Posts Tagged ‘Good Chance’

PIMCO’s Bill Gross Opines on the Bond Market Moves, QE, Inflation, Et Al

Monday, March 19th, 2012

PIMCO’s Bill Gross joined Dan Gross on Yahoo Tech Ticker to discuss a host of bond related and economic views.  Much like myself, he sees another round of QE (sterlized or otherwise) – in fact he takes it another step further and says there is a good chance of QE4 as well. :)

Another round (or two) of quantitative easing from the Federal  Reserve, muted growth and an end to the 30-year bull run in government  bonds. That’s what Bill Gross,  one of the largest bond investors in the world, sees for the U.S.  economy in the coming year.

 

Gross says long-term interest rates have been rising in recent weeks  for two principal reasons. “Yes, inflation is rearing its head. We’re  seeing that in oil prices and other commodities, and we’re seeing it in  the numbers,” he said. The consumer price index has risen 2.9% in the past 12 months. In addition, Gross says, the Federal Reserve’s “Operation Twist“  is scheduled to end in a few months. Under this plan, the Fed sold  short-term debt and purchased long-term bonds in an effort to keep  longer-term interest rates lower. At its meeting earlier this week, the  Fed indicated that it didn’t plan to extend the operation. “Yields have risen based  upon the possibility that the Fed simply stops buying long-term bonds,”  he said. “If they do that, the question becomes, who is left?”

Despite  the Fed’s communiqué earlier this week, Gross doesn’t believe the  central bank’s interventions in the bond markets are over. In two rounds  of quantitative easing (QE), the Federal Reserve printed money to buy  hundreds of billions of dollars of Treasury bonds and mortgage-backed  securities. “I believe there will be a QE3, and perhaps a QE4,” he said.  Why? In the past few years, whenever central banks have stopped or  paused their quantitative easing efforts, “stock prices have fallen and  economies have slowed.” The globe’s private economies simply aren’t  sufficiently strong enough to support robust growth, and the world’s  central banks aren’t willing to stand by and watch. “That’s not a policy  recommendation, it’s simply a realization that the substitution of  central bank monetary purchases will continue for a long time, as long  as they [central banks] try to support private economies on a global  basis,” Gross said.

Still, Gross  believes the 30-year long bull run for bonds may be coming to an end.  “We’re certainly close and have been close for a number of months,” he  said. It’s very difficult to imagine interest rates going lower. “The  bond market, whether it’s Treasuries, mortgages, or investment-grade  bonds in combination, basically yield a little higher than 2%,” Gross  said. “And unless the U.S. economy replicates Japan, where yields are  down to 1% on average, then you’d have to say that we’re close to the  bottom in terms of yield.” He adds: “It doesn’t mean the beginning of a  bear market, but it does suggest at least that the great bond bull  market since 1981 is probably over.”

Recent market activity in  some bonds certainly ratifies that view. In recent weeks, the yield on  the 10-year Treasury has risen from about 1.8% in late January to about  2.28% on Thursday. But “those yields aren’t attractive,” Gross says.  Gross recommends that investors avoid longer-term bonds —  i.e. 10-year and 30-year bonds — whose prices may fall if long-term  growth and inflation expectations rise. However, they should also avoid  short-term bonds. “The Fed has conditionally guaranteed that they won’t  be raising interest rates until late 2014, and that’s almost three years  from now.” Gross believes that bonds that mature in five, six, or seven  years occupy the sweet spot in today’s market.

Bond holders tend  to fear strong growth because it has the potential to ignite inflation  and boost interest rates, thus reducing their returns. Gross says that  while the economy has improved, it shows no signs of overheating. He  believes the U.S. economy is growing at about a 2% annual rate in the  first quarter “and probably beyond.” That’s about as good as can be  hoped for. While the Federal Reserve has injected close to $1 trillion  into the U.S. economy in the past year, growth is in large measure tied  to what happens in the global economy. And the omens from abroad aren’t  particularly good. “China is slowing and the euro land is in recession,”  Gross said. The U.S. is growing at a decent clip, “what we call a new  normal, but it probably won’t get back to the 3 or 4% real growth  numbers that we witnessed over the past decades.”

