David Rosenberg: “Despair Begets Hope”

Sunday, May 20th, 2012

Presenting the best weekly self-contrarian segment from everyone’s favorite Gluskin Sheff-based skeptic – David Rosenberg:

DESPAIR BEGETS HOPE

… Over half of the 2012 price advance has been reversed in barely over a month as the broad market drifts down to its lowest level since February 2nd. The Financial Times makes the point that the 10-day relative strength index at 29.2 is deeply into oversold territory. The Canadian TSX index is officially in bear market terrain, having declined 21% from its cycle high (posted in April last year) and is back to levels prevailing on October 2011.

Fading risk appetite is also underscored in the credit markets where BB-rated corporate spreads have widened to 450 basis points from the recent low of 420bps. Until we see some resolution to the latest round of euro area angst, one can reasonably expect spreads to widen further, but we would look at this as a nice buying opportunity as the link between the problems there and corporate default rates here is extremely loose. The fact that gold and other commodities are slipping while core government bond markets — gilts, bunds and Treasuries — are rallying strongly suggests that deflation risks are getting repriced into various asset classes. Greek bonds are trading at pennies right now and implicit probabilities in peripheral bond markets are highly discounting exits from the monetary union by year-end. Spanish bond yields have blown through 6% (Italy getting closer too) and 10-year spreads off Germany have hit a new record high of 485bps.

This is where the LTRO has proven to have actually been a dismal failure. Domestic banks used the program as a carry trade to play the yield curve and are now choking on losses on the sovereign government bonds they were enticed to buy. So thanks a lot, Mr. Draghi — ECB policies are at least partly responsible for why it is that euro area bank shares have sunk all the way back to March 2009 lows. Non-domestic investors have been dumping the peripheral government bonds just as the Italian and Spanish banks have been loading up — these foreign entities, we see in the FT, have been net sellers of Italian government bonds to the tune of 200 billion euros in the past nine months and 80 billion of Spanish debt over the same time frame. And guess what? They can unleash even more supply damage because they still own roughly 800 billion euros worth of combined bonds of both basket-case countries.

The most bizarre quote we have seen in quite a while came from a strategist in the FT. Get this:

We can take comfort from the fact that while the Greek electorate are against austerity, the support for staying within the eurozone is even stronger”.

I can replace that with this real-life comment:

We can take comfort from the fact that while my three sons are against doing their homework, the support for getting a passing grade is even stronger”.

How utterly lame.

If the Greeks want to stay in the eurozone, it’s probably because they know they can continue to suck at the teat of the Troika. More bailouts please and on easy terms since “austerity” is the new dirty nine-letter word globally.

The best lines actually came from the FT Lex column:

“All balled-out eurozone countries will ultimately have to decide whether they can make the fiscal adjustments and achieve economic growth more quickly in, or outside, the euro. That is where Greece now finds itself.”

Now that is a thoughtful comment.

There was another really good zinger in the Markets and Investing section. To wit:

“it’s naïve in the extreme to think you can limit the knock-on effect. As soon as Greece leaves or defaults, contagion will pass like a cannon going off in Spain”.

That was from an executive at a U.K. bank.

Arvind Subramanian penned a truly brilliant piece in the FT as well, titled Why Greece’s Exit Could Become the Eurozone’s Envy. In a nutshell, Greece’s challenge is that it is woefully uncompetitive and as such needs wages and prices to adjust sharply lower. You either do that organically or you devalue the currency — which then sharply boosts exports and fosters import substitution. Of course, the initial impact is recessionary and deflationary, but only for one to two years, if history is a guide, followed by a boom. This is exactly what happened to Asia a decade ago. As Arvind concludes, “the ongoing Greek tragedy could yet turn out not too badly for the Greeks. But tragedy it might well be for the eurozone and perhaps the European project”.

Indeed, the cost estimates I have seen published for the euro area would be in the neighbourhood of 400 billion euros — in terms of immediate direct financial losses. Second round impacts are far more difficult to assess, but would be enormous. While there are a myriad of legal complexities surrounding a Greek departure, it is not an impossible task. The bigger issue would be how the ECB would manage to ring-fence the banks in Portugal and Spain and prevent a contagion.

But let’s talk about what we do know with some certainty.

The Greeks voted against the status quo. It isn’t working for them. An election is likely around mid-June, and the party in the lead is dead-set against the initial bailout terms. The government, meanwhile, runs out of cash by early August when a bond payment comes due and that could well be the trigger for default and exit. It is tough to see this process being orderly — confusion, turmoil and volatility all come to mind. But if we do get a cathartic event, we will be able to buy assets for our client base at excellent prices. There always is a silver lining. You just have to find it.

We also know that Angela Merkel this far is not being swayed by her party’s recent electoral setbacks — at least that is the indication we are getting from her latest rhetoric.

Tags: Bond Yields, Broad Market, Bunds, Carry Trade, Credit Markets, David Rosenberg, Default Rates, Dismal Failure, Domestic Banks, Domestic Investors, Draghi, Financial Times, Gilts, Government Bond Markets, Government Bonds, Greek Bonds, Relative Strength Index, Risk Appetite, Sovereign Government, Yield Curve
Posted in Markets | Comments Off

Bob Janjuah: “Germany Will Walk, And The S&P Will Undershoot To 700 In 2012″

Friday, November 18th, 2011

Bob’s (latest) World is here.

From Bob Janjuah of Nomura

1 – My secular views remain unchanged. I see no (fundamental) developments or market (price action) developments that warrant a change of view. My very negative view of the latest (late October) round of eurozone “shock and awe? appears to have been quite accurate. All those European policymakers and sell-side commentators who told us on 27-28 October to great fanfare that the solution was now finally in place and that it was now “all fixed?, seem to have gone extremely quiet. The October deal was, as I said in my previous note, a confidence trick that has failed. And as a result it has made things a lot worse. At some point I hope that enough lessons will have been learnt, and we can finally move into the long endgame – hard (non-voluntary) default in the eurozone. Q1 2012 and the €80bn payment to Greece should be the focal point.

2 – My short-term view is also proving correct. Since the 27-28 October meeting, it has been a bad month for risk, especially in the case of peripheral eurozone debt, French debt, credit spreads, and the euro itself. Also as forecast, the dollar has done well, as have core government bond yields (bunds, USTs and Gilts). I expand further on my short-term view in point 2 below, as there are some very short-term risks to the  views I set out in my last note regarding the very back end of 2011.

There are two points I want to focus on a little:

1 – Eurozone solutions: With the late October “deal? now in tatters, and with subsequent developments in Italy, in Greece, and in the market pricing of French risk, the future for the eurozone now seems to be all about the ECB and outright monetisation. It seems amazing that the same folks who insisted that Greece would not default, that the eurozone was solvent and was just going through a CDS-trader-driven liquidity squeeze, that kicking the can down the road was a viable plan, and who trumpeted the late-October deal, now think ECB monetisation is the  solution. I would urge extreme caution, again. In my view, the eurozone can either go down the path of full political and fiscal integration, which clearly means a smaller neue-eurozone and default by the nations that don?t fit in with this hard-money Germanic ideal or it can take the soft-money Latin/UK/US-style soft-money route, where the ECB agrees to unlimited monetisation. It is clearly a case of “either, or?, but not both. These are two divergent policy paths.

Germany appears to be adamant that full political and fiscal integration over the next decade (nothing substantive will happen over the short term, in my view) is the only option, and ECB monetisation is no longer possible. I really think it is that clear and simple. And if I am wrong, and the ECB does a U-turn and agrees to unlimited monetisation, I will simply wait for the inevitable knee-jerk rally to fade before reloading my short risk positions. Even if Germany and the ECB somehow agree to unlimited monetisation I believe it will do nothing to fix the insolvency and lack of  growth in the eurozone. It will just result in a major destruction of the ECB’s balance sheet which will force an ECB recap. At that point, I think Germany and its northern partners would walk away. Markets always want short, sharp, simple solutions. This is why the begging bowl is out for ECB unlimited monetisation. But, as in the immortal words of Messrs Jagger and Richards, “you can?t always get want you want?.

I firmly believe that any conditional or finite monetisation would actually be the worst idea (most of the downside, very little of the upside, of infinite monetisation), but probably the most likely “compromise? if Germany were ever to “give? on this issue.

2 – Macro Divergence: While (to date) my risk-off call after the late-October deal has been the correct strategy, there are clearly growing divergences between credit/bond markets and equity markets, and also between optimism on the US and pessimism on the eurozone. On a secular basis I am convinced of two things. First, credit and bond markets are far better lead indicators than equity markets. Second, Europe will experience a hard default, worsening global growth and global financial conditions. In this context it is important to note that the global economy is now more closely coupled than at any point in the past three years. So I will happily position against optimism on the US economy, especially as what Kevin and I think we have seen over the past two to three months is the overdue and entirely forecast post-Japan tragedy cyclical bounce in the growth data. This bounce has now peaked, in our view, and moderation has resumed or is about to. And now the US?s own fiscal/debt problem is about to take centre stage again.

Having said all that, on a shorter timeframe a case can be made for a largely technical bounce higher in risk assets – based on price action rather than any genuinely positive fundamental developments. As such, I want to further refine my short-term view and, in particular, tighten up on my stop loss triggers. Using the S&P 500 as a proxy guide, I am looking for the S&P either to break and close (for 3 to 4 consecutive days) above 1285, or to break and close below 1230. I think the period a week either side of Thanksgiving will give us clarity on this. A break above 1285 – while doing nothing to alter my secular bearish view – would suggest 1320/1350 by year-end is possible. A break below 1230 would suggest 1150/1075 is likely before year-end. I still put an 80% probability on the break to the downside and 1100s S&P/perhaps low 1000s before year-end. In other words, the short term view detailed in my last note – which also calls for 10 year UST yields at 1.75%, Gilts sub-2%, Bunds at 1.5%, the iTraxx Crossover index up at 900, and the USD DXY Index above 80 – remains my core view. But it would be foolish of me not to tighten my stops and not to highlight the risk to my short-term outlook.

And to reiterate, as far as I am concerned, nothing has changed my very bearish secular view on global risk for 2012, which targets the S&P 500 in the 800/900 area, with risk of an undershoot to the 700s.

Tags: 28 October, Bond Yields, Commentators, Confidence Trick, Credit Spreads, Debt Credit, Endgame, Fanfare, Focal Point, Fundamental Developments, Gilts, Government Bond, liquidity, Nomura, Policymakers, Shock And Awe, Squeeze, Tatters, Usts, Viable Plan
Posted in Markets | Comments Off

Bob Janjuah (Nomura): Still Overreacting?

Monday, October 3rd, 2011

Nomura Bob is back with another hotly anticipated if, unfortunately, grammatically flawless, market strategy piece. Short and sweet, Bob as usual cuts right to the point.

Bob’s World – Still overreacting?

Summary

Most commentators now seem to accept that what is happening is not an overreaction, rather the markets are at last on the way to fully pricing in the sad state of the global economy and global markets. I remain firmly convinced that we are in a secular bear market where stage 1 was the late 2007 to early 2009 sell-off, stage 2 was the countertrend rally from early 2009 to April 2011, and stage 3 is the current phase, where I expect the sell-off to last at least until late 2012.

The key basic problems remain weak trend growth in the DM world, which we think will continue for another three to five years, the policy errors (in our view) of the current set of policymakers, and the existing set of inadequate ‘old world’ policy institutions.

