at Mizuho Research Institute. The Chinese economy is slowing sharply as exports to Europe and the United States plunge.”

Source: Mure Dickie, Financial Times, December 22, 2008.

Reuters: Japan output slumps
“Export-reliant Asian economies showed more signs of weakness on Friday, with Japan’s industrial output diving at a record pace and South Korea warning it faces an ‘unprecedented crisis’ as global demand wilts.

“Even the once unstoppable Chinese economy is feeling the strain, with companies recording a sharp slowdown in profit growth in the first 11 months of the year.

“On top of Japan’s steep fall in industrial output in November, core consumer inflation fell faster than forecast last month, putting the shrinking economy on course for a spell of deflation next year.

“The grim outlook could push the Bank of Japan to implement unorthodox monetary easing measures as it has little room left to cut interest rates after reducing them to 0.10% last week.

“But Japan’s Economics Minister Kaoru Yosano said he doubted that any so-called quantitative easing by the Bank of Japan would directly lead to an increase in loans to companies to get the economy moving again.

“Facing the worst international economic environment in more than eight decades, Yosano said his government would act flexibly on possible additional spending measures if conditions deteriorated further.”

Source: Hideyuki Sano and Yuko Yoshikawa, Reuters, December 26, 2008.

Reuters: Ireland to pour billions into 3 main banks
“The Irish government will invest 5.5 billion euros in the country’s three main lenders, taking majority control of Anglo Irish Bank after a loan scandal there rocked an already beleaguered industry.

“Investors have been waiting for months for a bailout plan to match schemes in other countries, but pressure on the government intensified this week after Anglo Irish revealed its chairman had kept shareholders in the dark about 87 million euros worth of loans he had received from the lender. Its shares slumped to a record low of 19 euro cents and the financial regulator has launched a probe into directors’ loans at all major Irish banks.

“‘This is a new beginning. We have to have proper lending, responsible lending, lending for the real needs of the economy,’ Finance Minister Brian Lenihan said on Sunday.

“Dublin will invest 2 billion euros each in market leaders Bank of Ireland and Allied Irish Banks via preference shares giving 25% voting rights over what the government described as ‘key issues’.

“The package will be paid for from funds set aside during Ireland’s ‘Celtic Tiger’ economic boom and originally intended to meet the state’s future pension obligations.”

Source: Kevin Smith and Carmel Crimmins, Reuters, December 22, 2008.

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Words from the (investment) wise for the week that was (November 17 – 23, 2008)

Sunday, November 23rd, 2008

A new bout of fear gripped financial markets during the past week, causing the slide in global stocks, commodities and emerging-market assets to deepen. As investors’ angst escalated, positions in risky assets were liquidated in exchange for perceived safe havens such as the US dollar, government bonds and gold bullion.

“We have seen fundamental selling, technical selling, forced selling (deleveraging), short selling, capitulation selling and selling due to ennui,” commented David Fuller (Fullermoney).

Fueling the sell-off were mounting concerns that the economic recession could not only be more intense than previously feared, but also fall into a corrosive deflationary phase. Additionally, sentiment was undermined by renewed questions about the effectiveness of the US government’s bailout plans.

A clear sign of distress and fear was the US three-month Treasury Bill rate falling to zero on Thursday, before nudging up to (a still minuscule) 0.10% by the close of the week. “The financial situation at the moment is so bad that women are now marrying for love,” quipped an e-mail doing the rounds.

After the S&P 500 Index breached the grim milestone of the October 2002 lows and fell to levels last seen in 1997 – thereby threatening to wipe out the entire 2002 to 2007 bull market – Wall Street regained some confidence late on Friday. The trigger for a strong turnaround arrived just in time for the 15:00 witching hour and came in the form of Timothy Geithner’s (pronounced GYTE-ner) nomination as new Treasury Secretary, resulting in the S&P 500 recovering from an intraday loss of more than 1% to a gain for the day of 6.3%.

On the bailout front, the Detroit automakers sought $25 billion from the Treasury to avert bankruptcy. However, Congress withheld financial aid for the time being, giving the companies until December 2 to submit a “viable” recovery plan.

“Don’t be misled, though – the something that is rotten in the auto industry has nothing to do with the credit crunch, and everything to do with years of mismanagement, shoddy products and bad choices,” said Bloomberg columnist Mark Gilbert. “Consider the credit-rating histories of GM and Ford. For both companies, the rot started all the way back in August 2001, when Standard & Poor’s put the A grades they enjoyed for a decade on review for downgrade. In October of that year they each suffered a two-level cut to BBB+ that left them just three moves away from junk status.”

I received the following note from an American friend a few days ago: “…even the children in my son’s second grade class are depressed about the auto industry. I had to answer my son’s questions about bankruptcy since the kids are talking about it …” This comment says it all!

Elsewhere, Citigroup’s (C) share price plunged by 60.4% over the week to a 16-year low as the company wrestled the financial crisis and planned to slash 50,000 jobs. According to The Wall Street Journal, “Citigroup officials have been talking in recent days to Treasury Department and Federal Reserve officials, and those discussions are expected to continue throughout the weekend …”

A pointed comment regarding the principle of bailouts came from Jim Rogers, as quoted by the Financial Times: “What they’re doing is taking the assets away from the competent people, giving them to the incompetent people and saying to the incompetent: ‘Okay, now you can compete with the competent people, with their money.’ I mean this is terrible economics. This is outrageous economics.”

Next, a tag cloud of the text of the plethora of articles I have read since a week ago. This is a way of visualizing word frequencies at a glance. Keywords such as “banks”, “economy”, “market” and “prices” occur often, but words such as “gold” and “deflation” have also started creeping into the tag picture.

The following update on the stock market outlook arrived on Friday from Bennet Sedacca (Atlantic Advisors): “We have been barely invested, mostly void, in equities, since May. We went ½ long today near the lows for a rally that could last longer than some think. Mostly large cap, high-quality, excellent balance sheet companies with a little tech and financials thrown in. We must remember, buy when you can, not when you have to.”

Oversold conditions are bound to result in rallies from time to time (and possibly around Thanksgiving), but these should not be trusted at face value. For a more lasting market turnaround to happen, I would like to see evidence of base formations on the charts, a 90% up-day, and relative outperformance by the financial sector.

I am also closely monitoring the surges in the US dollar and Japanese yen – low-yielding currencies previously used for funding risky investments – as a break of the uptrends in these two currencies will be a good indicator of the forced deleveraging selling starting to subside. Once this situation has played itself out, we should see a return to lower volatility levels and a return of confidence. (Also read my recent posts “Economic woes torpedo stock markets” and “Panic-crash sentiment causes extreme volatility“.)

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.

Economic reports
The Ifo World Economic Climate has worsened further in the fourth quarter of 2008 with the indicator falling to its lowest level in more than 20 years, according to the Ifo World Economic Survey. Not only the major economic regions of North America, Western Europe and Asia are affected, but also Central and Eastern Europe, Russia, Latin America and Australia. On the whole, the survey data point to a global recession.

Economic reports released in the US during the past week confirmed an increasingly dire situation.