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News That Matters (September 9, 2011)

Friday, September 9th, 2011

Ft.com

Regulators are nearing a settlement with Fannie Mae and Freddie Mac after a three-year investigation into whether the mortgage finance giants adequately disclosed their exposure to risky subprime loans,http://ftalphaville.ft.com/thecut/2011/09/09/673336/fannie-and-freddie-close-to-deal-with-regulators/

The US Federal Reserve “will certainly do all that it can to help restore high rates of growth and employment”, said its chairman Ben Bernanke in a speech in Minneapolis on Thursday, a small change in his rhetoric that suggests a good chance of further Fed action at an extended monetary policy meeting later this month, the FT reports. http://ftalphaville.ft.com/thecut/2011/09/09/673321/bernanke-hints-at-further-fed-action-2/

While strain in the short-term funding markets, where banks borrow money on a day-to-day basis, have grabbed the headlines, it is a slow withdrawal of longer-term funding that could turn out to be the bigger concern for Europe’s banks – and the wider economy, http://ftalphaville.ft.com/thecut/2011/09/09/673276/european-banks-face-long-term-funding-problems/

China’s attempts to cool persistent price increases appear to be taking effect as the pace of inflation slowed in August from a three-year high in July, the FT reports. The country’s consumer price index, rose 6.2 per cent in August from a year earlier, compared with a 6.5 per cent rise in July, according to figures released on Friday by China’s National Bureau of Statistics. Consumer prices rose 0.3 per cent in August from the previous month, compared with a 0.5 per cent increase in July, marking the second consecutive moderation in the month-on-month reading. The Chinese government and most economists had predicted that inflation would peak by August and the slowdown is largely in line with expectations. http://ftalphaville.ft.com/thecut/2011/09/09/673236/chinese-inflation-falls-in-august-to-6-2/

Barack Obama sought to resuscitate his flagging presidency and the US economy with a larger-than-expected $450bn jobs plan that emphasises tax cuts in a bid to win over Republican opposition, the FT reports. http://ftalphaville.ft.com/thecut/2011/09/09/673221/obama-outlines-450bn-growth-push/

Bank of America officials are discussing cutting as many as 40,000 staff over several years, the WSJ says, citing people familiar with talks about the bank’s restructuring plans. The sources say chief executive Brian Moynihan is expected to make an announcement at a conference on Monday. However the report cautioned the numbers could change; http://ftalphaville.ft.com/thecut/2011/09/09/673211/bofa-may-cut-40000-jobs/

Britain and China took fresh steps to improve their economic relationship on Thursday, agreeing to boost Chinese infrastructure investment in the UK and London’s role as an offshore trading centre for the renminbi, http://ftalphaville.ft.com/thecut/2011/09/08/673151/stocks-drop-following-bernanke-speech/

Oil traders are buying protection against a 2008-style price collapse with options that gain value if US crude plummets by year end, the FT reports. Exchange data reveal a surge of interest in options that convey the right to sell oil at $50 a barrel by December, http://ftalphaville.ft.com/thecut/2011/09/08/672586/oil-traders-buy-protection-against-price-collapse/

US intelligence has received information about “specific and credible” threats of a terrorist act planned for 10th anniversary of the September 11 terrorist attacks, White House officials confirmed on Thursday evening. The information came from overseas and related to a car bomb in New York or Washington, the US media reported. However, the White House also said that the information was “unconfirmed”. http://www.ft.com/intl/cms/s/0/d0f6393e-da27-11e0-90b2-00144feabdc0.html#axzz1XKlN2XFx

The correlation between the movement of big US stocks is at the highest level since Black Monday in 1987, with price moves increasingly driven by the ebb and flow of investors’ fears over the economic environment. Stocks, in theory, should move in individual directions based on company fundamentals. But markets of late have been characterised by mass selling alternating with waves of buying, as investors upgrade or downgrade the risk of the US slipping into recession, or a financial crisis sparked by a European sovereign default. http://www.ft.com/intl/cms/s/0/7fd33db8-d982-11e0-b16a-00144feabdc0.html#axzz1XKlN2XFx

While Switzerland this week in effect pegged the franc to the euro, a debate is intensifying in Hong Kong over whether to sever the city’s 27-year-old peg to the US dollar. The mechanism that links the Hong Kong and US dollars at a rate of HK$7.80 to US$1 has served the city well since its introduction in 1983. It has survived the hand-over of sovereignty from Britain to China, the Asian financial crisis and repeated attacks from speculators. http://www.ft.com/intl/cms/s/0/aabfedc2-da14-11e0-b199-00144feabdc0.html#axzz1XKlN2XFx