My secular view remains bearish. In or within a year from now I expect global equities to be 25% to 30% lower. My S&P500 target for the low in 2012 remains 800/900, and I think an ‘undershoot’ into the 700s is entirely possible. In this bearish outcome I would expect 10-year bund yields at 1% to 1.25%, 10 year UST yields at 1.25% to 1.5%, and 10-year gilts below 2%. The USD should do well, credit and commodities should not.

My view over the next month also remains unchanged. I expect stocks to reach their lows for 2011 in this time frame. I still expect the S&P 500 to bottom in the low 1000s in October. And I expect to see 10-year bund yields below 1.5%, 10-year UST yields below 1.75%, and 10-year gilts close to 2%. Beyond October 2011, on a two- to three-month basis into year-end/early 2012, I still see a possibility of a decent counter-trend risk rally. Should this materialise, the S&P500 could move from a low in October of around 1000, up to/towards 1200 by end-December 2011/January 2012.

On a secular basis, investors should remain cautious, and focus on strong balance sheets and strong/robust business models. I expect the next year to be about capital and job preservation. Any counter-trend rally should be tradable but short lived – it should be viewed opportunistically.

And the Full report

My last report (Bob’s World: It’s only just begun) was published on 23 August. A month on I have little to add as markets and data are evolving almost exactly as expected. Most commentators now seem to accept that what is happening is not an overreaction, rather the markets are at last on the way to fully pricing in the sad state of the global economy and global markets. It may sound repetitive, but I remain firmly convinced that we are in a secular bear market where stage 1 was the late 2007 to early 2009 sell-off, stage 2 was the countertrend rally from early 2009 to April 2011, and stage 3 is the current phase, where I expect the sell-off to last at least until late 2012.

Basic problems

The key basic problems remain weak trend growth in the DM world, which we think will continue for another three to five years, the shocking policy choices of the current set of policymakers, and the existing set of woefully inadequate ‘old world’ policy
institutions.

Growth

The consensus now appears to be moving towards the kind of weak trend growth outcome Kevin and I have been highlighting for some time, with trend DM growth expected to be around 1%pa over the next 3 to 5 years. For now, however, EM and thus global growth outlooks remain 100-200bp too high on a three- to five-year trend basis. Expect these to also be revised lower over the next few months. Decoupling may come one day, but we doubt it will happen in the foreseeable future.

Policy errors

More and more people seem to be coming around to our view that policymakers (globally, not just in the euro zone) have made some major errors in terms of diagnosis and treatment of the crisis. And they now seem to judge that responsibility for these policy errors lies not just with politicians, but also with central bankers. The policy errors are continuing, in our view, and look likely to do so until 2013. Even the consensus now sees the limits to credible policy, and can see that those limits either have or will very soon be exceeded. In 2012 I fully expect current policymakers to be revealed as „emperors with no clothes.?

Still bearish

It is for these reasons that my secular view remains bearish. In or within a year from now I expect global equities to be 25% to 30% lower. My S&P500 target for the low in 2012 remains 800/900, and I think an ‘undershoot’ into the 700s is entirely possible.

For the valuation-focused, assume S&P 500 EPS in 2012 of $90/$100, and P/Es in the 8 to 9 area – I see this kind of P/E as the new norm in the kind of world we are in. In this bearish outcome I would expect 10-year bund yields at 1% to 1.25%, 10 year UST yields at 1.25% to 1.5%, and 10-year gilts below 2%. The USD should do well, credit and commodities should not.

Here I have to insert an important caveat regarding Germany and bunds. My core assumption remains that in the euro zone policymakers DO NOT attempt to fix an excess leverage and low growth problem with MORE leverage! This type of plan obviously appeals to Tim Geithner, but the core euro zone should be extremely concerned by the suggestion that leveraging the EFSF is a supposed „solution?. And of course Germany should also be deeply concerned about de facto attempts to force the ECB to follow the Fed into unsterilized monetisation. Germany/the core euro zone are simply NOT the same as the US and should not attempt to follow a policy which, frankly, has in any case failed in the US!

Short-term view

My view over the next month also remains unchanged. I expect stocks to reach their lows for 2011 in this time frame. I still expect the S&P 500 to bottom in the low 1000s in October. And I expect to see 10-year bund yields below 1.5%, 10-year UST  yields below 1.75%, and 10-year gilts close to 2%.

A counter-trend risk rally

Beyond October 2011, on a two- to three-month basis into year-end/early 2012, I still see a possibility of a decent counter-trend risk rally. Should this materialise, the S&P500 could move from a low in October of around 1000, up to/towards 1200 by end-December 2011/January 2012. I see many possible drivers of this risk squeeze: Greece could be bailed out through to early 2012, which is when I would expect it to default and the restructuring of the euro zone to begin in earnest; Kevin expects a two- to three-month patch of „better? data in Q4 2011; QE2 in the UK; ECB rate cuts; positive EFSF headlines or progress; positive PSI headlines or progress. At least part of President Obama?s fiscal ‘boost’ should happen, and something is better than nothing. Additionally, should the S&P 500 hit the low 1000s (over the next month or so, as I expect) and the unemployment rate exceeds 10%, I believe the Fed will be unable to resist another dose of QE, whereby QE3 will be a rehash of QE2. Finally, I think positioning and sentiment by late October 2011 will be such that markets are ripe for a decent squeeze.

Of course, we may not see all or even any of these drivers, but in terms of the squeeze better in risk into year-end, only some would need to materialise. In terms of the bigger picture, however, I am sure that even if all of these drivers were to occur together over Q4, the net result would be nothing more than a short-term boost primarily to the paper value of risk assets in markets, and a boost to commodity prices. In the long run I would see QE3 (which is a redux of QE2) as an even bigger mistake than QE2, and in the context of the euro zone, I fully expect policymakers to remain badly behind the curve on substantive matters (mere word, hope and unfulfilled promises are very counterproductive).

Stay cautious

On a secular basis, investors should remain cautious, and focus on strong balance sheets and strong/robust business models. I expect the next year to be about capital and job preservation. Any counter-trend rally should be tradable but short lived – it should be viewed opportunistically. My core message is bearish. Over the past month Kevin and I have looked closely for anything that could change our view and have come up with nothing. Even the hope that EM or China can go on a multi-trillion USD investment binge to re-ignite global growth seems pretty forlorn, as China?s last fiscal and credit binge in 2008 is proving very costly to clean up. The euro zone may positively surprise us with a clear and credible plan for the region, involving major debt and economic restructuring for Greece, Portugal and Ireland, a major recapitalisation of the euro zone financial system, and the formation of a neue-eurozone with a hard-money ECB at the core. We can but hope. The only alternatives are immediate full fiscal union, or full on unlimited unsteralised monetisation by the ECB. Both „options? are I think extremely unlikely.

The Geithner plan

Finally, a quick comment on the Geithner plan for the euro zone, which proposes leveraging up of the EFSF and which ultimately relies on (not so) stealth unsterilized monetisation, without any control, by the ECB. The aim of this plan seems to be to extend the global debt “ponzi” for as long as possible, through financial alchemy by essentially boot-strapping a highly levered CDO onto the euro zone?s debt burden. We see major execution risks associated with this plan, and there is significant opposition to it already in key parts of the euro zone. Importantly, if this plan were ever implemented, then, when it inevitably fails – I feel this plan would be even more negative for private sector growth in the euro zone than is the case currently, and this growth weakness would totally undermine this plan – the eventual damage done to both the system and the real economy would dwarf the current burden that needs to be borne in order to put the euro zone onto a stable path again. And bearing in mind the highly problematic debt, deficit and economic situation in the US, which will take centre stage as the market worry in 2012, then a proverb about glass houses and stones springs to mind.

Tags: Commodities, Dm World, Gilts, Global Economy, Global Equities, Global Markets, Lows, Market Strategy, Nomura, Outlook, Overreaction, P500, Point Bob, Policy Institutions, Policymakers, Sad State, Secular Bear Market, Secular View, Stage 1, Stage 2, Stage 3, Target
Posted in Commodities, Markets, Outlook | Comments Off

Bill Gross: Investment Outlook (February 2011) “Devil’s Bargain”

Wednesday, February 2nd, 2011

Devil’s Bargain

Bill Gross, PIMCO, February 2011

• Money has become the economic and political wedge for profound changes in American society.
• Perhaps the most deceptive policy tool to lessen debt loads is the “negative” or exceedingly low real interest rate that central banks impose on savers and debt holders.
• Old-fashioned gilts and Treasury bonds may need to be “exorcised” from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint.

There are lots of ways to describe money: moolah, lean green, dinero … I memorized one definition of “money” from an economic textbook way back in 1966: “A medium of exchange and a store of value,” it said. Well, yes, I suppose, although it failed miserably in the latter capacity in subsequent years. My primer also neglected to mention the increasingly dominant function that money was to assume in a finance-oriented, capitalistic system: Money can be used to make money. Not that interest rates and biblical usury aren’t millenniums old. I remember a story from Sidney Homer’s history of finance that described how a BC-era borrower would be forced to turn over his wife as collateral upon default – wondering at the time whether that might be an incentive for a future Mesopotamian debt bubble! Still, my textbook was nowhere near contemplating the half century of financial “innovation” that was ahead and how money and its levering was to be the foundation for much of America’s prosperity.

Money would also become the economic and political wedge for profound changes in American society. Fifty years ago, the highest paid and most prestigious professions were that of a doctor or a 707 airline pilot who flew the “golden” route from Los Angeles to Honolulu. Today the yellow brick road begins on Wall Street or the City. Aside from supernova innovators such as Steve Jobs or Mark Zuckerberg, the money is made from securitizing things instead of booting and rebuilding America. The tallest buildings in almost every major city are banks, with tens of thousands of people shuffling and trading paper for a living. One of this country’s premier investment banks paid each of its 26,000 employees an average of $370,000 in 2010, nearly ten times the take-home pay of other American workers. Almost a quarter of the 400 wealthiest people on Forbes annual richest list make their money from money, whereas only 8% could make that claim in its first issue in 1982, and probably close to 0% when I first read my economic primer in 1966.

Having been part of this process and even a member of the rogue’s gallery itself, I know one thing for sure: This is not God’s work – it has the unmistakable odor of Mammon. PIMCO, while Mammonesque, is a company to be proud of. I can say with confidence that there are very few clients who have not benefited from our investment management over the years. Some of the rest of this industry, however, I’m not so sure of: rating agencies that perpetually fail at commonsensical quality judgments, bankers that make loans to subterranean credits and then extend the beggar’s bowl for themselves, and 80% of active money managers that underperform the market. As a profession we have failed miserably at our primary function – the efficient and productive allocation of capital: The S&L debacle of the early 1980s, the Asian crisis, LTCM, dotcoms, subprimes, Lehman and the resurrection, instead of the reformation, of Wall Street, are major sins of the modern era of money. Hang your heads, moneychangers. And no, it is not yet time to move on, as many banking CEOs suggest. How can bond traders make ten, one hundred, one thousand times more money than an engineer or social worker given their dismal historical performance? Why is it that some of today’s doctors are using food stamps while investment banking executives complain about millions of dollars in compensation that might be deferred in case of a future bailout?

Financiers have lost their high ground and, if truth be told, we began to lose it a long time ago when we figured out that money was more than a medium of exchange or a poor substitute for a store of value. We figured out a turbocharged way to make money with money and proclaimed ourselves geniuses in the process. Well, we’re not. We may be categorized as “opportunists,” to be generous, but society’s “paragons” and a legitimate destination for a significant percentage of college graduates? Hardly. To paraphrase Paul Volcker, the only productive invention to come out of the banking industry over the past generation was the ATM.