- The US moved closer to deflation territory as the CPI decreased by 1.0% from September to October (the largest monthly decline since the 1930s), leaving the CPI 3.7% higher compared with a year ago and significantly down from September’s 4.9% rate. The continuing decline in US economic activity is pushing down inflationary pressure.

- Because of weak demand, producer prices for finished goods gave up ground for the third month in a row, falling by 2.8% in October largely as a result of much less expensive energy products.

- On par with expectations, residential construction slowed again in October, with a 4.5% month-on-month decline in total housing starts. At 791,000 annualized units, starts have hit another record low as exceptionally weak demand was constraining homebuilding.

- The NAHB housing market index fell further in November, setting a record low.

- Slumping demand is hitting US industry hard, although production bounced back in October from hurricane-related declines in September. Total industrial production increased by 1.3% after having fallen a downwardly revised 3.7% in September, but the indicator fell around two-thirds of a percent in September and October when excluding once-off effects.

- Initial claims for unemployment insurance benefits increased by 27,000 to 542,000 for the week ended November 15, putting claims at their highest point since the early 1990s. This is a serious warning signal about the health of the labor market.

- The Conference Board Index of Leading Economic Indicators declined by 0.9% in October, led by a sharp plunge in stock prices and decreases in residential building permits and consumer expectations. The LEI in the last three months has shown an acceleration in the rate of decline, adding to evidence that the US has entered a recession that will likely be much deeper than either of the previous two.

It comes as no surprise that the minutes of the Federal Open Market Committee’s meeting of October 28 to 29 indicate that members were extremely concerned about the near-term prospects for the economy, given the stresses in financial markets. With the problems in credit markets persisting, the FOMC’s forecast called for falling growth through the first half of 2009, with next year’s real GDP growth projection lowered to -0.2% to 1.1% (previously 2.0% to 2.8%).

Banks continue to hoard all the liquidity the Fed is injecting directly instead of lending it out. This raises the question: Is the Fed “pushing on a string”? Asha Bangalore (Northern Trust) commented as follows: “The lowering of the Fed funds rate, the Fed’s innovative programs to provide liquidity to financial institutions and more lenient rules for borrowing through the discount window appear to have exhausted the gamut of possibilities routed through monetary policy changes to influence aggregate demand.

“The provisions of the Emergency Economic Stabilization Act of 2008 allow for recapitalization of banks. The FDIC is working on obtaining an approval for the anti-foreclosure plan to address the housing market issues that are central to the current crisis. … the probability of a hefty fiscal stimulus package … is growing every day.”

Economic reports in other parts of the world were equally dismal.

Japan entered into its first recession in seven years as the financial crisis curbed demand for its exports. GDP growth contracted by 0.1% during the third quarter, or at an annualized rate of -0.4%, following a second quarter contraction of a massive 0.9%.

Source: Financial Times, November 17, 2008.

China also warned that the unemployment outlook was “grim” as a result of the financial crisis forcing the closure of more export-oriented factories.

In Europe, a further slowdown in economic activity caused the Swiss National Bank to announce a surprise 100 basis-point cut in its three-month target range to 0.5%-1.5% – the third emergency reduction in two months.

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

Source: Yahoo Finance, November 21, 2008.

Next week’s US economic highlights, courtesy of Northern Trust, include the following:

1. Existing Home Sales (November 24): Sales of existing homes are predicted to have declined in October after a small gain in September. Sales of existing homes advanced by 7.8% from a year ago in September, after posting declines since late 2005. Consensus: 5.00 million versus 5.18 million in September.

2. Real GDP (November 25): Incoming economic reports suggest a small downward revision of real GDP in the third quarter to a 0.5% drop from the advance estimate of a 0.3% decline. Consensus: -0.5%

3. New Home Sales (November 26): Sales of new homes are expected to have fallen in October after a 2.3% increase in September. Sales of new homes have dropped by 32.1% from a year ago in September. Consensus: 450,000 versus 464,000 in September.

4. Durable Goods Orders (November 26): Durable goods orders (-2.0%) are predicted to have dropped in October reflecting declines in bookings of defense and aircraft, which posted large gains in September. Consensus: -2.6% versus +0.9% in September.

5. Personal Income and Spending (November 26): The earnings and payroll numbers for October indicate a steady reading for personal income in October. Auto sales fell sharply in October and non-auto retail sales were noticeably weak, pointing to a likely drop in consumer spending (-0.6%). Consensus: Personal income +0.1%, consumer spending -0.9%

6. Other reports: Case-Shiller Price Index, OFHEO Price Index, Consumer Confidence (November 25).

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

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

Source: Wall Street Journal Online, November 14, 2008.

Equities
Global stock markets suffered badly during the past week on mounting worries about the severity of the economic slowdown. The week’s movements – MSCI World Index -9.6% and MSCI Emerging Markets Index -11.8% – tell the story of a rough ride for bourses all over the world and marked a third straight week of losses. And the scoreboard would have been even worse if not for a dramatic late-session recovery in the US on the news that Timothy Geithner would be named Treasury Secretary.

Not a single developed market closed the week unscathed. Similarly, large losses also abounded among emerging markets, with the sole exception being the Shanghai Stock Exchange Composite Index that recorded only a relatively small 0.9% decline. The Index plunged by 72.0% since its high of October 16, 2007 until hitting a low on November 4, but has subsequently bounced by 15.4% to flirt with its 50-day moving average and roundophobia 2000 level. Will the upside leadership for global stock markets come from China on this occasion?

The chart below shows the performances of the four BRIC countries during the past week.

Click here or on the thumbnail below for a (very red) market map, obtained from Finviz, providing a quick overview of last week’s performances of global stock markets (as reflected by the movements of ADR stocks).

The US stock markets all declined sharply over the week as shown by the major index movements: Dow Jones Industrial Index -5.3 (YTD -39.3%), S&P 500 Index -8.4% (YTD -45.5%). Nasdaq Composite Index -8.7% (YTD �‘47.8%) and Russell 2000 Index -10.9% (YTD -46.9%).

The S&P 500 closed below its October 2002 low of 777 on Thursday, but Friday’s rally (+6.3%) to 800 put it back above this key support level. The Dow remained above its 2002 low of 7,286 on Thursday and closed 760 points above this level after Friday’s surge.

Click here or on the thumbnail below for a market map, also from Finviz.com, showing the performances of the various segments of the S&P 500 over the week.

As far as industry groups are concerned, gold (+19%) was the top performer for the week, led by Newmont Mining (NEM) on the back of a sharp rise in the price of gold bullion.

On the other side of the performance spectrum, the industrial real estate investment trust (REIT) group (-40%) was the worst performer. The diversified financial services group (-38%) was the second worst performer, with each of the group’s large banks – Citigroup (C), JPMorgan Chase (JPM) and Bank of America (BAC) – dropping sharply. Investor concerns about future credit losses, valuations of “toxic” securities on the banks’ books, job layoffs and capital adequacy issues were the drivers for the declines.

David Fuller (Fullermoney) commented as follows on the outlook for stock markets: “… we have yet to see evidence of bottoming out on many major stock market charts. While this is worrying, to put it mildly, and sentiment is diabolical, investors should recall an extremely important behavioural conditioning process. The crowd has always turned progressively more bearish with each additional decline towards the eventual low for every bear market. This is inevitable as more people sell, and unfortunately, few are more bearish than a battered holdout who finally capitulates.