WSJ.com

Japan’s Nikkei Stock Average shed 0.5%, as investors remained non-committal after data showing the economy contracted more severely than previously reported in the April-June period after the March 11 natural disasters, as it was in line with expectations. Australia’s S&P/ASX 200 rose 0.5% and South Korea’s Kospi Composite lost 1.4%. Hong Kong’s Hang Seng Index added 0.2%, while China’s Shanghai Composite edged up 0.1%. Dow Jones Industrial Average futures were up 39 points in screen trade. http://online.wsj.com/article/SB10001424053111903285704576559451025655360.html?mod=WSJASIA_hpp_LEFTTopWhatNews

The Japanese economy contracted more severely than previously reported in the April-June period, data released Friday showed, with firms cutting back on capital spending at a faster pace in the wake of the March 11 earthquake and tsunami. The revised gross domestic product shrank at a price-adjusted annual pace of 2.1% in April-June from the previous quarter, the Cabinet Office said, compared with a preliminary 1.3% contraction announced three weeks ago. The figure matched expectations from a survey of economists by Dow Jones Newswires and the Nikkei.http://online.wsj.com/article/SB10001424053111903285704576559380092114762.html?mod=WSJASIA_hpp_LEFTTopWhatNews

The European Central Bank opened the door to interest-rate cuts if needed to bolster a weakening economic recovery—a dramatic U-turn from its decision to raise interest rates just two months ago. Economic risks have “intensified” to the downside with “enormous” uncertainty, ECB President Jean-Claude Trichet told reporters after the central bank held its main policy rate at 1.5%. He called the ECB’s reassessment of the economic outlook “significant,” and highlighted weakening global growth, declines in equity markets and strains in euro-zone government bond markets as trouble spots.http://online.wsj.com/article/SB10001424053111904836104576558241910980966.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

Fast-growing emerging economies in Asia are facing an unsettling combination of slowing growth and persistent inflation, complicating decisions for central banks who seem content for now to take a wait-and-see approach. With the global economy cooling, central banks in South Korea, Philippines, Indonesia and Malaysia opted Thursday to leave benchmark interest rates steady, despite signs that price pressures aren’t yet easing. These countries face a classic monetary-policy challenge of trying to fight inflation at a time when growth is slowing and the chances for an outright recession in the developed world have increased.‬ http://online.wsj.com/article/SB10001424053111903285704576557492765115376.html?mod=WSJASIA_hpp_LEFTTopWhatNews

The Organization for Economic Cooperation and Development Thursday slashed its growth forecasts for this year, painting a gloomy picture of the outlook in the world’s richest economies and putting pressure on central banks to intervene if there is continuing weakness or signs of recession. The Paris-based organization doesn’t expect a recession of the magnitude seen in 2008 and 2009, but protracted contractions in some countries would knock confidence, which in turn risks derailing medium term growth. http://online.wsj.com/article/SB10001424053111904836104576558010597968124.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

Greece’s Socialist government is scrambling to cut public spending after receiving stark ultimatums from euro-zone governments that further rescue money will be withheld if Athens doesn’t deliver on promises to reduce its budget deficit. The government now is looking at unprecedented public-sector layoffs and cuts in civil-service perks, steps that could reshape Greek political culture by upending decades of cozy ties between the ruling Socialist party and a core constituency. http://online.wsj.com/article/SB10001424053111903285704576556162077324344.html?mod=WSJ_hp_us_mostpop_read

Norwegian and Canadian officials on Thursday criticized Switzerland’s move this week to cap the rise of its currency, as the impact reverberated in currency markets world-wide. The Norwegian krone soared against the euro after the Swiss National Bank said Tuesday that it would use “unlimited” spending to prevent the euro from falling below 1.20 francs. The move sent investors flooding into other currencies belonging to economies viewed as fiscally sound, with Norway among the top destinations.  Norwegian central bank Gov. Oystein Olsen warned investors that a strengthening krone would stifle Norway’s economy by hurting exports. A swift policy response—likely lower interest rates—is in the offing if the krone keeps rising, Mr. Olsen said. http://online.wsj.com/article/SB10001424053111904836104576558982460348312.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