This country desperately requires a rebalancing of priorities. After readjusting the compensation scales via regulation and/or free market common sense, America needs to anoint a new set of Mensans who can create something more than a cash machine and make this country competitive again in the global marketplace. We need to find a new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again. We must have a President whose idea of “centrist” policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship. We need a President who does more than propose “Win The Future” at annual State of the Union addresses without policy follow-up. America requires more than a makeover or a facelift. It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system. It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola. Are record corporate profits a fair price for America’s soul? A devil’s bargain more than likely.

This metaphorical devil’s bargain has its equivalent in the credit markets these days. Central bankers have lowered the cost of money for 30 years now, legitimately following global disinflationary forces downward, but also validating increased leverage via lower real interest rates. Today’s rock-bottom yields, however, have less to do with disinflation and more to do with providing fuel for an asset-based economy that promotes unsustainable wealth creation and a false confidence in perpetual capital gains. Real 10-year interest rates fell from over 5% in the early 1980s to just under 1% in recent months and have arguably been responsible for 3,000–4,000 Dow points and 2–3% annual appreciation in bonds over those three decades.

Tags: Airline Pilot, Attractive Alternatives, Ben Bernanke, Bill Gross Pimco, Bondholders, BRIC, BRICs, Capitalistic System, Central Banks, Changes In American Society, Currency, Debt Bubble, Debt Holders, Debt Loads, Dominant Function, Emerging Markets, Financial Innovation, Gilts, Gold, Gross Investment, Investment Outlook, Latter Capacity, Mark Zuckerberg, Model Portfolios, Policy Tool, Prestigious Professions, Real Interest Rate, Sidney Homer, Spread Fear, Treasury Bonds, Yellow Brick Road
Posted in Credit Markets, Emerging Markets, Gold, Markets, Outlook | 2 Comments »

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.

Advertisement, story continues below

“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
Posted in Commodities, Markets | Comments Off

RBS’ Janjuah Shares 2010 Outlook (in Short-hand Note)

Thursday, January 21st, 2010

Courtesy of BusinessInsider.com, Bob Janjuah, Royal Bank of Scotland’s Chief Global Strategist, shares his outlook for 2010 – He really likes commodities – and anything Bernanke and King can’t print.

RBS: Not all sovereigns have bad and/or fast deteriorating balance sheets (as a result of highly risky fiscal and monetary paths). Core Europe, much of NJA, Oz, Norway, Brazil all spring to mind. I think that bonds, currencies, credit and equities in such parts of the world will (a) outperform their peer grp equivalent asset classes in the bad and/or fast deteriorating sovereign balance sheet zones, but (B) will do merely OK on an absolute basis.

Elsewhere I think hard assets, most obviously to me GOLD and even CRUDE, will do EXTREMELY well. Over the belly of 2010 I expect to CRUDE up at $100 and Gold up at $1500.

I like commodities, anything which Bernanke and King can’t print at the press of a button.

Q2/Q3 2010 is when we will see the S&P down in the low 800s or lower, Gold at $1500, Crude at $100, the euro.

XO Index up at 700/700+. We will see BUNDS massively outperform Gilts and USTs. In the 10yr, I expect the Bund/UST spread to be at least 100bps – ie, 10yr USTs to yield 100bps+ more than 10yr Bunds.

(REMEMBER: None of this has anything to do with actual near term CPI-style inflation – assuming of course YOU still believe the data or believe that the official data tells even a half of the whole story – but rather everything to do with rapidly deteriorating sovereign credit risk/debasement/monetisation/shattered & zero policymaker credibility all being priced into bond yields).

In a follow up, Bob Janjuah shares his profound update to his outlook for 2010 in this grammatically incorrect short hand note. He says we may have already seen the highs for the year as a result of the fact that everyone in the world is now tightening:

This section is courtesy of Tyler Durden, ZeroHedge.com.

Bob’s World: Equity Highs/Credit Tights For 2010 Already Seen?

After putting my 1st piece out since Nov just this week, I have been sitting here and thinking…Forgive me for indulging myself in a stream of my own consciousness, but here goes:

The NAHB Index was ugly, as was the UK Inflation data, the ZEW survey, AND the ABC Consumer Confidence release….we also saw CITI BoA as well as MS all ‘miss’….

And yet stocks were at/close to post March 09 highs and up over 1% on Tues in the US ….Very strange!! Whilst I have only a very small degree of doubt that the Fed/US Treasury PPT is and has been actively goosing the US equity mrkt since Obama said Stocks Were Cheap in March 09 (funny that!!), I was beginning to think that we were/are close to peak levels because at peak bubble levels the price action is most ‘irrational’.

AND THEN 3 things hit me – Bang, Bang and Bang…..3 VERY SIGNIFICANT things:

1 – The Chinese are tightening policy more aggressively then even I thgt they would, and the core of the EUROZONE are playing uber Hard Money with Greece

2 – The Obama defeat in Mass is HUGE…….even a freshman can figure out that ‘Obama’s’ defeat in Mass is a move towards a lame duck president AND, most seriously, is a move that will directly and indirectly cause de facto FISCAL TIGHTENING – the Republicans have seen some serious and seriously UNEXPECTED gains in Washington since Obama’s inauguration and are now at the point where they COULD block Obama’s fiscal recklessness….most seriously, the message out of Virginia, New Jersey and now Mass is that the Republicans will do really well in the mid-terms…they will do ‘really well’ because they are going on the tkt of anti-big govt, anti-bailouts to all, & anti-big deficits, all of which is clearly hitting the sweet spot with the US electorate….furthermore, Obama has become a guy who folks either perceive or believe (I’m in this latter camp) has merely bailed out Big Wall St & Big Corporate America, all at the expense of the lower strata of the US economy (the youth, Black and Hispanic people, the SME sector, regional banks) – Yes, that’s right, the very folks who voted Obama in……all he has offered these folks is healthcare, which is now in serious risk, and benefits, where his temptation will be to DO MORE HANDOUTS (including making up more airy-fairy ‘fake job creation schemes’ just to keep folks, technically, off of the unemployment data) but which the Republicans can now much more effectively challenge/block, and which they certainly WILL (IMHO) block post mid-term victories. Key however is that the Mass defeat means Obama and Summers MUST now have serious doubts abt their reckless policies.

3 – The FHA is TIGHTENING policy too (!!!) re its lending in response to its SHOCKING delinquency data and its now invisible capital base – by law FHA will require a BAILOUT!!!!!! This is DIRECT MONETISATION and mrkts won’t like it

SO, back to what I wrote earlier this week. It COULD be that the Austerity is coming ANYWAY & EVEN SOONER than I had originally thght thru a combo:
- of Euro uber-discipline (VA),
- pro-active China (tightening) policy shifts (VA),
- the commercial realisation that the US/UK consumer and housing mrkts are still in a deep deep hole where the fundamentals are getting worse and where lenders (are forced to) pull back even more/tighten money a LOT in order to stop the rot on THEIR OWN balance sheets (part VA, part IA), and, lastly & most importantly,
- maybe, JUST MAYBE, the People have spoken and the message is clear (clearly IA as far as policymakers are concerned). They DON’T want BIG GOVERNMENT. They DON’T want our currencies debased anymore. They DON’T want to bail-out everyone. They don’t want to pay even more taxes to fund bloated government and to fund entitlement pay-outs ad infinitum. Maybe the People GET IT. They may get the fact that the West, esp. the US/UK, CANNOT PRINT/BORROW/SPEND its way out of our hole. Indeed, they may get the fact that we in the West need a deep-rooted and painful restructuring of our economies away from consumption and dissaving, towards savings and investment. If you think abt it for just one minute, it ain’t that complicated. Yes it means less holidays and less consumption of rubbish we dont need. It means a painful period of higher unemployment whilst the Austrian cleansing is allowed to play out. But all of which will then create the platform for the next 20yr period of REAL growth, REAL wealth gains, REAL productivity gains & REAL innovation.

The US electorate, so far, is clearly shouting this message and Obama must be nervous. Clearly in the UK all will be clear in a few mths time. But the sense I have right now is that the political classes may be forced into austerity because its is what voters want. Wow! Lets See.

In terms of mrkts vs what I wrote on Monday, it may mean that the Q1 peak in risky assets that I was looking for MAY have already been seen this week. It is too soon to be too sure – I need to see 3/4 consec closes below 1120 S&P before I have a very high degree on confidence on this – but the distinct possibility IS there.

IF this does indeed prove to be the case, then I would expect to see a move in S&P thru 1080, 1030 and into the 950/1000 range over the rest of Q1. In this move credit does badly, esp. weaker rated credit, and govvies do well, as does the GBP and the UST. Why? Because the market will be pricing for lower grwth, and tighter money + smaller deficits esp in the UK and US).

Again, IF this is the path we are going to follow, I would be extremely surprised if we did not see at least 1 decent multi-mth counter trend rally, but I also think we see lower highs. So think S&P going form 950/1000 back up to 1080/1120 in Q2. The driver for this counter trend rally will be the mrkt belief that the grwth story can survive even with tighter policy. Lagging grwth indicators and overly optimistic fwd looking ‘subjective’ indicators will support this, + also lower bond yields will provide ‘some’ support.

HOWEVER, as Kevin and I remain convinced that the underlying grwth story for the US & UK – in fact, for the whole world – will be one of multi-yr grwth disappointment (esp. in the UK US) due to weak final demand/prvte sector balance sheet repair and due to the fact that the supposed driver for grwth for EVERY economy seems to be EXPORTS, yet NOBODY can tell who the end buyer is ( it AIN’T China!!), then the call remains that in H2 10, we will see the resumption of serious risk asset weakness, higher volatility, and strength in govvie mrkt – esp BUNDS.

Cheers, Bob

Bob Janjuah
Chief Markets Strategist
RBS Global Banking & Markets
135 Bishopsgate, London EC2M 3UR
Office: +44 20 7085 3249

Tags: 3 Things, Abc Consumer Confidence, Absolute Basis, Asset Classes, Balance Sheet, Balance Sheets, Bank Of Scotland, Bernanke, Bond Yields, Brazil, Bubble Levels, China, Commodities, CPI, Credit Risk, Debasement, Emerging Markets, Eurozone, Gilts, Global Strategist, Gold, Hard Money, Inflation Data, Lame Duck President, Mid Terms, Mrkt, Nahb Index, oil, Peak Levels, Policymaker, Q3, Rbs, Recklessness, Royal Bank Of Scotland, Significant Things, Sovereigns, Tyler Durden, Uk Inflation, Us Treasury, Usts, World Equity, Zew
Posted in Brazil, Canadian Market, China, Commodities, Markets, Outlook | Comments Off

Hendry: Fears of inflation could trigger bigger downturn

Tuesday, June 30th, 2009

We have followed Hugh Hendry, the outspoken and bold CIO of Eclectica Asset Management, and one of the few profitable absolute return hedgies during the last 12 to 18 months, as he built his high conviction case for deflation, and invested as such, in long dated government bonds, Gilts and 30-year US treasury bonds. Last year, it was Hendry who pointed out that 10-year US treasury bonds were signalling deflation, and that in a sea of risky assets, they were the only asset that was up, and up by 15%, while stocks declined in value by 20% or more, the first half of 2008. Falling interest rates, a flattening yield curve, which came as a result of investors flight from risk in equities and commodities, paid off, with Hendry ending the year up some 40% in his flagship Eclectica hedge fund.