“If global stock markets are not close to a major buying opportunity, then I suggest we should all head to sea and become Somali pirates.”

Fixed-interest instruments
Government bond yields across the world plunged last week as spooked investors rushed out of equities into sovereign debt.

The ten-year US Treasury Note yield declined by a massive 57 basis points to 3.18%, the UK ten-year Gilt yield dropped by 20 basis points to 3.87% and the German ten-year Bund yield fell by 30 basis points to 3.38%. However, emerging-market bonds, in general, lost ground as further deleveraging took its toll on risky assets.

The yield on ten-year Treasuries touched a 5½-year low (3.01%) on Thursday before rebounding by the close of the week, whereas the yield on 30-year bonds dropped to its lowest level (3.53%) since the start of regular issuance in 1977 before snapping back by 14 basis points.

US mortgage rates also declined, with the 30-year fixed rate dropping by 9 basis points to 6.09% and the 5-year ARM also by 9 basis points to 5.89%.

A number of indicators show that the credit crisis is still severe. For example, credit default swaps that measure default risk for investment grade debt are trading at their highest levels of the bear market. This is seen from Bespoke’s index that measures default risk for 125 companies with investment grade debt ratings.

Currencies
The week’s feature among currencies was safe-haven flows into the US dollar and Japanese yen as investors liquidated risky assets previously funded with these low-yielding currencies.

The Swiss franc came under pressure as the Swiss National Bank slashed interest rates a full percentage point to 1% as an emergency step to soften the economic slowdown.

The chart below illustrates the accent of the US dollar and Japanese yen since September 15. (The US dollar is measured against a trade-weighted basket of currencies, whereas all the other currencies are measured against the US dollar.)

Emerging-market currencies had another bad week as a result of increasing risk aversion. Examples of losses against the greenback include the Brazilian real (�‘10.4%), the Turkish lira (-4.5%), the South Korean won (-6.7%) and the South African rand (-4.4%).

RGE Monitor raised the question whether Bulgaria and the Baltic states will be forced to reset their fixed exchange rate pegs to the euro as a result of their large external imbalances and the global financial crisis. “Because of their fixed exchange rates, these economies cannot conduct independent monetary policy so the burden of macro-economic adjustment falls on fiscal policy.”

Commodities
The Reuters/Jeffries CRB Index (-6.5%) witnessed a further decline amid fears of a protracted global economic recession and expectations that demand will drop.

Gold bullion (+6.6%) bucked the trend and surged as the yellow metal found support among nervous investors as a safe store of value. A report that China might embark on a gold-buying program provided an additional boost.

On the other hand, West Texas Intermediate crude declined by a further 13.3% to $49.9 – a level not seen since May 2005. OPEC meets on November 29 to consider additional production cuts.

The graph below shows the movements of various commodities over the past week – a continuation of the intense bear market that has been in force since the beginning of July.

Lau-Tzu said: “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” Wise words indeed, but hopefully the news items and words from the investment wise below will cast some light on the lie of the investment land. And may the markets bring you additional reason to celebrate a joyous Thanksgiving.

That’s the way it looks from Cape Town.

Source: Pat Oliphant, Slate

Barry Ritholtz (The Big Picture): Record-breaking data everywhere!
“One of the interesting aspects of this unprecedented housing collapse, credit crisis, economic recession and market crash has been all the new records we keep seeing:

- Over the past year, the S&P 500 Index lost ~$1 trillion more than the entire 2000-2002 bear market, according to Standard & Poor’s. From the October 2007 highs of 1,565, to yesterday’s close of 806.58, the S&P 500 market capitalization lost $6.69 trillion. That’s almost $1 trillion more than entire 2000-03 bear market losses of $5.76 trillion. (Marketwatch)

- The S&P 500 hasn’t been this far below its 200-day moving average on a percentage basis since the Great Depression. (Doug Kass)

- CPI: US consumer prices in October registered their largest single-month decline since before World War II. It is the largest monthly drop in the 61-year history of the data;

- PPI, down 2.8% for the month, was also a record-breaking drop.

- The dividend yield on the S&P 500 is now greater than the yield on the 10-year Treasury. That hasn’t happened since 1958. (Barron’s)

- First-time claims for US unemployment insurance rose to the highest level since September 2001. The total number of people on unemployment benefit rolls jumped to the highest level since 1983.

- Housing starts fell to 791,000, off 38% from a year ago. That’s the slowest pace of starts since data began being compiled in 1959. Starts are now down 65% from the early 2006 peak – this has become the very worst housing downturn on record.

- Permits for new houses, at a 708,000 pace, were off 40% from a year ago, also the lowest total since it has been tracked starting in 1960. Put this into context of population – in 1960, the total US population stood at 180 million – 60% of today’s 300 million.

- The 30-year return for BBB-rated corporate bonds is now greater than the 30-year return for stocks. So it has not paid to take equity risk for 30 years! (The Street.com)

- The TIPS Spread ( Treasury Inflation Protected Securities versus the 10-year Treasury) is at a record low 54 basis points (1997).

- The Russell 3,000 now has 1,228 stocks a share price under $10. That’s 42% of the index. At the market’s 2002 lows, there were significantly less stocks trading below $10/share – just 884. (Bespoke)”

Source: Barry Ritholtz, The Big Picture, November 20, 2008.

The Wall Street Journal: Obama likely to pick Fed’s Geithner for Treasury
“President-elect Barack Obama is expected to nominate as Treasury Secretary Timothy Geithner, the president of the Federal Reserve Bank of New York and a figure who has been deeply involved in tackling the financial crisis.

“Mr. Geithner, 47 years old, would be one of the youngest-ever US Treasury secretaries. His nomination would come as Wall Street is being challenged by the financial crisis and a Washington power vacuum, and as the world’s debt markets show fresh signs of falling into deeper problems.

“Mr. Obama is expected to introduce his entire economic team on Monday, according to people familiar with the matter. The president-elect has been under pressure to speed up his transition as stock markets this past week fell to lows not seen since the late 1990s.

“Mr. Geithner served as a Treasury attaché in Japan in the 1990s and later at the International Monetary Fund. He was a protégé of former Treasury Secretaries Lawrence Summers and Robert Rubin. Mr. Summers, who was also a potential candidate, instead is expected to take a position within the White House as an economic adviser.

“Mr. Geithner has spent most of his career managing government responses to financial crises, from the 1990s bailouts of Mexico, Indonesia and Korea, to the debt-market meltdown that has brought Wall Street to its knees this year.

“Mr. Geithner (pronounced GYTE-ner) pushed for earlier intervention in the financial markets to stem the financial crisis, and looks likely to continue that activist approach in his new job. Among his first priorities could be a large fiscal-stimulus package.

“Unlike previous picks for Treasury secretary, who hailed from Wall Street, industry or the Senate, Mr. Geithner has been a technocrat most of his career.”

Source: Jonathan Weisman, Deborah Solomon and Jon Hilsenrath, The Wall Street Journal, November 22, 2008.