President Barack Obama called on Congress Thursday to pass a $447 billion package of spending initiatives and tax cuts to boost economic growth, in what might be the White House’s last chance to revive its political fortunes before the 2012 campaign kicks into high gear. More than half of Mr. Obama’s plan consists of payroll-tax cuts for employees and employers—an idea the White House hopes will appeal enough to Republican lawmakers—and is the policy that could have the best chance to pass. Among other measures, the president also called for more than $62 billion in spending to extend unemployment insurance benefits through 2012 and fund programs to alleviate long-term joblessness. He also proposed $140 billion in infrastructure spending and aid to states.http://online.wsj.com/article/SB10001424053111904103404576559062901863074.html?mod=WSJAsia_hpp_LEFTTopStories

Reuters.com

Spot gold eased 0.36 percent to $1,861.46 an ounce by 0013 GMT, well below a lifetime high around $1,920 hit this week. Lingering debt crisis in Europe and volatile currencies have sent gold prices to a series of record highs this year. U.S. gold GCcv1 added $5.2 an ounce to $1,862.7 an ounce. http://www.reuters.com/article/2011/09/09/markets-precious-idUSL3E7K901220110909

Federal Reserve Chairman Ben Bernanke on Thursday said the U.S. central bank would spare no effort to boost weak growth, but to the dismay of investors stopped short of a full plunge into further monetary support. “The Federal Reserve will do all it can to help restore high rates of growth and employment in a context of price stability,” Bernanke told the Economic Club of Minnesota. In what could be taken as a bid to quell concerns among some of his colleagues that further easing could spark inflation, Bernanke said a rise in consumer prices this year would likely to be transitory.http://www.reuters.com/article/2011/09/08/us-usa-fed-idUSTRE7870W120110908

The U.S. economy may be stumbling, but it is still standing. That was the message from two economic reports that pointed to a weak labor market but also a better performance on trade that should boost third-quarter gross domestic product. Still, Federal Reserve Chairman Ben Bernanke, highlighting an elevated jobless rate and sluggish underlying growth, hinted the central bank may ease monetary policy further at its September meeting. http://www.reuters.com/article/2011/09/08/us-usa-economy-idUSTRE77U25D20110908

G7 finance chiefs meet on Friday under heavy pressure to take action to revive flagging economic growth in rich nations and to calm the biggest confidence crisis in markets since the 2007-09 credit crunch. Host country France has called for a coordinated response from the Group of Seven industrialized nations after mounting anxiety over Europe’s debt crisis and the fragility of its banks caused a big fall in  world stockmarkets in recent weeks. Differences between the economic problems facing the United States, Britain and eurzone states are complicating the task though, meaning one-size-fits-all solutions, like moderating government budget cutbacks or unleasing more monetary stimulus, will not work. http://www.reuters.com/article/2011/09/09/us-g-idUSTRE7880S620110909

Bloomberg.com

Rising food prices that defy easing global inflation may challenge policy makers in countries including China to control costs without hurting economic growth, panelists at a forum said yesterday.  A growing middle class seeking higher-protein foods is contributing to increased demand and prices, Abby Joseph Cohen, partner and senior U.S. investment strategist at Goldman Sachs (GS) said at the Bloomberg Global Inflation Conference in New York hosted by Bloomberg Link. http://www.bloomberg.com/news/2011-09-08/food-price-gains-defy-policy-makers-bid-to-ease-inflation-panelists-say.html

Almost 13 years after its demise, the deutsche mark retains enough potency to haunt Jean-Claude Trichet’s final days as European Central Bank president.  Trichet, 68, lost his cool yesterday with a reporter who asked whether Germany should abandon the euro and return to the mark as Europe’s debt crisis roils markets and spooks voters.  “I would like very much to hear the congratulations for an institution which has delivered price stability in Germany for almost 13 years,” Trichet said in Frankfurt in an uncharacteristically raised voice. “It’s not by chance we have delivered price stability,” he said. “We do our job, it’s not an easy job.” http://www.bloomberg.com/news/2011-09-08/trichet-loses-his-cool-at-prospect-of-deutsche-mark-s-revival-in-germany.html

CNBC.com

The race to the bottom in picking economic growth figures this year seems to have stopped nearly as quickly as it started.  No, that doesn’t mean that economists suddenly believe US gross domestic product will hit the pace it normally would see two years after the end of a recession.  But Wall Street’s biggest names have backed off earlier doom-and-gloom predictions of near-zero growth and now believe the economy at least has a better chance of avoiding an outright recession The impetus for the optimism: Thursday’s trade balance report which showed that the US deficit unexpectedly slid to $44.8 billion in July from $51.6 billion in June, primarily on the strength of a 3.6 percent surge in exports. http://www.cnbc.com/id/44442250