In the months since the beginning of March, however, his thesis has been challenged by the market’s renewed embrace of inflation risk, and stocks recovered off brutal lows, as a result of the deemed “risk” trade. By April, Hendry, who is not known for being a buy and hold investor, despite his standing beliefs, reduced his positions in long duration government bonds, treasurys and gilts in the short term, challenged by yields returning to last year’s levels as the economic “green shoots” teased.

We recently posted Hendry’s June 2009 letter to investors in which he re-iterates his view on inflation/deflation, and explains in fair detail that rough waters lie ahead for stocks and commodities as a result of the markets’ over-anticipation of the effects of the whirring central banks’ printing presses. He has avoided investing in stocks for most of the last year, making almost all of his fund’s returns from owning long duration government securities.

Hendry, an avid market historian, believes it possible that we have already experienced the very inflation and hyperinflation the market fears, during the 2002-2007 period where creditor nations (BRIC) amassed enormous forex reserves in the trillions, while gold broke out of a 27-year trend and oil skyrocketed to $147 per barrel. In yesterday’s interview, he also points out that during in the last 7 years the US dollar lost 40% of its value, an occurrence which is often overlooked or underplayed, but that he calls unprecedented. He explains this view in yesterday’s CNBC interview. As usual Hendry’s clarity on the matter is enlightening, as he has a mastery of the complexity of currency effects arising from carry trades and currency crosses.

One year ago, Hendry warned the Hungarian finance minister that the Hungarian economy, and others like it in Eastern Europe, which were financing their growth with Yen and Swiss Franc crosses and/or carry trades, would be unable to keep up with the spectre of cyclical currency fluctuations which could rapidly destroy the monetary liquidity they were awash in during the “strong Euro” era.

Click play to watch the June 29, 2009 interview:

CNBC: Fears about inflation and hyperinflation could create another economic downturn, bigger than the one the world went through, Hugh Hendry, chief investment officer at hedge fund Eclectica, told CNBC Tuesday.

The stock markets are due for a correction after having risen dramatically this year, but this is not likely to come in the summer and another rally is possible, Hendry, who said he was remaining risk-adverse this year, told “Squawk Box Europe.”

“We have a huge intellectual conviction… that this is a more profound downturn that we’re experiencing and markets will be under pressure,” Hendry said.

“People get more get more concerned about government debt… and it sows the seeds of its own destruction,” Hendry said. “We’re actually tightening the screw, we make monetary policy tighter and tighter.”

Long-term yields on government bonds have been rising, as investors fear central banks, especially in the US and the UK, will have to absorb excess liquidity from the system and raise interest rates to fend off inflation once an economic recovery takes hold.

“I think this paranoia today that inflation is happening today I think it puts in place a motion for a decline in the economy,” Hendry said. “I think they’re not printing enough money… with regards to the wealth destruction that has been happening over the past 18 months.”

“We raised interest rates and actually we killed the golden goose,” he added.

Stock Market Correction

A correction in the stock market is likely, but it will not come over the summer, and the S&P 500 index may even hit 1,000 before the downturn, according to Hendry, who admitted he is not stepping in to catch the tail of the rally.

“It’s kind of fun watching it from the sidelines, I must say I’m not participating,” he said. “My flower opens in the winter, not in the summer.”

There is a tight correlation between the oil price and the Chinese currency, the yuan, with oil prices rising as the yuan was strengthening, Hendry said. This is because Chinese speculators had borrowed in dollars as the yuan firmed, and all that liquidity was thrown into the oil market last year.

“The one non-confirmation in the world is that, since July, the Chinese currency has done nothing, it was flat vis-à-vis the dollar,” he added.

Hendry said he still prefers conventional government bonds, and admitted they were the cause his fund was 3 to 4 percent down on the year. But, he added, government bonds were down 20 percent – although he doesn’t think they will end the year like this.

China and other countries with a current account surplus are not as safe as they seem at first glance, because their economies are still hugely dependent on exports to the US, which is still “down on its luck,” he said.

“If that’s the case, the last place you want to be is the surplus countries,” Hendry said.

Source: CNBC, June 29, 2009

http://www.cnbc.com/id/15840232/?video=1167997692&play=1

Tags: Absolute Return, BRIC, BRICs, Central Banks, Chief Investment Officer, Cnbc, Cnbc Interview, Commodities, Creditor Nations, Duration Government, Economic Downturn, Excess Liquidity, Finance Minister, Flattening Yield Curve, Forex Reserves, Gilts, Government Bonds, Government Debt, government securities, Hedgies, Hugh Hendry, Hyperinflation, Inflation Deflation, Inflation Fears, Inflation Risk, Intellectual Conviction, Investing In Stocks, Lows, oil, Printing Presses, Risky Assets, Rough Waters, Squawk Box, Stock Markets, Stocks And Commodities, Term Yields, Treasurys, Trillions, Us Treasury Bonds
Posted in Emerging Markets, Gold, Markets | Comments Off

Hugh Hendry: “AIG is no longer with us”

Tuesday, March 3rd, 2009

Hugh Hendry, CIO, Eclectica Asset Management, hosted CNBC Asia’s Squawk Box, while on a visit to Hong Kong, and shared his thoughts on AIG and the revelation of its record-breaking writedown.

The thing about Hugh Hendry is that while he has been one of the most outspoken and brutally honest practitioners in the hedge fund sphere, he has also openly shared his calls on global television, and in articles, sounding the deflation call firmly well ahead of the present. We hitched our trailer to just about everything Hendry, and it has been with enormous common sense, and an unwavering passion for his art that Hendry has called it right.

Hendry sticks by his long-duration bond investments in 30-year US Treasuries, German Bunds and UK Perpetual Gilts firmly, even today, as the market has been consensus on what has been described as a bond bubble. By Hendry’s estimates, (and his money is where his mouth is) there is far more delevering in store for the market, that debt levels are still far too high.

Click play to watch here:

“American International Group is being kept alive on artificial support from the government, and many other financial companies are in the same situation”

“I think it’s rather a series of redundant thoughts, because AIG is really no longer with us,” Hendry said when asked about the chances of success of a new bailout for the insurer. “AIG is a ward of the US government, AIG’s executives were naughty. They wrote naked (credit default swaps) and in the process they bankrupted the business.”

“We live in a very strange, twilight period where we pretend that a lot of these financial companies are still with us. I think the reality is they left the business last year,” Hendry added.

Banks’ stock prices show that the markets think many financial institutions are bankrupt and the big debate is really how we bring down the debt supporting these companies, he said.

“Nationalization really provides for an orderly liquidation for what are insolvent institutions and I think we have to be willing to have that discussion,” Hendry said.

“If we had governments actually saying listen, the financial sector is insolvent, we would be on the first positive step to moving way from that situation,” Hendry said.

Tags: Aig, American International Group, Bailout, Banks, Bond Investments, Bunds, Cio, Cnbc, Cnbc Asia, Credit Default Swaps, Debt Levels, Deflation, Eclectica Asset Management, ETF, Financial Institutions, Financial Sector, Gilts, Global Television, Governments, Hong Kong, Hugh Hendry, Insurer Aig, Nationalization, Orderly Liquidation, Revelation, Squawk Box, Stock Prices, Twilight, Us Government
Posted in Bonds, Credit Markets, ETFs, Markets | Comments Off

Words from the (investment) wise for the week that was (February 9 – 15, 2009)

Sunday, February 15th, 2009

“Words from the Wise” this week comes to you from my abode in a visibly depressed Europe, from where I am compiling this report as welcome relief from gloomy conversations with taxi drivers and cheerless meals in deserted eateries.

Events during the past few days were dominated by the announcement of US Treasury Secretary Timothy Geithner’s financial stability plan and a deal reached by Congress on the economic stimulus bill. However, the much-anticipated bailout bang soon whimpered as investors were disappointed about the lack of “beef”. Meanwhile, markets were also mired in uncertainty on the back of fresh evidence of headwinds facing the global economy – notably in major economies such as the UK, continental Europe and Japan.

Jim Rogers gave the bank rescue plan a big thumbs-down: “(Geithner) … has been dead wrong about everything for 15 years in a row … This (the rescue plan) is not going to solve the problem, it’s going to make it worse.”

Referring to the stimulus bill, Steve Forbes said: “It’s just a grab bag of every spending proposal that’s been banging around Congress for years.”

And Bill King (The King Report) commented as follows: “A cure should have something to do with the diagnosis. The classic argument for fiscal stimulus presumes that the central cause of our current economic problems is this: We, the people and our government, are not doing nearly enough borrowing and spending on consumer goods. The government must step in to force us all to borrow and spend more. This diagnosis is tragically comic once said aloud.”

Stock markets were on the receiving end as risk-averse investors sought out the safe havens of the US dollar (+0.8% in the case of the US Dollar Index), gold (+3.1%) and bonds (with the yields of 10-year Bunds and Gilts down by 21 and 17 basis points respectively).

The week’s movements of the MSCI Global Index (-3.9%, YTD -9.0%) and MSCI Emerging Markets Index (-0.6%, YTD -2.2%) reflect global investors’ skepticism about the rescue plans. Strong performances came from China (+6.4%) and Russia (+14.3%), but still left these markets in the red by 61.9% and 63.0% since their respective bull market highs. As mentioned before, the chart pattern of the Chinese Shanghai Composite Index shows arguably one of the most bullish formations of the major stock market indices.

The major US indices suffered their worst weekly losses this year (to record five losing weeks out of six): Dow Jones Industrial Index -5.2% (YTD -10.6%), S&P 500 Index -4.8% (YTD -8.5%), Nasdaq Composite Index -3.6% (YTD -2.7%) and Russell 2000 Index -4.7% (YTD -10.2%).

John Nyaradi (Wall Street Sector Selector) pointed out that among the exchange-traded funds (ETFs) none of the main economic sectors registered positive returns, as summarized in the chart below. Not shown, the KBW Bank Index ETF (KBE) lost 14.3% on the week, and the Dow Jones US Real Estate Index ETF (IYR) 12.0%. The ProShares Short Dow30 ETF (DOG) led the way among inverse funds with a gain of +5.3%.

Source: StockCharts.com

As investors became more fearful of the economic situation, gold bullion (+3.1%) assumed its traditional safe-haven role. “Inflows into gold-backed exchange-traded funds surged in January, pushing their bullion holdings to an all-time high of 1,317 tons. Last month’s flows of 105 tons were above September’s previous record of 104 tons, and absorbed about half the world’s gold mine output for January,” said Barclays Capital, as reported by the Financial Times.

The chart below shows the long-term trend of the yellow metal (green line) together with a 14-month rate of change (ROC) indicator (red line). Monthly indicators come in handy for defining the primary trend. In this case the ROC line above zero depicts the bull market in bullion that commenced in 2001. And there is more to come: According to Gary Dugan, the chief investment officer of Merrill Lynch, gold prices may hit US$1,500 an ounce in the next 12 to 15 months.

Source: StockCharts.com

In addition to last week’s bailout actions, policymakers are also working on a housing subsidy plan that will use government money to help reduce interest rates for struggling borrowers. The details are to be announced by President Obama on Wednesday.

Needless to say, Capitol Hill’s various actions come at a hefty price. According to The Wall Street Journal, Strategas Research estimates that the federal budget will work out to roughly 13.5% of GDP in 2009. Asha Bangalore (Northern Trust) added: “2009 will go down in history as the year during which the US economy recorded the largest federal budget deficit as a percent of GDP in a span of eighty years, excluding the war years. The budget deficit as a percent of GDP through the war years of 1942 to 1945 was 14.2%, 30.3%, 22.7% and 21.5%, respectively.”