The Wall Street Journal: Paulson – we’re not experimenting with bailout
“Treasury Secretary Henry Paulson defended the Bush Administration’s $700 billion bailout plan, telling WSJ’s Alan Murray he doesn’t think he’s doing FDR-like experimentation with liquid assets.”

Source: The Wall Street Journal, November 17, 2008.

CNBC: Bernanke testimony
Federal Reserve chairman Ben Bernanke testifies before the House Financial Services Committee.

Source: CNBC, November 18, 2008.

Financial Times: US economy chiefs say policies bear fruit
“The cost of insuring top quality US companies against default hit a record high on Tuesday even as Hank Paulson and Ben Bernanke told Congress that their radical policy actions to ease the credit crisis were starting to bear fruit.

“‘We have turned the corner in terms of stabilising the system and preventing collapse,’ said Mr Paulson, Treasury secretary. He called for patience, saying: ‘There is a lot of work that still needs to be done in terms of recovery of the financial system.’

“Mr Bernanke said there were ‘some signs that credit markets, while still quite strained, are improving’.

“However, the Federal Reserve chairman noted that ‘overall credit conditions are still far from normal, with risk spreads remaining very elevated’.

“On Tuesday, the CDX index that measures the cost of insuring investment grade companies against default closed at a record high on mounting concern about the global economy, and there were fresh signs of dislocation in the swaps market.

“Meanwhile, indices that measure the value of securities backed by residential and commercial property loans – which have plunged since Mr Paulson abandoned his plan to buy toxic assets last week – continued to plumb new depths.”

Source: Michael Mackenzie and Krishna Guha, Financial Times, November 18, 2008.

The Wall Street: Paulson, Summers, Rubin debate crisis
“Current Treasury Secretary Henry Paulson and predecessors Lawrence Summers and Robert Rubin locked horns over the best way to get the US economy back on track.”

Source: The Wall Street Journal, November 17, 2008.

Bespoke: Paulson trying to rewrite his own history
“Treasury Secretary Henry Paulson spoke at the Reagan Library this afternoon, and judging by the speech, it appears as though Mr. Paulson is embarking on a PR campaign to rewrite the history of his handling of the credit crisis. One line that stood out was when he said: ‘By pro-actively addressing the problems we saw coming …’

“Judging by excerpts of prior comments the Treasury Secretary made during 2007, if Mr. Paulson saw the problems coming, he wasn’t telling anybody.

“Marketwatch 3/13/07: Paulson also said the fallout in subprime mortgages is ‘going to be painful to some lenders, but it is largely contained.’

“Reuters 4/20/07: ‘I don’t see (subprime mortgage market troubles) imposing a serious problem. I think it’s going to be largely contained.’

“Bloomberg 5/22/07: Paulson, also speaking to CNBC, said the housing slump was ‘largely contained‘ and that market’s correction was mostly ‘behind us.’

“Bloomberg 6/20/07: Subprime fallout ‘will not affect the economy overall.’

“Forbes 7/27/07: Appearing on CNBC with other members of the Bush administration’s economic team, he again said mortgage industry problems would be ‘largely contained.’

“Boston.com 8/1/07: Paulson added that he did not see anything that caused him to reconsider his view that the economic damage from the housing correction was ‘largely contained.’

“Another classic line from today was, ‘As I assess our current situation, I believe we have taken the necessary steps to prevent a financial collapse.’ Mr. Paulson, what is it going to take for you to consider this a financial collapse?

“Given that the extent of the credit crisis was underestimated by almost everyone, you can give Paulson somewhat of a pass for missing it. But to try and rewrite history through speeches even while the credit crisis is still playing out is inexcusable.”

Source: Bespoke, November 20, 2008.

Financial Times: Congress reaches an impasse on car bailout
“The US Congress is unable to approve a new emergency loan to the country’s troubled car sector, Democratic leaders said on Thursday.

“Industry chiefs’ pleas for aid appeared to backfire after two days of hearings on Capitol Hill. News of the impasse over one of the hardest-hit sectors of the US economy came as President George W. Bush agreed to extend unemployment benefits after US weekly jobless claims hit a 16-year high.

“Harry Reid, Senate majority leader, and Nancy Pelosi, speaker of the House of Representatives, said there were not enough votes to pass a $25 billion loan for Detroit that Democrats had advocated. They said car companies had to be more specific about restructuring.

“The pair gave the big three carmakers – General Motors, Ford and Chrysler – until December 2 to submit a ‘viable’ recovery plan, with the prospect of convening hearings immediately afterwards and possible congressional votes a week after that.

“The announcement came in spite of last-minute efforts by six Democratic and Republican senators from car-producing states to reach a deal on a bridging loan.”

Source: Daniel Dombey, Andrew Ward and Bernard Simon, Financial Times, November 20, 2008.

ABC News: Auto bailout – would be better to burn the money
“Congress is debating cutting the Big Three Autos a check … something to tide them over through these tough times. General Motors is bleeding money … some 2 billion dollars a day. Bail them out or let them go bankrupt? That’s the billion dollar question. And its billions of your money.

“One side says give them money – they’re too big to fail, too many jobs will be lost, the American economy will be hit hard, they need time to get fuel efficient cars to the market.

“The flip side – let them fail, they brought this on themselves, pouring 25 billion into these failed models is a waste, bankruptcy protections will let them out of their incredibly expensive labor contracts.

“… David Yermack from NYU Stern Business School chimed in: ‘The implications of this story for Washington policy makers are obvious. Investing in the major auto companies today would be throwing good money after bad. Many are suggesting that $25 billion of public money be immediately injected into the auto business in order to buy time for an even larger bailout to be organized. We would do better to set this money on fire rather than using it to keep these dying firms on life support, setting them up for even more money-losing investments in the future.’”

Source: ABC News, November 17, 2008.

Paul Kedrosky (Infectious Greed): The auto bankruptcy teeter-totter
“GM, for its part, isn’t taking this lying down. It has posted a video on YouTube explaining – okay, propagandizing – the implications of letting it die. Watch it to see how the straight-to-consumer “Save us!” game is played.”

Source: Paul Kedrosky, Infectious Greed, November 15, 2008.

CNBC: Financial crisis tab already in the trillions
“Given the speed at which the federal government is throwing money at the financial crisis, the average taxpayer, never mind member of Congress, might not be faulted for losing track.

“CNBC, however, has been paying very close attention and keeping a running tally of actual spending as well as the commitments involved.

“Try $4.28 trillion dollars. Not only is it a astronomical amount of money, it’s a complicated cocktail of budgeted dollars, actual spending, guarantees, loans, swaps and other market mechanisms by the Federal Reserve, the Treasury and other offices of government taken over roughly the last year, based on government data and new releases. Strictly speaking, not every cent is directed as a result of what’s called the financial crisis, but it arguably related to it.”

Source: CNBC, November 17, 2008.

Reuters: Financials need at least $1 trillion – analyst
“The US financial system still needs at least $1 trillion to $1.2 trillion of tangible common equity to restore confidence and improve liquidity in the credit markets, Friedman Billings Ramsey analyst Paul Miller said.

“Eight financial companies – Citigroup, Morgan Stanley, Goldman Sachs Group, Wells Fargo, JPMorgan Chase, AIG, Bank of America Corp and GE Financial – are in greatest need of capital, he said.