Nytimes.com

Taking a bleak view of Saab Automobile’s prospects for recovery, a Swedish court on Thursday rejected the troubled carmaker’s application for protection from creditors. The decision sharply narrows its room for maneuvering and pushes it a step closer to financial collapse. Saab employees have not been paid for August, and the company’s unions had been considering legal action that could have forced the company into liquidation when the bid for protection from creditors was announced on Wednesday. Saab’s unions had given guarded support to bankruptcy protection, partly because the government would have been asked to guarantee workers’ salaries. But with its prospects dwindling, unions may feel they have no choice but to press on with their legal action. http://dealbook.nytimes.com/2011/09/08/court-denies-saab-protection-from-creditors/?ref=global

USAtoday.com

Fixed mortgage rates fell this week to the lowest levels in six decades. But few Americans can take advantage of the rates to refinance or buy a home. The average rate for a 30-year fixed mortgage fell to 4.12%, from 4.22%, Freddie Mac said Thursday. That’s the lowest level on records dating back to 1971. Freddie Mac says the last time rates were cheaper was 1951, when most home loans lasted just 20 or 25 years. The average rate on a 15-year fixed mortgage, a popular refinancing option, fell to 3.33% from 3.39%. That’s the lowest on records dating to 1991 and likely the lowest ever, according to economists.http://www.usatoday.com/money/economy/housing/story/2011-09-08/Mortgage-rates-fall-to-lowest-level-since-1950s-few-qualify/50319086/1

BBC.co.uk

German exports fell by 1.8% in July, much more than expected, official figures have shown. The month-on-month fall compares with a 1.2% decline in June. Economists had only expected exports to contract by 0.1% in July. At the same time, Germany’s imports fell 0.3% in July, again surprising analysts who had expected a 0.2% rise. Separate data showed France’s exports rose 0.3% in July, while its imports also increased, adding a sharp 2.9%. http://www.bbc.co.uk/news/business-14833474

Spanish home sales fell 41% in April to June from a year earlier, official figures have shown. This was a bigger fall than the 30% drop in the first quarter of 2011. The declines follow after Spain ended tax deductions for property purchases on 1 January. These had been introduced after the 2008 housing market crash. The fall in sales also reflects the continuing weakness in the Spanish economy. A new tax cut on the purchase of new homes was introduced last month http://www.bbc.co.uk/news/business-14835957

Telegraph.co.uk

The Bank of England has kept interest rate unchanged at a record low of 0.5pc and resisted calls for more quantitative easing to boost economic growth. Thursday’s decision by the nine-member Monetary Policy Committee on Thursday was in with forcasts.  However, the minutes for the meeting due in around two weeks time is expected to reveal discussions on more economic stimulus – or money printing – as evidence grows that the economy is faltering. http://www.telegraph.co.uk/finance/economics/8749608/BoE-keeps-rates-unchanged-holds-off-on-more-stimulus.html

Germany and Holland have threatened to block rescue payments to Greece unless the country complies to the letter with bail-out terms, raising the spectre of default and a chain-reaction through southern Europe. German finance minister Wolfgang Schauble said there will be no more money until Grecce “actually does” what it agreed to do. “I understand that there is resistance among the Greek population to austerity measures. But in the end it is up to Greece whether it can fulfil the conditions necessary for membership of the common currency. We offer no discounts,” he told Deutschlandfunk.http://www.telegraph.co.uk/finance/financialcrisis/8751180/Germany-pushes-Greece-to-the-brink-in-dangerous-brinkmanship.html

Britain is at “significant risk” of a double-dip recession said the Organisation for Economic Development and Co-operation, as it slashed its growth forecasts in a gloomy assessment of the wider G7 economy. The OECD predicted in its ‘interim assessment report’ that the UK economy would come to a virtual halt in the second half of 2011, with growth of just 0.1pc in the third and fourth quarters. That was a significant downgrade from the 0.4pc quarter-on-quarter growth it was forecasting in May. http://www.telegraph.co.uk/finance/financialcrisis/8749436/OECD-warns-of-double-dip-threat-in-UK-and-cuts-forecasts.html