Next, a tag cloud of the text of all the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. As the saying goes: A picture paints a thousand words …

But back to the stock market. Key resistance and support levels for the major US indices are shown in the table below. All the indices are trading below their 50-day moving averages and the Industrial and Transportation Averages have also breached the December 1 lows. The all-important November 20 lows are now within close reach – already broken by the Transportation Average – and must hold in order to prevent considerable technical damage.

Richard Russell (Dow Theory Letters), 84-year old doyen of investment newsletter writers, interprets the technical situation as follows: “The Point & Figure chart below may currently be the most important single chart in the world. This is the DJ Industrial Average, and it’s in the act of testing its November 20 low. If the Dow violates its low, it will have confirmed the prior bearish penetration of the Transportation Average. If that happens, the primary bear market will be reconfirmed. But if the Industrials stubbornly refuse to break to a new low, then the inference is that something else is happening. The inference is that the bear market may be forming a temporary bottom.”

“What I think we’ve seen, so far, is the end of forced selling. At this point, professionals are trying to gauge whether the huge market collapse of 2007-2008 has discounted the worst to come or whether ‘the worst’ still lies ahead,” said Russell. “The drama should be played out over the next week or so.”

Given all the cross-currents, short-term movements are almost impossible to predict and traders will simply have to remain level-headed and wait for Mr Market to show his hand, especially as far as the November 20 lows are concerned.

For more discussion about the direction of stock markets, also see my recent posts “Finally, the plan … sort of” and “Video-o-rama: Risk appetite fades on stimulus gloom“.

Economy
“There is no let-up in the dark pessimism that engulfs nearly all businesses across the globe. Global business sentiment weakened again in early February back close to the record low set in mid-December,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Confidence is poor across the globe; if there is a distinction it is that Asian businesses are a bit more upbeat than businesses everywhere else.”

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

Friday, February 13
- Fiscal stimulus package in a nutshell
- Federal budget deficit in turbulent times
- Consumer sentiment remains gloomy

Thursday, February 12
- Retail sales stabilized in January, future remains gloomy

Wednesday, February 11
- Sharp drop in exports and imports reflects global recession

Tuesday, February 10
- Geithner unveils financial stability plan

Monday, February 9
- Market spreads – moving in the desired direction but more is necessary in the mortgage market

In last Sunday’s “Words from the Wise” I referred to the surge in the Baltic Dry Index (BDI) – measuring freight rates for iron ore and other bulk goods. The Index has gained 188% over the past two months after plunging by 94% since its high in May. In my opinion, the rally in the BDI is in the expectation (or, should I say, “hope”) that the manufacturing Purchasing Managers’ Indices (PMIs) will start improving, i.e. moving closer to the neutral level of 50 (see graph below). This does not mean the global economy will expand, but merely that the trough of the logjam in international trade might have been reached. Not shown, the trends of the BDI and credit spreads follow a strong inversely correlated path.

Source: Plexus Asset Management

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

Source: Yahoo Finance, February 13, 2009.

In addition to Fed Chairman Bernanke speaking at the National Press Club in Washington (Wednesday, February 18) and the Bank of Japan’s monetary policy announcement (Thursday, February 19), the US economic highlights for the week include the following:

Source: Northern Trust

Click the links below for the following reports:

- Wachovia’s Weekly US Economic & Financial Commentary (February 13, 2009)

- Wachovia’s Global Chartbook (February 2009)

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, February 13, 2009.

“It is the markets’ job to reallocate money from the ignorant to the intelligent, from the lazy to the hard working and studious, from the naive to the educated, and from the speculator to the investor,” said Barry Ritholtz (The Big Picture). Hopefully the “Words from the Wise” reviews offer assistance to Investment Postcards‘ readers not to get separated from their hard-earned funds in these taxing times.

That’s the way it looks from Cape Town (or, more accurately, from “gnomeland”, Switzerland, for the next few days).

Barry Ritholtz (The Big Picture): Stimulus package explained (Q&A)
“Sometime this year, taxpayers will receive an Economic Stimulus Payment. This is a very exciting new program that I will explain using the Q and A format:

Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers.

Q. Where will the government get this money?
A. From taxpayers.

Q. So the government is giving me back my own money?
A. No, they are borrowing it from China. Your children are expected to repay the Chinese.

Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.

Q. But isn’t that stimulating the economy of China?
A. Shut up.

“Below is some helpful advice on how to best help the US economy by spending your stimulus check wisely:

If you spend that money at Wal-Mart, all the money will go to China.
If you spend it on gasoline it will go to Hugo Chavez, the Arabs and Al Queda
If you purchase a computer it will go to Taiwan.
If you purchase fruit and vegetables it will go to Mexico, Honduras, and Guatemala (unless you buy organic).

If you buy a car it will go to Japan and Korea.
If you purchase prescription drugs it will go to India
If you purchase heroin it will go to the Taliban in Afghanistan
If you give it to a charitable cause, it will go to Nigeria.

“And none of it will help the American economy. We need to keep that money here in America. You can keep the money in America by spending it at yard sales, going to a baseball game, or spend it on prostitutes, beer (domestic only), or tattoos, since those are the only businesses still in the US.”

Source: Barry Ritholtz, The Big Picture, February 13, 2009.

CEP News: Financial rescue plan unveiled
“The US Treasury’s financial rescue package includes up to $1 trillion in insurance financing for the purchase of toxic assets, and the expansion of a Fed lending facility (TALF) – backing up to another $1 trillion in consumer debt including mortgage backed securities. Under the program, the US Treasury will enter into a private and public sector partnership where both sides will provide insurance financing on toxic debt.

“However, the final details of the toxic debt program remain unclear, according to Treasury Secretary Tim Geithner. ‘We are exploring a range of different structures for this program, and we will seek input from market participants and the public as we design it,’ Geithner said. ‘We believe this program should ultimately provide up to $1 trillion in financing capacity, but we plan to start it on a scale of $500 billion, and expand it based on what works.’”

Source: CEP News, February 10, 2009.

BCA Research: Where’s the beef Mr. Geithner?
“There is still no clarity about how the US will ‘fix’ its troubled banking sector.

“Markets yesterday gave Treasury Secretary Geithner’s Financial Stability Plan a resounding thumbs down because of a lack of detail about how it will work, following a build-up of expectations that concrete measures were ready to go.

“The plan’s tenets are broadly sound – examining and stress testing bank balance sheets and then using government money to re-capitalize banks and eventually induce private sector purchases of the banks’ toxic assets; supporting a US$1 trillion Consumer and Business Lending Initiative modeled on the Fed’s Term Asset Backed Securities Loan Facility (TALF) to keep credit flowing to the private sector; and, launching a comprehensive program to stabilize the beleaguered housing sector.

“Yet, Geithner offered no specifics on the implementation process needed to identify and value the toxic assets, compel banks to disgorge them, and incentivize private capital to acquire them, though he indicated that details would be forthcoming in the weeks ahead. In short, many of the hurdles that befell the original TARP plan remain in place.

“Bottom line: Financial market risks will remain elevated until policymakers spell out more clearly how banks can be restored to health and encouraged to lend.”

Source: BCA Research, February 11, 2009.

CNN: Yves Smith – “Banks must be nationalized”
“Blogger Yves Smith says that ‘bad bank’ proposals won’t work; the government must take direct control of troubled lenders.”

Source: CNN, February 11, 2009.

Martin Wolf (Financial Times): Why Obama’s new Tarp will fail to rescue the banks
“Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.

“What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.

“Yet hoping for the best is what one sees in the stimulus programme and – so far as I can judge from Tuesday’s sketchy announcement by Tim Geithner, Treasury secretary – also in the new plans for fixing the banking system. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years’ economic crisis, has let Congress shape the outcome.

“The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this “progeny of the troubled asset relief programme” fails, Mr Obama’s credibility will be ruined. Now is the time for action that seems close to certain to resolve the problem; this, however, does not seem to be it.

Click here for the full article.

Source: Martin Wolf, Financial Times, February 10, 2009.

Bill King: Tell the truth about toxic assets
“Only weeks ago the fin media hyped the Great & Powerful Geithner as a market savior!

“Though Geithner offered up to $2 trillion to aid banks and credit markets, stocks tanked because the plan had few specifics and was lamer than what had been leaked and proffered over the past several weeks.

“More importantly, Geithner and Team Obama have been furiously polling private equity and Street titans to gauge their interest and participation thresholds in various bailout plans. Geithner’s lame plan implicitly indicates that few people wanted to participate in the leaked/proposed plans.

“Private investors know toxic paper remains incalculable with open-ended liability. The market understands that no bank bailout has been announced because there is no plan, barring an outright gift, that will fly with private investors. And an outright gift will infuriate taxpayers.

“Also, as any trader that has bought into any syndicate or group offering would tell you, a major problem is calculating the behavior of the other buyers. How much pain can they stand? When will they panic?

“If other buyers cannot endure pain or go bust themselves, bids will be hit and the entire buying group will suffer huge losses … It keeps coming back to toxic payer and transparency.

“Geithner asserted, ‘We will have to try things we’ve never tried before.’ You mean like telling the truth about the quantity and quality of toxic assets?”

Source: Bill King, The King Report, February 11, 2009.

Financial Times: Nouriel Roubini – Anglo-Saxon model has failed
“The Anglo-Saxon model of supervision and regulation of the financial system has failed, Nouriel Roubini, chairman of RGE Monitor and professor of economics at New York University, told the Financial Times on Monday.

“Answering questions from FT.com readers, Prof Roubini, who is widely credited with having predicted the current financial crisis, said the supervisory system “relied on self-regulation that, in effect, meant no regulation; on market discipline that does not exist when there is euphoria and irrational exuberance; on internal risk management models that fail because – as a former chief executive of Citi put it – when the music is playing you gotta stand up and dance.”

“‘All the pillars of Basel II have already failed even before being implemented,’ he added, referring to the internationally agreed set of banking regulations that are forcing banks to set aside more capital to maintain their existing lending.

“Prof Roubini also predicted that it was possible another large bank could fail, saying: ‘In many countries the banks may be too big to fail but also too big to save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system.’

“He also criticised the US and UK approach to bank bail-outs, comparing it with attempts by Japan in the 1990s to solve its banking crisis. ‘The current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze,’ he said.”

Source: Financial Times, February 9, 2009.

CEP News: US Senate approves $787 billion stimulus bill
“The US Senate approved President Barack Obama’s $787 billion stimulus bill late Friday night, satisfying his request that the bill be ready for signing after President’s Day long weekend.

“The bill, which Obama says is designed to energize the American economy and save 3.5 million jobs, passed in a 60-38 vote. Three moderate Republicans voted in support of the bill, giving it the crucial 60-vote support, which it needed to be approved.

“Earlier on Friday, the House or Representatives voted 246-183 in favour of the bill, while no Republicans supported the legislation.

“The bill contains roughly $212 billion, or 27%, in tax cuts for individuals and businesses. Republicans had wanted at least 40% of the bill to be dedicated to tax relief.

“A stabilization fund for education, police and fire services at the state level was set at $53.6 billion, and $87 billion was allotted for Medicaid.

“The final version of the bill scales back tax credits for home and car first-time buyers.

“The final version of the package also contains a softer version of the controversial ‘Buy American’ clause, which now stipulates that all government spending from the plan must use American-made products and labour, but only if this does not violate current trade deals with US trade partners.”

Source: CEP News, February 14, 2009.