“‘Debt or TARP capital is not true capital. Long-term debt financing is not the solution. Only injections of true tangible common equity will solve the current crisis,’ he said.

“Currently, the US financial system has $37 trillion of debt outstanding, he noted.

“Combined, these eight companies have roughly $12.2 trillion of assets and only $406 billion of tangible common capital, or just 3.4%, the analyst said.

“Miller said these institutions need somewhere between $1 trillion and $1.2 trillion of capital to put their balance sheets back on solid ground and begin to extend credit again, given their dependence on short-term funding and the illiquid nature of their asset bases.”

Source: Reuters, November 20, 2008.

Mr Mortgage: The great mortgage modification pump
“Reworking loans to make ‘payments affordable’ without permanently reducing principal balances is the worst possible thing that can be done because it ensures the housing and foreclosure crisis will be with us for a long time. If these programs are widely accepted, housing is a dead asset class indefinitely …

“This style of modification does not sit well with owners of mortgage securities either, which make up the bulk of distressed mortgages. This is because deferred interest, 40-year terms and interest only teaser periods, greatly reduces the cash flows and lengthens the duration of the security.”

Click here for the full article.

Source: Mr Mortgage, November 19, 2008.

Credit Suisse: More fiscal action needed to ease crisis
“The US, Europe and Japan are in significant recession, says Giles Keating, Head of Global Research at Credit Suisse. He explains how the financial crisis is evolving and why capital injections are needed.”

Source: Credit Suisse, November 12, 2008.

The Wall Street Journal: Discussing the Great Depression
“Dorothy Womble and William Hague survived the Great Depression. They share their stories of living during that time as children.”

Source: The Wall Street Journal, November 14, 2008.

Reuters: Fed’s Hoening – Fed has done “as much as it can”
“Kansas City Federal Reserve President Thomas Hoenig said on Monday the US central bank has done what it can to buffer the economy through a downturn, and a painful process of readjustment is likely ahead.

“‘The Fed has done about as much as it can do,’ he said in an interview on PBS’s Nightly Business Report. Interest rates are already extremely low, he noted, according to a transcript of the program.

“‘We might put it out there, but banks are not able to, given their own capital constraints, able to lend as aggressively,’ he added.

“Hoenig said he was surprised at how quickly economic activity has slowed, but that a sharp reversal of consumption was clearly a key development.

“‘The consumer factor was a major part of the strong slowdown and the actual entering into the recession,’ he said.

“‘Part of it is working through the deleveraging,’ he said. ‘I don’t know of any painless way to rebalance your economy, you have to go through this adjustment, and we will get through it, but it’s not going to be without consequence,’ he added.”

Source: Mark Felsenthal, Reuters, November 17, 2008.

Bloomberg: NABE’s Varvares says US recession to extend into 2009
“Chris Varvares, president of Macroeconomic Advisers LLC and president of the National Association for Business Economics, talks with Bloomberg about the results of NABE’s survey of business economists.”

Click here for the article.

Source: Timothy R. Homan, Bloomberg, November 17, 2008.

Bloomberg: Nouriel Roubini – “I fear the worst is yet to come”

Source: Bloomberg, November 20, 2008.

Clusterstock: Roubini – How are we screwed? Let us count the ways
“Nouriel Roubini weighs in with another treatise of doom, this time focused on consumer spending. He lists 20 reasons consumer spending is headed to hell in a handbasket, taking the economy down with it. We’re short on Prozac, so we’ll summarize only a handful here, and we’ll let Nouriel take it away:

“Today’s news about October retail sales (-2.8% relative to the previous month and now down in real terms for five months in a row) confirm what this forum has been arguing for a while, i.e. that the US has entered its most severe consumer-led recession in decades. At this rate of free fall in consumption real GDP growth could be a whopping 5% negative or even worse in Q4 of 2008. And this is not a temporary phenomenon as almost all of the fundamentals driving consumption are heading south on a persistent and structural basis …”

Click here for the article.

Source: Henry Blodget, Clusterstock, November 15, 2008.

Asha Bangalore (Northern Trust): What is the Fed’s next move?
“The minutes of the October 28 to 29 FOMC meeting were published this afternoon [Wednesday]. The main thrust of these minutes is that economic growth is the topmost concern. The minutes noted that ‘members also saw the substantial downside risks to growth as supporting a relatively large policy move at this meeting, though even after today’s 50 basis point action, the Committee judged that downside risks to growth would remain. Members anticipated that economic data over the upcoming intermeeting period would show significant weakness in economic activity, and some suggested that additional policy easing could well be appropriate at future meetings.’

“The target rate was lowered to 1.0% on October 29, with the effective rate trading between 22 bps and 37 bps since then. Is there a benefit to lowering the Federal funds rate? A lower Federal funds rate, as suggested in the minutes of the October 28-29 meeting, would only accomplish validating the already low effective Federal funds rate. It is possible the Fed could cut the Federal funds rate and abandon attempting to manage the effective rate such that it trades close to the target rate. It appears that the Fed may be considering the possibility of a zero federal funds eventually, if economic conditions warrant it.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 19, 2008.

Bloomberg: Fed to cut rates to zero on deflation risk, JPMorgan predicts
“The US Federal Reserve will probably cut interest rates to zero percent over the next two months to staunch deflation, according to JPMorgan Chase.

“The Fed will lower borrowing costs by 50 basis points at each of the next two policy meetings on December 16 and January 28, JPMorgan economist Michael Feroli wrote in a note to investors yesterday. The central bank will hold rates at zero for the rest of 2009 to prevent prices from spiraling down as companies cut jobs and banks reduce lending, stifling spending, Feroli said.

“The Fed may not be the only central bank to begin offering free money to jolt life into their recessionary economies and keep prices rising as the 15-month credit crisis deepens. The Bank of Japan cut its benchmark rate to 0.3% last month, and the European Central Bank has signaled it’s ready to lower rates further after two reductions in the past six weeks.

“‘Taking the target rate to zero percent would not be costless for the Fed,’ Feroli said. Public confidence may drop ‘if there is a perception that the Fed has run out of ammo’.”

Source: Jason Clenfield, Bloomberg, November 20, 2008.

Asha Bangalore (Northern Trust): Leading index points to further weakening of economy
“The Conference Board’s Index of Leading Economic Indicators (LEI) dropped 0.8% in October after a revised 0.1% increase in September. The LEI has dropped in four of the last six months. On a year-to-year basis, the LEI has dropped 3.5%, the largest monthly decline for the current cycle.

“The LEI has sent a reliable warning of weakening economic conditions for all recessions since 1960, with the exception of the 1967 dip (the economy was weak in this period but it was not a recession).”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 20, 2008.

Asha Bangalore (Northern Trust): Industrial production is significantly weak
“The headline industrial production index rose 1.3% in October, after a 3.7% drop in September. The September estimate now shows a larger drop than the original estimate of a 2.8% decline due to revised estimates of the impact of Hurricanes Gustav and Ike on the chemical industry. According to the Fed, excluding the special factors of hurricanes and Boeing strike, industrial production dropped 2/3 percent in both September and October.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 17, 2008.