One in three UK households ‘never worked’ in Liverpool. Almost one in three households in Liverpool, Nottingham and Glasgow has no-one in work – the highest concentration in the UK for the second year running, official figures show. In Liverpool, 31.9pc of houses last year were without anyone who has ever had a paid job. The figure fell from 32.1pc the previous year, but it is still the worst in the country. Glasgow had 31.1pc of workless households, down form 30.7pc the year before. But Nottingham’s “never-worked” rate increased slightly to 31.6pc. http://www.telegraph.co.uk/finance/jobs/8749282/One-in-three-UK-households-never-worked-in-Liverpool.html

Independent.co.uk

Britain faces a very real chance that the lights could go out in the next five to 10 years, as its ailing energy infrastructure struggles to attract the massive investment needed to ensure a reliable electricity supply, according to a warning by the CBI. Companies named the potential absence of a secure, affordable energy supply as their biggest concern in a damning report published today by the employers’ organisation and KPMG. The report also finds that the UK’s road and rail systems are falling further behind the EU average, while 58 per cent of respondents said that, overall, the country’s infrastructure is more expensive, less reliable and inferior to that of the Continent. http://www.independent.co.uk/news/business/news/lack-of-infrastructure-investment-could-leave-britain-in-the-dark-2351518.html

Smh.com.au

Crude prices were up in Asian trade, boosted by data showing a drop in US oil stocks, analysts said. New York’s main contract, West Texas Intermediate (WTI) light sweet crude for delivery in October, gained 23 cents to $US89.28 per barrel. Brent North Sea crude for October delivery rose 21 cents to $US114.76. US crude oil inventories fell by four million barrels last week, according to weekly data published Thursday by the Department of Energy. http://www.smh.com.au/business/markets/oil-up-in-asia-as-us-crude-inventory-falls-20110909-1k0gf.html#ixzz1XQjEH7Nf

Theglobeandmail.com

Greece ruled out quitting the euro on Thursday, shrugging off warnings by its biggest creditor Germany and yet another set of bad economic figures showing it is struggling under the weight of EU/IMF-imposed austerity. Anger at Greece’s failure to meet fiscal targets that are a condition for its international bailout is nearing breaking point in Berlin and other European capitals, with senior German politicians now talking openly about the possibility of Athens exiting the euro zone. http://www.theglobeandmail.com/report-on-business/international-news/greece-rules-out-euro-zone-exit/article2157654/

Xinhuanet.com

China’s Producer Price Index (PPI), a major measure of wholesale-level inflation, rose 7.3 percent year-on-year in August, the National Bureau of Statistics said Friday. August’s PPI growth was lower than July’s 7.5 percent increase, the NBS said in a statement on its website. During the first eight months of this year, the country’s PPI climbed 7.1 percent from the same period last year.http://news.xinhuanet.com/english2010/china/2011-09/09/c_131121423.htm

Brazil’s inflation has peaked, the country’s Monetary Policy Committee (Copom) said Thursday, apparently in response to doubts about its decision to slash interest rates last week. Inflation will start to drop in September, and the inflation rate in 2012 will further go lower, said Copom in a report. Given those aspects, the committee cut Brazil’s annual basic interest rate by 0.5 percentage points to 12 percent last week, and said there was room for further cuts in the future, according to the report. http://news.xinhuanet.com/english2010/business/2011-09/09/c_131123059.htm

South Korea’s producer prices grew at a faster pace last month than a month earlier due to higher food and energy prices, the central bank said Friday. The producer price index (PPI), a barometer of future consumer price inflation, jumped 6.6 percent in August from a year earlier, slightly faster than a 6.5 percent on-year gain in July, the Bank of Korea (BOK) said in a statement. The August growth was the highest in five months, keeping an on- year rise for the 21th straight month. From a month earlier, producer prices rose 0.3 percent last month, slightly down from a 0.4 percent on-month advance a month before. http://news.xinhuanet.com/english2010/business/2011-09/09/c_131122249.htm

U.S. consumer credit increased at an annual rate of 5.9 percent in July, the tenth consecutive monthly growth, offering some relief to a string of weak economic data in recent weeks, the Federal Reserve reported on Thursday. The U.S. central bank said that total borrowing in July rose to 2454.5 billion U.S. dollars from the revised figure of 2442.5 billion dollars in June. The Fed said demand for revolving credit, the category that includes credit cards, dropped 5.2 percent in July after rising 3. 9 percent in June. http://news.xinhuanet.com/english2010/business/2011-09/09/c_131119438.htm