Bloomberg: Krugman says stimulus not up to scale of recession
“Paul Krugman, a professor at Princeton University and winner of the 2008 Nobel Prize for economics, talks with Bloomberg’s Kathleen Hays about the likely effectiveness of President Barack Obama’s $787 billion economic stimulus plan. Krugman also discusses the outlook for government debt and potential nationalization of troubled banks.”

Source: Bloomberg, February 13, 2009.

Bloomberg: Feldstein says Senate stimulus bill better than House’s
“Martin Feldstein, an economics professor at Harvard University, talks with Bloomberg’s Kathleen Hays about the US economic stimulus package scheduled for a critical procedural vote in the Senate. Feldstein also discusses the outlook for Treasury Secretary Timothy Geithner’s financial rescue plan, the Federal Reserve’s efforts to increase consumer lending and the priorities of President Barack Obama’s Economic Recovery Advisory Board.”

Source: Bloomberg, February 9, 2009.

Bloomberg: US housing plan to fund interest-rate reductions
“The Obama administration’s housing plan will use government money to help reduce interest rates for struggling borrowers, while asking lawmakers to approve more ways to modify mortgages, according to a person briefed on the proposal.

“US Treasury Secretary Timothy Geithner intends to make the plan public in coming days, possibly within a week, said the person, who declined to be identified before the announcement. Some elements can begin immediately, and others must be considered by Congress.

“Foreclosure filings in the US surged 81% last year to 2.3 million, the highest on record, as home prices fell and tighter mortgage standards made it harder for homeowners to sell or refinance, according to RealtyTrac, a provider of real estate data. The administration has pledged to use $50 billion to $100 billion for housing relief, taken from the $700 billion bank rescue package enacted last year.

“‘Our focus will begin on using the full resources of the government to help bring down mortgage payments and help reduce mortgage interest rates,’ Geithner told the Senate Banking Committee yesterday.”

Source: Rebecca Christie and Margaret Chadbourn, Bloomberg, February 12 2009.

CEP News: JPMorgan and Citigroup announce moratorium on foreclosures
“Three major US financial institutions have announced they will halt foreclosures after coming under intense pressure from US politicians on Wednesday to do something to help US citizens weather the financial crisis.

“Citigroup announced it will be halting foreclosures starting February 12. The bank said it will uphold this commitment until US President Barack Obama has finalized the details of his plan to modify mortgage loans to benefit US residents at risk of losing their homes.

“Minutes later, JPMorgan announced it will also put a moratorium on foreclosures for a three-week period, or until March 6. Morgan Stanley later made a similar statement.

“Bank of America CEO Ken Lewis already announced a similar pledge earlier this week in a hearing before the House Financial Services Committee.

“On Wednesday, CEOs from Bank of America, Goldman Sachs, Citigroup, Morgan Stanley, Wells Fargo, JPMorgan Chase, Bank of New York Mellon and State Street all faced harsh criticism from lawmakers for allowing the financial system to come crashing down in 2008.

“All of the executives said they will do what they can to boost lending and stem foreclosures to aid the US economic recovery.”

Source: CEP News, February 13, 2009.

Peter Schiff (Seeking Alpha): This is just the beginning
“The intense scrutiny recently paid to my investment strategy in the immediate wake of the financial crisis of the last six months has unfortunately obscured the central element of my larger economic forecast. The standard line has been that although I was able to predict the crash, in the form of the housing collapse and the credit crunch, my expected fallout of a weaker dollar and global decoupling has been proven false. However, this assumes that the crash has fully played out. In reality, all we have heard thus far is the overture.

“In 2008, the bubble economy that I had meticulously described years ago finally hit the pin that I knew was out there. The corporate losses, frozen credit markets and plunging home prices were the opening salvo in the unfolding economic crisis. However, the vast majority of air has yet to leak out of the bubble. As it does, the US economic crisis will kick into a much higher gear. I have positioned my clients to withstand the full fury of the gale, and when it finally comes, the question ‘was Peter Schiff right?’ will finally be answered.

“Thus far, our economy has actually been spared the worst due to the temporary strength in the dollar and the recent desirability of our Government’s debt. These movements derailed the short-term performance of many of my investment recommendations (though clearly not to the extent alleged by my critics) and threw a life-line to the downing US economy. The demand for US Treasuries has led to one of the sharpest dollar rallies on record, which has helped bring about just as pronounced a decline in commodity prices. As a result, although consumer income has fallen, so too have prices and interest rates.”

Click here for the full article.

Source: Peter Schiff, Seeking Alpha, February 8, 2009.

Google Video: Peter Schiff’s presentation at the Global Competitiveness Forum

Source: Google Video, February 9, 2009.

Chales Munger (The Washington Post): How we can restore confidence
“Our situation is dire. Moderate booms and busts are inevitable in free-market capitalism. But a boom-bust cycle as gross as the one that caused our present misery is dangerous, and recurrences should be prevented. The country is understandably depressed – mired in issues involving fiscal stimulus, which is needed, and improvements in bank strength. A key question: Should we opt for even more pain now to gain a better future? For instance, should we create new controls to stamp out much sin and folly and thus dampen future booms? The answer is yes.

“Sensible reform cannot avoid causing significant pain, which is worth enduring to gain extra safety and more exemplary conduct. And only when there is strong public revulsion, such as exists today, can legislators minimize the influence of powerful special interests enough to bring about needed revisions in law.

“Many contributors to our over-the-top boom, which led to the gross bust, are known. They include insufficient controls over morality and prudence in banks and investment banks; undesirable conduct among investment banks; greatly expanded financial leverage, aided by direct or implied use of government credit; and extreme excess, sometimes amounting to fraud, in the promotion of consumer credit. Unsound accounting was widespread.

Click here for the full article.

Source: Charles Munger, The Washington Post, February 11, 2009.

CNN: Vanguard founder blames banks
“John Bogle, the founder of the Vanguard Group, says Wall Street’s risky business resulted in the worst recession he’s ever seen.”

Source: CNN, February 11, 2009.

Financial Times: Sales of PCs to fall for first time in eight years
“Problems in the personal computer business have increased the likelihood that 2009 will bring the first decline in PC sales since 2001, according to industry analysts.

“Evidence has been accumulating since the start of the year that the deterioration has reached unexpected parts of the market, with trouble appearing even in some emerging markets, which had previously been seen as the main source of growth.

“‘We’re definitely more pessimistic,’ said Loren Loverde at IDC, the technology research group.

“He said IDC’s latest official forecast, for 4 per cent growth in the number of PCs sold this year, was unlikely to hold: ‘As things sink in, it could easily be in negative territory.’

“Weak earnings reported last week by Lenovo, the world’s fourth-biggest PC maker, showed that corporate buyers in particular have been cutting back.

“That, and softening sales in emerging countries, suggests that the pain has spread beyond consumers in the developed world, who had been expected to be the main source of industry weakness.

“Last month Microsoft warned that the first half of this year at least could see even weaker conditions than the final quarter of last year, when an expected 10-12% increase in the PC market completely evaporated.”

Source: Richard Watersin, Financial Times, February 8, 2009.

CNBC: Marc Faber: “US will default on debt or enter hyperinflation”

Source: CNBC (via YouTube), February 5, 2009.

Asha Bangalore (Northern Trust): Housing market update – applications for both purchase and refinance decline
“The Purchase Index of the Mortgage Bankers Association fell to 235.9 during the week ended February 6 from 261.4 in the prior week. The Purchase Index is at its lowest level since the end of 2000.

“The Refinance Index fell sharply to 2722.7 from 3906.3 in the prior week. The 30-year fixed rate mortgage has risen to 5.19% during the week ended February 6 from a low of 4.89% in the week ended January 9. Although the Housing Affordability Index is at a record high, demand for homes will gather momentum only after employment conditions have improved.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 11, 2009.

Asha Bangalore (Northern Trust): Retail sales stabilized in January, future remains gloomy
“Retail sales moved up 1.0% in January, after a revised 3.0% drop in December. The gain in retail sales in January was a surprise. But, the good news does not imply that the weakness in consumer spending is behind us. Unemployment claims numbers were also published in addition to retail sales this morning. Jobless claims remain at elevated levels and reinforce expectations of a continued gloomy outlook. The bottom line is that consumer spending will be weak again in the first quarter, but by a considerably smaller degree. The weakness in the fourth quarter is most likely the worst performance of retail sales in the current downturn.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 12, 2009.

Asha Bangalore (Northern Trust): Consumer sentiment remains gloomy
“The University of Michigan Consumer Sentiment Index fell to 56.2 in the early-February survey from 61.2 in January. The Current Economic Conditions Index moved up slightly (67.1 versus 66.5). The Expectations Index dropped to 49.1 from 57.8 in January. The gloomy outlook should not be surprising given the nature of economic reports and financial market conditions. The level of the index is second only to the low readings seen in 1980.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 13, 2009.

Asha Bangalore (Northern Trust): Sharp drop in exports and imports reflects global recession
“The trade deficit of the US economy narrowed slightly to $39.9 billion in December. Both exports (-6.0%) and imports (-5.5%) of goods and services fell in December. The trade deficit of goods, after adjusting for inflation, was wider in December compared with November ($43.3 billion versus $40.1 billion in November). The headline GDP estimate is most likely to be revised down to a nearly 5.0% drop to reflect this discrepancy and that of inventories and construction outlays (net impact of both these components is also a weaker GDP), assuming insignificant revisions of retail sales during November and December.”

The Wall Street Journal: $100 bills as toilet tissue?
“Efforts to avoid a deflationary depression will probably produce the opposite – a nasty bout of inflation, says John Williams of Shadow Government Statistics, who advises hoarding gold and even Scotch to barter. Alistair Barr reports.”

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

Telegraph: GM and Chrysler “Chapter 11″ to protect US taxpayers
“The US government is exploring the possibility of placing General Motors and Chrysler in Chapter 11 bankruptcy protection in an effort to safeguard the $17.4 billion in loans extended to the two ailing car manufacturers.

“The move, which is one of a range of options understood to be being considered by government advisers, would ensure that taxpayers would be paid out first in the event that either company actually collapsed.

“Chapter 11 is designed to allow a company to undertake drastic restructuring measures while protecting it from its creditors. However both companies have in the past said that a move into Chapter 11 would destroy them, as customers would lose confidence and many suppliers would cease working with them.

“As the current loan agreements stand, the US Treasury’s loans stand behind those from other creditors, including banks such as Goldman Sachs and Citigroup, as those lenders have, according to Bloomberg News, first position on some assets.

“It is thought that Treasury officials are aiming to renegotiate their position in the debt chain ahead of a March 31 deadline. By then, both car manufacturers must show that they have begun to restructure their operations to such an extent that they will be able to return to profitability. If not, the government can demand return of the loans.”

Source: James Quinn, Telegraph, February 9, 2009.

Dealbreaker: CDS death bill introduced in the house
“H.R. 977 (The Derivatives Markets Transparency and Accountability Act of 2009), from the brilliant mind of Rep. Collin Peterson (D-MN), puts restrictions on OTC contracts and would ‘deny the Federal Reserve the authority to establish regulations or rules with regard to clearing OTC transactions.’

“Instead, OTC contracts must either be cleared centrally or reported to the CFTC. Ouch. This would pretty much end the custom options and swap business, making it very difficult to tailor specific instruments for specific risk.

“The bill also gives ‘the CFTC the authority to suspend credit default swap trading, with the concurrence of the president.’”

Source: Dealbreaker, February 12, 2009.

Bloomberg: Post-election movements of Dow

Source: Bloomberg (via Fullermoney), February 12, 2009.