Asha Bangalore (Northern Trust): Decline in housing starts stress persistence of housing turmoil
“Total housing starts dropped 4.5% to an annual rate of 791,000 in October, reflecting a decline in starts of both multi-family and single-family units. These numbers along with the record low of the Housing Market Index of the National Association of Home Builders in November imply that the bottom of housing starts is not here yet.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 19, 2008.

Asha Bangalore (Northern Trust): Housing market update – grim news bolsters Sheila Bair’s plan to stem the crisis
“The grim housing market news continues to support opinions that the mortgage problem is the key to a resolution of the current financial market crisis. The crux of the issue is that falling home prices, foreclosures, and rising inventories need to be replaced by more stable conditions for the economy to turnaround. The National Association of Home Builders reported in the November survey that the Housing Market Index fell to 9.0 from 14.0 in October to establish a new record.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 18, 2008.

Asha Bangalore (Northern Trust): Consumer Price Index plunges
“Today the BLS reported that the Consumer Price Index (CPI) fell by 1.0% both seasonally adjusted as well as unadjusted. On an unadjusted basis, this was the largest monthly decline in the CPI since January 1938.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 19, 2008.

BCA Research: Heading for deflation?
“A deflation scare will grip the developed world over the next 12 to 24 months.

“Our research on past real estate bear markets and subsequent banking sector stress (throughout Europe, the US and Japan) highlights that these episodes always lead to a recession, followed by a multi-year period of sub-par growth (i.e. negative output gap). In turn, excess supply helps dramatically drive down core CPI inflation in the years that follow. Granted, it could be argued that the previous episodes occurred during a period of strong structural disinflationary trends, thereby amplifying the magnitude and duration of the decline in price pressures.

“Nonetheless, core CPI inflation is likely to drop sharply throughout the G7 over the next 12 to 24 months, to lows at least comparable to the 2003 deflation scare. In turn, it is likely that the US prints very low positive or even mildly negative headline CPI numbers, given the drag resulting from the recent plunge in food and energy prices.

“Headline inflation is less likely to turn negative in Europe given the rigidity of the price structure but a deflation scare similar to the US earlier this decade is likely. The implication is that policymakers will continue to ease aggressively and then stay on hold for an extended period, benefiting our long duration call. “While the longer-term consequences of such actions may be inflationary, government bond yields will adjust lower in the near term.”

Source: BCA Research, November 17, 2008.

Bloomberg: Bond-market yields signal deflation worldwide
“Bonds worldwide are showing that investors are betting that slumping economic growth will lead to deflation in every major economy. Britain’s five-year breakeven rate went negative Tuesday for the first time since Bloomberg records began in 1996.”

Source: Bloomberg, November 19, 2008.

Financial Times: In a weird world, yields on Tips point to deflation
“Would you believe that we shall actually have significant deflation in the US next year? And the year after that? And flat consumer prices for the year following? That’s happened only once in a developed country since the 1930s – when Japan recorded a negative 1.6% consumer price index for 2002.

“Yet, if you believe the yields on US Treasury inflation protected bonds, or Tips, we shall have a 2.2% fall in prices in 2009, a 2.5% decline in 2010 and only flat prices in 2011. If that turns out to be true, the real interest rate burden on even the highest-rated borrowers will be extremely hard to bear.”

Source: John Dizard, Financial Times, November 18, 2008.

John Davies (WestLB): Buy German bunds
“The 10-year German Bund yield could fall to a record-equalling 3 per cent in the months to come in response to worries about the eurozone economy, believes John Davies, bond analyst at WestLB.

“‘Given the contracting economy and mounting threat of deflation, we now expect the European Central Bank to cut rates to 1.5% by the summer [from 3.25% now], which is lower than the market expects,’ he says.

“Mr Davies notes that the rapid steepening of the spread between two-year and 10-year German yields, which started in September, has slowed as the market moves to price in rates of 2% by the spring.

“But he says: ‘Given our forecast of a more aggressive ECB rate cut cycle, we fully expect the curve-steepening trend to remain safely intact.’

“While the steepening will primarily be driven by moves at the short end of the curve, long-end yields will fall as recession fears overshadow a jump in new issuance, Mr Davies says.

“‘We expect the 10-year yield to fall from 3.6% to 3.25% within the next three-to-six months, and even test the 3% record low set in September 2005. It is only the rise in supply next year that stops us projecting a sub-3% yield.’”

Source: John Davies, WestLB (via Financial Times), November 18, 2008.

Bloomberg: China passes Japan as biggest US Treasuries holder
“China surpassed Japan in September to become the biggest foreign holder of US Treasuries, as foreign investors sought the relative safety of government debt as stocks plunged 9.1% that month.

“Total net purchases of long-term equities, notes and bonds increased a net $66.2 billion in September from $21 billion the previous month, the Treasury said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $143.4 billion, compared with net buying of $21.4 billion the month before.

“China led all foreign official investors in September by posting a net increase in US Treasuries for the sixth month in the past seven, bringing its total ownership close to $600 billion. Japan was a net seller of Treasuries for the fourth month in the past six.

“‘The details of the report paint a much more positive picture of cross-border investments than expected,’ said Michael Woolfolk, a senior currency strategist at Bank of New York Mellon Corp. ‘China, along with others, is showing more demand than anticipated for US assets.’”

Source: John Brinsley and Rebecca Christie, Bloomberg, November 18, 2008.

Bespoke: High yield spreads – no slowdown in sight
“If you’re looking for signs of stabilization in the credit markets, the high yield market is not a good place to start. Based on data from Merrill Lynch, high yield bonds are yielding nearly 1,800 basis points more than comparable Treasuries. In the last month alone, spreads have risen by more than 200 basis points, and since bottoming in the Summer of 2007 at 241 basis points, they are up 645%. To put this in perspective, with the 10-year US Treasury now yielding 3.4%, a high-yield borrower would need to pay roughly 21.4% per year to take out a ten-year loan. With terms like these, who needs loan sharks?”

Source: Bespoke, November 19, 2008.

Bespoke: Financial weapons of mass destruction aimed at Omaha
“Warren Buffett is credited with coining the phrase ‘financial weapons of mass destruction’ with respect to derivatives. However, after some big unrealized losses on index options that Berkshire has written in the last couple of years, it now appears as though the derivative market is taking aim at Omaha. Over the last eight days, the cost to insure debt of Berkshire Hathaway has risen to 475 basis points per year. To put this into perspective, Morgan Stanley’s credit default swaps are currently trading at 456 basis points, and that is the highest of the big global banks and brokers. Berkshire Hathaway has long been considered one of the safest of the safest financial companies, but if Black October 2008 has taught us anything, it’s that nothing is safe.”

Source: Bespoke, November 20, 2008.

Bespoke: S&P 500 200-day moving average spread at -32%
“Multiple market pundits have recently mentioned that the S&P 500 is trading the furthest below its 200-day moving average since the Great Depression. Below we have plotted the 200-day spread indicator going back to 1927. The index is currently trading 32% below its 200-day moving average, which is indeed the most negative spread since 1937. While the spread can remain negative for quite some time, the reaction to the upside has been extreme once the market turns. In the 1930s, and even following the big declines in the 70s, 80s, and early 2000s, the spread turned violently positive in the months following the ultimate low in the 200-day spread. Unfortunately, nobody knows when that low will be.”

Source: Bespoke, November 17, 2008.

Barron’s: Reversal of fortunes between stocks and bonds
“… the dividend yield on the Standard & Poor’s 500 stock index touched 3.57% at 1:13 PM Eastern time [on Tuesday], exceeding the 3.54% yield on the benchmark Treasury 10-year note, according to Bloomberg News. That’s something that hadn’t happened since 1958.

“I was aware that there was a time when equities provided more income than bonds, but that belonged to a long-gone era. That was a time I knew of only from old movies, yellowed newspaper clippings and stacks of old Life magazines. It was when gentlemen wore suits and fedoras, not just to work but even to the ballpark; when the Dodgers played in Brooklyn; a bygone era already a half century ago.

“To contemporary market observers, it’s more than nostalgia. For the S&P 500 to yield more than Treasuries suggests the market is very cheap by historical standards, says Jack Ablin, portfolio strategist for Harris Private Bank. ‘Dividend yield, like price-to-sales, is one of those persistent metrics. We can all quibble about earnings, but dividends, particularly those of the entire S&P 500, are remarkably consistent,’ he adds.

“‘You can fake earnings through account hanky-panky, but you cannot fake dividends,’ agrees Barry Ritholtz, chief executive of Fusion IQ. So after a 47% drop, stocks look relatively cheap for the first time in a long time, he adds.

“Scott Minerd, chief investment officer for Guggenheim Partners, calls the drop in Treasury yields below the S&P 500 dividend yield a ‘straw in the wind’ that the stock market may be bottoming. Still, he thinks the market is signaling that dividend cuts are in the offing, but this recessionary trend also will push Treasury yields still lower.”

Click here for the full article.

Source: Barron’s, November 19, 2008.

John Authers (Financial Times): US stocks fall on deflation fears

Click here for the article.

Source: John Authers, Financial Times, November 19, 2008.

Frank Holmes (US Global Investors): An emotionally impaired market
“Global equities are now trading on their lowest valuations since the early 1980s. History says we should expect stock prices to turn up before earnings do. A recovery in earnings, when it happens, has previously been a robust second leg for more significant price appreciation. The second leg will take place when the earnings recession ends and profits begin to recover. Investment research based on historical patterns by Citigroup suggests the second leg is about 12 months away. With this in mind, we’re nibbling on stocks we believe are undervalued based on fundamental screens and have been hit the hardest as candidates for price appreciation.

“Weak earnings and expectations of more bad news to come have weighed heavily on stock prices. The global equity market trades on 10 times trailing earnings and over 15 times expected trough earnings. The 40-year average global price-to-earnings ratio is 17 times. Citigroup’s research demonstrates that the global equity market is extremely undervalued, but valuations could continue to fall through year end.

“We believe the market and economy are now being emotionally impaired due to the cascading negative news by unbalanced media. Today [Friday] is the first day this week without negative grandstanding politicians on TV and the market was up. Stocks are so oversold and markets, as we have commented in the past, are due for a substantial rally. We believe the market is looking for certainty that President-elect Obama and his team are not going to raise taxes in this economic environment. If the new administration reverses course and denounces tax hikes for two years and proposes a budget to rebuild our infrastructure, then this week could have been the bottom for the market.”

Click here for article by Robert Buckland, Citigroup’s Chief Global Equity Strategist.

Source: Frank Holmes, US Global Investors – Weekly Investor Alert, November 21, 2008.

Bespoke: Trailing 12-month P/E ratios are low
“The S&P 500 Financial, Consumer Discretionary, and Telecom sectors currently have negative P/E ratios, which makes the overall index’s P/E high at 18.41. Sectors whose P/Es aren’t negative have very low trailing P/Es versus historical readings. The Energy sector currently has the lowest P/E at 6.55. The second lowest is Materials at 9.14, followed closely by Industrials at 9.44. And the Technology sector, which usually has a relatively high P/E, currently has a P/E of just 12.49.”

Source: Bespoke, November 17, 2008.

Bloomberg: Mobius says he’s buying China, India, South Africa
“Mark Mobius said he’s ‘aggressively’ buying consumer stocks, including cell-phone companies, retailers, banks and furniture makers, as faster economic growth in China, India, South Africa and Turkey offsets sagging demand from developed nations.

“‘We see a consumer boom in all of those countries,’ Mobius, who oversaw more than $24 billion in emerging-market stocks on September 30 as executive chairman at Templeton Asset Management, said in a Bloomberg Television interview from Johannesburg. ‘Per-capita income is growing at a very rapid pace in these countries.’

“China announced a $586 billion stimulus plan on November 9 after its gross domestic product grew 9% in the third quarter, the slowest pace in five years. India’s central bank estimates growth will slow to 7.5% this year and next, from an annual average of 8.9% in the past four years. Emerging markets will expand at an average of 5% in 2009, compared with 1% in developed countries, Mobius forecast on October 21.

“The global economic downturn may not be as long or severe as expected because of the coordinated fiscal and monetary stimulus put forth by policy makers worldwide, the 72-year-old investor said today.

“The slowdown ‘will be rather short-lived and, of course, the markets will anticipate this’, Singapore-based Mobius said. ‘There will be some deceleration, but these are still fast- growing countries.’”

Source: Fabio Alves and Monica Bertran, Bloomberg, November 17, 2008.

David Powell (Bank of America): Is the dollar’s recent rally coming to an end?
“David Powell, currency strategist at Bank of America, believes the dollar has lost several important sources of support.

“The global shortage of dollar liquidity – one of the primary reasons for the US currency’s strength as the financial crisis escalated in September – has been sharply reduced by the extraordinary measures introduced by central banks to ease money market stress, he says.

“Furthermore, the repatriation of the dollar, which prevented its retracement as tensions in the wholesale funding markets were reduced, may no longer provide the currency with much support moving forward. Private sector flow data indicate the repatriation of foreign investments to the US is slowing sharply, Mr Powell says.

“‘A third factor behind the resilience of the dollar seems to have been the steady return offered by longer-dated US Treasuries, when compared with the sharp drop in German Bund yields. However, the fall in the euro against the dollar appears excessive even when compared to drop in the 10-year Bund-Treasury yield spread.

“‘In addition, a dollar retracement is likely to gain momentum from the pattern of seasonal weakness normally seen in December. As such, we affirm our year-end euro/dollar forecast of $1.38 and outlook for a return to $1.44 by the first quarter of 2009 before the pair resumes a more gradual sell-off.’”

Source: David Powell, Bank of America (via Financial Times), November 19, 2008.

Financial Times: Jim Rogers – the dollar is a flawed currency
The following is an excerpt from an online interview with Jim Rogers.

“FT: It’s a year since we last interviewed you. You were aggressively bearish about the dollar, but you thought there would probably be a rebound and you would take that as an opportunity to further get out of the dollar. Have you made a further exit from the dollar?