Bespoke: A look at 10-year market returns
“The New York Times published an article this weekend highlighting that the current 10-year stretch that ended last month was the worst for the S&P 500 in at least the last 82 years. The Times looked at total returns for the S&P 500, and below we provide a similar analysis of the 10-year rolling price change of the Dow Jones Industrial Average going back to 1910.

“As shown, there have only been four other periods where the 10-year return has been negative, and three of the four periods saw returns float around the negative to flat line for quite some time. While it may have taken ‘buy-and-holders’ a few years to end up making money if they got in early when the 10-year returns went negative, they did end up making money.

“When looking at 10-year returns, however, where the market was 10 years ago is just as big of a factor as where it is now. Ten years ago, the market was just about to hit the peak of the Internet bubble, and once it burst, the 10-year return was destined to take a big hit right about now.”

Source: Bespoke, February 9, 2009.

Bespoke: Percentage of stocks above 50-day moving averages
“Below we highlight the percentage of stocks in the S&P 500 that is currently trading above their 50-day moving averages. As shown, even though the S&P 500 has been getting close to touching its November lows recently, 42% of stocks in the index are above their 50-days. This means breadth within the index is still strong even though the index itself has been struggling.

“On a sector basis, Financials have the weakest breadth with just 16% of stocks above their 50-days. Health Care, Energy, and Technology are the three sectors that currently have more than 50% of stocks above their 50-days.”

Source: Bespoke, February 13, 2009.

John Authers (Financial Times): The importance of dividends
“John Authers explains why dividends are the key to finding long-term value in equities.”

Click here for the article.

Source: John Authers, Financial Times, February 10, 2009.

Bespoke: Earnings season “beat rate” at 55%
“Along with guidance and a multitude of other indicators, we track the ‘beat rate’, which is the quarterly percentage of companies that report earnings that are better than analyst expectations. As shown in the chart below, this earnings season, 55% of US companies have reported better than expected earnings.

“Nearly 1,000 US companies have already reported, and there is only a week or so left of earnings season, so this number is definitely starting to firm up. The current ‘beat rate’ of 55% is the weakest reading in about 8 years, but it still hasn’t gotten as low as it got during the ‘00-’02 bear market. Bears will argue that the ‘beat rate’ needs to get down to the ‘00-’02 levels before a bottom can be put in, while bulls will argue that it’s an indication that things aren’t as bad as people think. Only the market will eventually tell us who is right.”

Source: Bespoke, February 9, 2009.

The New York Times: Why analysts keep telling investors to buy
“Even now, with the recession deepening and markets on edge, Wall Street analysts say it is a good time to buy. Still.

“At the top of the market, they urged investors to buy or hold onto stocks about 95% of the time. When stocks stumbled, they stayed optimistic. Even in November, when credit froze, the economy stalled and financial markets tumbled to their lowest levels in a decade, analysts as a group rarely said sell.

“And last month, as the Dow and Standard & Poor’s 500-stock index suffered their worst January ever, analysts put a sell rating on a mere 5.9% of stocks, according to Bloomberg data. Many companies have taken such a beating in the downturn, analysts argue, that their shares are bound to bounce back.

“Maybe. But after so many bad calls on so many companies, why should investors believe them this time?”

Source: David Ranson, The New York Times, February 8, 2009.

David Fuller (Fullermoney): Where should we look for global stock market leadership?
“Most analysts, not to mention those who are Americans, will inevitably hover over US stock market’s data, given the size and influence of that market. However, this mother ship seldom leads the global equity armada either north or south, although none will significantly diverge from Wall Street’s course for long.

“So where should we look for global leadership and what is Wall Street doing at present?

“Taken in reverse order, US stock market indices are ranging in potential base formation development. However, the Dow and S&P 500 are uncomfortably close to their November lows. Both need to sustain moves above this week’s highs to remain consistent with base development. While this may seem like a ‘big ask’ to some, the Nasdaq 100 is considerably firmer.

“However the largest capitalisation market seldom leads. With the US economy remaining the epicentre of global economic risk, there is no chance that it will lead on the upside, although it could still drag other stock markets lower.

“If the S&P and Dow stay within their current trading ranges, let alone move higher, markets with better fundamentals such as China and Brazil will do considerably better, as we are already seeing. Fortunately, they remain highly favoured Fullermoney investment themes.”

Source: David Fuller, Fullermoney, February 11, 2009.

Charles Dumas (Lombard Street Research): A bleak outlook for Asia
“The recent crash in Chinese imports augurs ill for the region – and Asian stocks are less likely to recover than their north American counterparts, says Charles Dumas, economist at Lombard Street Research.

“‘China’s imports are down 40% over six months, as are the exports of South Korea and Taiwan, and almost certainly Japan,’ he says.

“‘By contrast, the drop in Chinese exports has been a ‘mere’ 20%. This suggests that Chinese final assemblers of goods for export are lowering their sales expectations.’

“Mr Dumas acknowledges that the highly disruptive new year period means the position cannot be fully judged until March data are released. ‘But the scale of these trade declines means that in any scenario the outlook for this particular set of mercantilist ‘savings gluttons’ is for a much worse recession than in the deficit economies with currency and monetary flexibility – i.e. the Anglo-Saxons.’

“He suggests the fall in exports will wipe out more than half of China’s 10% trend growth – leading to a significant knock-on to consumer spending, he says.

“‘Of course, Beijing will strive to offset the collapse of private demand – but the chance of actual Chinese recession looks major.’

“In Japan, Mr Dumas says a fall of 30-40% in exports implies a fierce recession – and much the same applies to Korea and Taiwan.

“‘This Asian recession could be worse than the Asian crisis of 1997-98.’”

Source: Charles Dumas, Lombard Street Research (via Financial Times), February 11, 2009.

Moneywise: Could you profit from new frontiers?
“As developing countries appear to defy the global gloom, Liam Tarry looks at the opportunities – and risks – of investing these new frontier markets.

“Countries such as Vietnam, Nigeria and Kazakhstan are often associated with images of political unrest and corruption – few of us imagine that they could offer a sound investment opportunity. Yet these countries belong to a relatively unknown sector called ‘frontier markets’, which has performed very well in recent years. Although highly volatile, this sector may hold hidden treasures for those investors willing to take the risk.

“Frontier markets are, in essence, very small emerging markets. Just 15 years ago, the BRIC markets (Brazil, Russia, India and China) were classed as frontier markets, but they now form a part of many investors’ portfolios. Today’s frontier markets, however, are virgin territory for most of us. They can be found across the globe, from Bulgaria to Bangladesh and from Kazahkstan to Kenya.

“According to Morgan Stanley Capital International, which launched the MSCI Frontier Market Index in November 2007, there are about 20 frontier market countries vying to become tomorrow’s emerging markets.

“‘Frontier market economies are generally much smaller and less developed than emerging markets, but investors understand their potential to grow and become tomorrow’s success stories,’ says Mark Mobius, executive chairman of Templeton Asset Management and manager of its range of emerging market funds.

“So, if you dare to step into the unknown, you could find that high returns are there for the taking.”

Source: Liam Tarry, Moneywise, February 9, 2009.

Steven Lewis (Monument Securities): A yield too high?
“The Federal Reserve must tread carefully in regard to the sharp rise in Treasury bond yields over the past couple of months, warns Stephen Lewis, economist at Monument Securities.

“He says rising yields risk nullifying the actions being taken by the Fed and the Treasury in other policy areas to stimulate the economy. The authorities need to assess the impact of their fiscal and Tarp-related (troubled asset relief programme) measures on Treasury yields, he says, and balance the loss to demand from higher yields against the gains to demand expected from their actions.

“‘It is entirely possible that a point might be reached where the loss would exceed the gains. This would, in effect, set a limit to what the US authorities could do to support the economy.

“‘Any attempt to reflate the economy beyond that point would be as futile as an attempt to travel faster than the speed of light.’

“Mr Lewis says the Fed may believe it can circumvent this constraint by holding down yields in the marketplace.

“‘If they initiate a strategy of buying Treasuries in such circumstances, they will very likely find plenty of willing sellers.

“‘But to keep yields steady, the Fed might have to progressively increase the scale of its purchases, and eventually wind up holding most of the Treasury debt in issuance. This looks like a route-map to the destruction of financial markets and the establishment of a command economy.’”

Source: Steven Lewis, Monument Securities (via Financial Times), February 9, 2009.

Neil Mellor (Bank of New York Mellon): Why the ruble still looks risky
“The recent appreciation of the ruble by no means indicates that Russia has yet secured stability for the currency – particularly if oil prices continue to suffer from declining optimism about the global economy, says Neil Mellor, currency strategist at Bank of New York Mellon.

“He notes that the ruble’s jump on Wednesday was the biggest since the current composition of its euro/dollar trading basket was established two years ago. ‘On the face of it, the central bank’s efforts to steer the ruble away from the lower boundary of its trading band appear to be working,’ he says.

“‘But in doing so, the Bank has been obliged to draw upon its full arsenal; it has hiked interest rates, limited the money on offer at its liquidity operations, cautioned investors against depreciation bets and put its money where its mouth is by using up around one third of its reserves to defend the currency. Yet it remains to be seen whether this will be enough.’

“Mr Mellor says that for the week to February 6, the central bank spent a further $4.6 billion defending the ruble; and that if weakening optimism indeed bodes ill for the oil price, this might be at the lower end of the expenditure scale.

“‘The ruble might have enjoyed a degree of respite, but, at the very least until the price of oil shows greater signs of life, pressure on the currency is unlikely to desist – resulting in central bank intervention that can only further undermine confidence in Russia’s current credit ratings.’”

Source: Neil Mellor, Bank of New York Mellon (via Financial Times), February 12, 2009.

Bespoke: Baltic Dry, winning streaks, and China
“The Baltic Dry Index (BDI) has been making news lately after its impressive performance over the last few weeks. For those unfamiliar with the BDI, it measures the cost to transport raw materials by sea, and it is currently on a 16-day winning streak in which it has risen 126%. The last five trading days have seen the index rise 14.63%, 13.83%, 9.61%, 10.54%, and 8.80% – talk about a rally!

“And while the Baltic Dry doesn’t have much correlation with US stocks, it does follow China’s equity market pretty closely. Over the Baltic Dry’s 16-day winning streak, China’s Shanghai Composite index is up 14% as well, and it really looks like it’s beginning to turn a corner. Below we provide a chart of the Baltic Dry Index compared to China’s Shanghai Composite. While the percentage changes are more extreme for the Baltic Dry, the direction of its move is very similar to China. Given the fact that China is such an export based economy, it’s no surprise that this trend exists.

“Finally, it’s important to note a few things regarding the Baltic Dry. First, the index declined more than 94% from its peak to trough over the last two years. While it has made a nice move upward in the past few weeks, it is still way, way down from its highs.”

Source: Bespoke, February 10, 2009.

Bespoke: Commodity snapshot
“Below we provide our trading range charts of commodities. The green shading represents two standard deviations above and below the commodity’s 50-day moving average. Moves above or below this green shading are considered overbought or oversold.

“As shown, oil has once again taken a turn for the worse, and it is currently testing support at its prior lows over the past couple of months. Metals, on the other hand, continue to surge. Gold, silver, and platinum are all trading at the very top of their trading ranges. They’ve rallied nicely over the past few weeks, and a further move of 1% to 2% higher will put them at overbought levels.”

Source: Bespoke, February 12, 2009.