“JR: Not yet, no. And the reason I haven’t is because we’re in a period of forced liquidation of everything. We’ve only had eight or nine periods like this in the past 150 years, where everybody has to reverse their positions on everything. There is a gigantic short position in the dollar and they’re all having to cover as they reverse their positions, so this rout is going to go on much further than I would have expected, to my delight, because then I’ll get to sell at higher prices. I don’t know whether I’ll get out this month or this year even, maybe next year, but I do plan to get out of the rest of my US dollars, because this is an artificial rally caused purely by short covering.

“FT: How will you tell when that deleveraging is finally over?

“JR: I’m sure I won’t get it right, but I do hope that when there’s a lot of euphoria about the dollar and everybody’s saying, well, see, there’s no problem with the dollar … I hope I’m smart enough to recognise it and finally get out of the dollar, because it is a flawed and maybe, even, doomed currency.

“FT: Do you see the sell-offs we’ve seen in commodities as a drastic correction?

“JR: Well, we’re in a period of forced liquidation of all assets … we’re getting the business cycle effect on demand right now, certainly, but unless the world’s in perpetual economic decline, commodities are the only thing going to come out of this okay.

“FT: Does this mean you’re actually buying back into commodities at the moment, or is this an area you’re standing clear of?

“JR: No, no. In October when I started covering my shorts in the US stock market, I started buying Chinese shares, Taiwan shares, I started buying commodities again. No, no, I’ve added to those positions.

“FT: What’s your strategy towards emerging market stocks?

“JR: My hope is that I’m smart enough and brave enough at some point along the line to buy some of them back. But I’m not even thinking about it right now … The world’s financial situation is in a mess, and there are a lot of people who have to liquidate. I mean, we must have had 30,000 MBAs flying around the world looking for emerging markets. All of that money has got to come home.

“FT: How do you think the world should go about redesigning the regulatory system, and are you worried that we’re going to end up with a swing towards over-regulation?

“JR: Well, we probably will, The problem is that people like Alan Greenspan would never let the market work … For 15 years, under Greenspan, and now Bernanke, they would not let the market work. Had they let Long-Term Capital Management fail back in 1998, we wouldn’t have these problems now, I assure you. Lehman Brothers would have been smashed. Goldman Sachs, Bear Stearns, would have been smashed. We wouldn’t have these problems now. That only happened because every time they turned around they propped these guys up, gave them more money, and that’s why we have the problem … But now, of course, they’re going to blame it on other people and cause more regulations.

“FT: You’re arguing we need to allow some more big institutions to fail?

“JR: One failed. Why didn’t they let Fannie Mae and Freddie Mac? I mean, I was short Fannie Mae, and they should have let it fail, go to zero. AIG, they should have let it fail, they should have let all of these guys fail, and we would clean out the system … What they’re doing is they’re taking the assets away from the competent people, giving them to the incompetent people and saying to the incompetent: ‘Okay, now you can compete with the competent people, with their money.’ I mean this is terrible economics. This is outrageous economics.”

Source: Jim Rogers, Financial Times, November 17, 2008.

Bloomberg: China should buy gold for reserves, Association says
“China, the second-biggest overseas holder of US Treasuries, should increase its bullion holding to diversify its reserves because the dollar may decline, the country’s gold association said.

“‘China should have at least several thousand tons of gold in its reserves, five to six times the officially announced 600 tons,’ Hou Huimin, vice chairman of the China Gold Association said from Beijing. The group represents producers, traders and retailers.

“The US budget deficit climbed to a record in October, and some investors are betting the dollar may weaken as the Treasury would need to sell more debt to finance its $700 billion financial-rescue package. Gold has tumbled 29% from its March record.

“‘There’s no doubt that gold would be attractive, as US debt is likely to swell,’ said Kenichiro Ikezawa, who oversees about $3 billion as a fund manager at Daiwa SB Investments in Tokyo. ‘In the long term, both the dollar and Treasuries will probably weaken. It’s possible that China will buy more gold, though the country is likely to do so gradually.’”

Source: Xiao Yu and Ron Harui, Bloomberg, November 14, 2008.

Reuters: Iran switches reserves to gold
“Iran has converted financial reserves into gold to avoid future problems, an adviser to President Mahmoud Ahmadinejad said in comments published on Saturday, after the price of oil fell more than 60% from a peak in July.

“Iran, the world’s fourth-largest oil producer, is under UN and US sanctions over its disputed nuclear programme and is now also facing declining revenue from its oil exports after crude prices tumbled.

“‘With the plans of the presidency … the country’s money reserves were changed into gold so that we wouldn’t be faced with many problems in the future,’ presidential adviser Mojtaba Samareh-Hashemi was quoted as saying by business daily Poul.

“Iranian officials in July denied reports that Iranian banks were moving funds from Europe, with one report suggesting as much as $75 billion had been withdrawn and converted into gold or placed in Asian banks, because of a threat of tightening sanctions.”

Source: Zahra Hosseinian, Reuters, November 15, 2008.

The New York Post: Global run on gold coins
“There’s a worldwide run on gold coins. Even as the price of the precious metal itself comes under pressure along with commodities like oil and copper, people around the world are demanding so many of the valuable coins that government mints are having difficulty filling orders.

“A spokesperson for the US Mint tells me that gold coins in this country, for the past month, ‘are being allocated because of an increased demand’.

“And the price that the government charges coin dealers has recently been increased by as much as 10% for a 10-ounce coin.

“And even when gold coins are available, dealers report that customers are paying a bigger premium than they would have just a few months ago.

“In one sense, the attraction for gold coins isn’t surprising. Since ancient times, gold has been considered the safest investment to hold in times of uncertainty.

“With fears of future inflation rising and concern about the value of paper currency and government-debt increasing with each new recovery plan announced in Washington and in foreign capitals, the desire to hold gold grows.

“That part makes perfect sense. But there’s another more puzzling aspect to the recent gold rush. Even as the demand for gold coins such as the Canadian Maple Leaf or the Krugerrand of South Africa has grown, the market price of the precious metal itself is off its highs.

“Bill Murphy, chairman of the Gold Anti-Trust Action Committee, says the price of spot gold is even more perplexing given the demand for coins and the fact that central banks in Europe have stopped selling gold into the open market.

“‘Gold should be moving up,’ Murphy says. ‘How could there be such a dichotomy between the historic high premium for coins all over the world and the low Comex price?’

“His answer? ‘Today the public is buying gold like crazy, but the US government and the banks that hold bullion are intentionally keeping the price down.’”

Source: John Crudele, New York Post, November 18, 2008.

James Pressler (Northern Trust): Japan enters first recession in 7 years
“Today’s indicators out of Japan confirmed what we had expected – that Japan is in recession, though the consensus believed there were enough one-offs to growth to keep the headline figure on the positive side of zero. Real GDP contracted by 0.1% from the previous quarter after a sharper fall of 0.9% in Q2 (originally -0.7%), with Q3 consumption rising by 0.3% after a fall of 0.6%. True, there were factors that perked up private consumption, but they were not enough to overcome a weak net exports figure that will only get worse in the coming quarters.”

Source: James Pressler, Northern Trust – Daily Global Commentary, November 17, 2008.

YouTube: Bloomberg Voices – Japan enters recession

Source: YouTube, November 17, 2008.

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