Richard Russell (Dow Theory Letters): Gold frenzy lies ahead
“There’s only one item that is bought through both fear and greed. That item is gold. Are you worried about the viability of the dollar? Then buy gold – (fear). Are you afraid that the gold market is getting away from you? Then don’t wait – buy gold (greed).

“Those subscribers who have heeded my advice – ‘buy gold’. They are doing OK today. Of course, for years I advocated buying gold coins and hiding them away and never looking at them or thinking of selling those little beauties. Now if you want gold, you have to buy ‘paper gold’ in the form of GLD. Which is probably OK. Below we see an up-dated chart of GLD. And we see the breakout today at 92.29. This completes a huge base, which started at the 69 box and since has been building and building.

“Today, with the upside breakout at the 93 box on the P&F chart, we’re forced to buy gold in the 944 (April futures) area. For those who missed out on gold when it was in the 700s and 800s, this is a scary proposition. So question – is it too late to buy GLD or high-premium coins if you can find them? As I see it, the frenzy, the speculative phase of gold, the rush of a frightened public lies ahead.

“Big bull markets always find a way to keep you frightened and OUT. Big bull markets are devils with no conscience – to get in you have to ‘close your eyes, and just do it’. Not easy, but in this business nothing is easy except losing money. ‘There’s no fever like gold fever.’ And I’m beginning, just beginning, to feel the fever now. When I look at the chart below, I can sense the fever rising.”

Source: Richard Russell, Dow Theory Letters, February 11, 2009.

Business Intelligence: Merrill Lynch – $1,500 target for gold
“Gold prices may hit US$1,500 an ounce in the next 12 to 15 months, Gary Dugan, the Chief Investment Officer of Merrill Lynch, said yesterday.

“Dugan termed his apprehensions of gold striking such a high as a ‘fear’ that may come true. He reasoned that such a price would mean the other commodities and streams of investments have been shunned by investors.

“With confidence in currencies shaken to the core, the yellow metal is increasingly assuming the role of ‘the most trusted currency’, Dugan said. ‘We have never seen such a rush to buy gold. It’s bringing in security and it’s still affordable.’

“Merrill Lynch commodity price forecast authored by Dugan showed that gold prices can rise from the currently prevailing US$913 per ounce to US$1,100 in the first quarter of 2009 and to US$1,150 in the second quarter. ‘While demand for gold has been rising production has been declining. South Africa, which accounts for the major share of global gold production, is facing political issues and has energy problems,’ Dugan said.

“With reports of declining returns from other investment options, ‘cash’ – keeping money safe in banks and investing in government bonds – is the option in front of investors, Dugan said.

“‘Fear’ and eventual decline of the greenback are the two factors that will drive gold prices, he said. While commodity markets could also bounce back in the first half of the year, a rebound is likely to be short-lived in the absence of strong US consumer demand.”

Source: Business Intelligence, February 8, 2009.

Financial Times: Bullion sales hit record in rush to safety
“Investors are buying record amounts of gold bars and coins, shunning risky assets for the relative safety of bullion amid renewed fears about the health of the global financial system.

“The US Mint sold 92,000 ounces of its popular American Eagle coin last month, almost four times that which it sold a year ago and more than it shipped during the whole of the first half of 2007.

“Other countries’ mints have also reported strong sales. ‘Large purchases of coins are perhaps the ultimate sign of safe-haven gold buying,’ said John Reade, a precious metals strategist at UBS.

“Inflows into gold-backed exchange traded funds surged in January, pushing their bullion holdings to an all-time high of 1,317 tonnes. Last month’s flows of 105 tonnes were above September’s previous record of 104 tonnes, and absorbed about half the world’s gold mine output for January, said Barclays Capital.

“‘We estimate that investment demand [into gold] could double in 2009 compared to 2007,’ said Mr Reade. ‘Purchases of physical gold have jumped over the past six months as investors’ fears about the current financial crisis … have intensified.’

“The move into gold is being driven by the very rich, with bankers saying that some clients are hoarding gold in their vaults. UBS and Goldman Sachs said last week that investor hoarding would drive prices back above $1,000 an ounce.

“Traders and analysts said jewellery demand, historically the backbone of gold consumption, had collapsed under the weight of the high prices. Sharp falls in demand in the key markets of India, Turkey and the Middle East have capped the potential of any price rally. But the lack of jewellery demand has not discouraged investors.

“GFMS, the precious metal consultancy, estimated bullion coin demand last year reached its highest level in 21 years.”

Source: Javier Blas, Financial Times, February 9, 2009.

CEP News: Euro Zone GDP contracts at record pace in fourth quarter
“The euro zone economy shrank at a record pace to end off 2008, suggesting that the current recession in the monetary union will be both deep and prolonged.

“According to advance estimates from Eurostat, the euro zone economy contracted by a record 1.5% in the fourth quarter of 2008 compared to the previous quarter. Economists had expected a more modest fall of 1.3% following Q3’s 0.2% decline.

“Germany led the way in declines, contracting 2.1% in the fourth quarter. Conversely, Slovakia was one of the few economies to show any gains over the period, rising 2.1% according to preliminary estimates.

“Year-over-year, overall output in the monetary union shrank by 1.2%, its sharpest pace in series history and down from both the 1.1% contraction expected and Q3’s annualized gain of 0.6%. Looking at 2008 as a whole, GDP growth slowed to 0.7%, down two percentage points from the rate in 2007.”

Source: CEP News, February 13, 2009.

David Fuller (Fullermoney): China has the money
“Every country faces the most serious economic problems in decades but you can be reasonably certain that US Treasury Secretary Tim Geithner and UK Chancellor of the Exchequer Allistar Darling would love to have China’s problems. China is a creditor nation with enviable amounts of cash.

“Yes, the export sector is in a mess and the PRC had been overly reliant on it for two decades. Nevertheless, by being the world’s manufacturer of first resort, China gained enormous technological know how. This will be invaluable as they move their manufacturing base to a more sophisticated level.

“China will not worry about lots of toy manufacturers going out of business. However consider these comments mentioned to me last weekend by a friend visiting from Hong Kong. China is making huge efforts to improve the economic wellbeing of its rural poor. For instance, he said the government has told manufacturers of refrigerators not to lay off workers or slash prices. Instead, it is buying surplus refrigerators at market prices and selling them to the rural poor at half price. There are plenty more rural poor who need looking after than unemployed factory workers in the Southern provinces, although China’s population statistics are astronomical for Western observers.

“The point is, China has the money to do that and does not need to borrow. However, the PRC is not just subsidising the poor with its vast surplus.

“For over a year it has been fashionable to say once again that: ‘Cash is king.’ To the extent that this is a truism, it means that anyone with cash can buy cheap assets when others are forced sellers. From Russia to Australia, China is buying cheap industrial resources for its long-term development.”

Source: David Fuller, Fullermoney, February 12, 2009.

Financial Times: Alarming times for China as exports fall
“Jung Ulrich, chairman, China equities at JP Morgan says the exports drop is a real cause of concern for the Chinese leadership. She tells FT’s capital markets correspondent David Oakley that there is little prospect of a return to 8% growth until world economy recovers.”

Source: Financial Times, February 11, 2009.

Bloomberg: China’s new loans rise by record on stimulus efforts
“China’s new loans rose by a record in January and money supply expanded at the fastest pace in more than a year as the government pressured banks to support a 4 trillion yuan ($585 billion) stimulus package.

“Banks extended 1.62 trillion yuan of new local-currency loans and M2, the broadest measure of money supply, climbed 18.8% from a year earlier, the People’s Bank of China said today on its website.

“The jump in new loans to twice the record set a year earlier shows China may succeed in reviving growth even as credit markets around the world remained locked and after developed economies slumped into what the International Monetary Fund calls a ‘depression’. Loan default risk is rising and represents the biggest single threat to Chinese lenders this year, Fitch Ratings said last month.

“‘We believe China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near collapse,’ said Lu Ting and T.J. Bond, Merrill Lynch economists in Hong Kong. Soaring credit growth ‘might be at the cost of the future health of the banking system’.”

Source: Kevin Hamlin and Luo Jun, Bloomberg, February 12, 2009.

Financial Times: Economists warn of Chinese deflation
“China faces a bout of deflation, economists warned on Tuesday as data revealed that inflation dropped to its lowest in 2½ years in January and that the price of goods leaving factory gates fell 3.3% in January.

“In the latest sign of economic weakness in the country, consumer price inflation fell for the ninth month in a row to 1% in January from 1.2% the previous month as prices for clothing, transport and housing tumbled.

“Several economists forecast that consumer prices in China would begin to fall from this month.

“However, most analysts say that China will avoid a prolonged period of deflation, which could lead to a sharp drop in output as consumers and companies delay spending, because of the aggressive monetary and fiscal stimulus policies introduced by the Chinese authorities.”

Source: Geoff Dye, Financial Times, February 10, 2009.

Financial Times: Japan faces “unimaginable” contraction
“Japan’s economy faces an ‘unimaginable’ contraction, the chief economist of its central bank warned on Monday, as figures revealed surging bankruptcies and a big fall in machinery orders.

“The warning from Kazuo Momma, head of the Bank of Japan’s research and statistics department, underscored the gloom surrounding the world’s second-largest economy as export orders dry up, companies shut down production lines and consumers stop spending.

“Japan, where industrial output plunged a record 9.6% month on month in December, is due to announce fourth-quarter gross domestic product data next week. Polls of economists suggest GDP will have fallen more than 3% compared with the previous quarter – an annualised decline of more than 10%.

“‘From October to December the scale of negative growth [in GDP] may have been unimaginable – and we have to consider the possibility that there could be even greater decline between January and March,’ Mr Momma said in a speech on Monday.

“His remarks came as a private research company reported a 16% year-on-year rise in the number of bankruptcies among Japanese companies to 1,360 in January, the highest level for six years. Total debts left by failed companies rose 44% from a year earlier to Y839 billion ($9.2 billion), Tokyo Shoko Research said.”

Source: Mure Dickie, Financial Times, February 9, 2009.

Financial Times: Australian Senate passes A$42 billion stimulus plan
“Australia’s Senate on Friday passed a A$42 billion ($27.4 billion) economic stimulus package it had blocked the day before after frantic overnight negotiations won a vital extra vote allowing the government to over-ride opposition from conservative parties.

“Independent South Australian senator Nick Xenophon switched sides after winning a commitment from Wayne Swan, Australia’s Treasurer, that the Labor government would commit almost A$1 billion to help improve water flow in the ailing Murray-Darling river system.

“The unexpected second vote, in which senators backed the amended package by 30 votes to 28, boosted the Australian dollar on hopes the stimulus payments would reach households in time to avert recession in an economy badly hit by the global slowdown.

“‘I’m not sure whether this package is going to save this country from recession,’ Xenophon told parliament. ‘I’m pleased to say I believe we have been able to reach a compromise, which while not giving everybody what they want, may give everyone what they need.’”

Source: Kevin Brown, Financial Times, February 12, 2009.

Tags: Bailout, Bill Gross, Bill King, Brazil, BRIC, BRICs, Bunds, Continental Europe, Economic Stimulus Bill, Emerging Markets, ETF, Fiscal Stimulus, Gilts, Global Economy, Global Index, Gold, Gold Bullion, Grab Bag, Headwinds, India, Jim Rogers, Safe Havens, Steve Forbes, Stock Markets, Taxi Drivers, Timothy Geithner, Treasury Secretary, Us Dollar Index, Welcome Relief
Posted in Bonds, Commodities, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, ETFs, Gold, India, Markets, Oil and Gas, Outlook, Silver, US Stocks | Comments Off