France’s central bank Banque de France (BdF) on Thursday revised down growth rate forecast during the third quarter of the year to 0.1 percent from an initial estimation of 0.2 percent. According to the bank’s economic monthly report, “industrial activity rose very slightly in August” with the capacity utilisation rate reported an “ongoing decline” at 78.7 percent. In short term, the bank’s “forecasts point to stability in industrial production.” In August, services showed a tepid performance despite a buoyant activities in computer and information services. But, the BdF expected the sector’s improvement over the coming months. http://news.xinhuanet.com/english2010/business/2011-09/09/c_131119373.htm

Thehindu.com

Food inflation eased to single digit at 9.55 per cent for the week ended August 27 from 10.05 a week ago but provided hardly any relief to the common man as all items, except wheat and pulses, continued to rule at higher levels.  As per the WPI (Wholesale Price Index) data released here on Thursday, while pulses and wheat saw a decline in prices by 1.56 per cent and 1.04 per cent, respectively, on yearly basis, all other food items turned dearer. Prices of onions surged by 42.03 per cent and potatoes by 13.38 per cent on an annual while vegetables, as a whole, were 22.42 per cent dearer.http://www.thehindu.com/business/Economy/article2435339.ece

Union Commerce and Industry Minister Anand Sharma on Thursday said that India would meet its commitment of reducing tariff lines under sensitive list by 20 per cent for all by next month under the South Asian Free Trade Area (SAFTA) agreement signed by South Asian Association for Regional Cooperation (SAARC) member countries. “The time has come to take a call on reduction of barriers to trade. SAFTA is moving forward on the path of economic integration and India should give full support so that the region realises its full potential,” http://www.thehindu.com/business/Industry/article2436543.ece

A sharp jump in refunds eroded the Centre’s net direct tax collections by 3.4 percent during April-August 2011. However, gross tax collections for the first five months of the current fiscal grew 25.89 percent, higher than the 24 percent growth seen in the first quarter.  The improved performance mainly came through higher corporate taxes that grew about 30 percent during April-August this year.  The overall refund payout of the tax department jumped 156.04 percent in April-August to Rs 57,622 crore (Rs 22,505 crore). Net direct tax collections declined 3.4 percent to Rs 96,738 crore (Rs 100,113 crore). http://www.thehindubusinessline.com/industry-and-economy/article2436435.ece

Economictimes.com

India is unlikely to yield to a fresh effort by the developed countries to push for greater concessions by the larger emerging economies to salvage the World Trade Organisation’s Doha Round of global trade talks. WTO Director General Pascal Lamy told ET that some developing countries now expect the larger emerging economies, including India, to compete on a level playing field. “The question is whether emerging countries are rich, developing countries or poor, developed countries, which will determine the future course of events,” he said. http://economictimes.indiatimes.com/news/economy/foreign-trade/india-to-resist-fresh-pressure-from-developed-nations-at-wto/articleshow/9918528.cms

Yonhapnews.co.kr

South Korea plans to expand its economic cooperation with South Asian countries in a bid to capitalize on one of the fast-emerging markets in the world, the finance ministry said Friday. The move comes amid growing demand for export market diversification as the world’s major economies such as the United States and European Union remain fragile, posing a threat to South Korea’s trade-reliant economy.http://english.yonhapnews.co.kr/business/2011/09/09/55/0502000000AEN20110909003500320F.HTML

Fin24.com

South Africa’s manufacturing output fell by a more than expected 6.0% year-on-year (y/y) in volume terms in July, compared with a revised 0.8% increase in June, Statistics South Africa said on Thursday. Economists in a Reuters poll saw a contraction of 0.6% y/y in July’s factory output.  Compared to June, production in volume terms also contracted by a seasonally adjusted 6.0% in July. It was down 3.5% in the three months to July, compared with the previous three months. http://www.fin24.com/Economy/Factory-output-slows-down-20110908

Thetrader.se

You might want to check out Dalio’s Secret Rules after reading the below. Dalio and Renaissance are the Winners this year. Link to Dalio’s Rules. From FinAlternatives; Amidst August’s hedge fund carnage, some managers were able to produce some impressive returns. Perhaps not surprisingly, some that did are among the biggest and most successful in the industry. http://www.thetrader.se/2011/09/08/and-the-winner-are-mr-dalio-and-renaissance/

Remember when the World did care about Oil, Opec and Saudi Arabia? Well it is time for an OPEC meeting on Sep 9th. Some insight by Stratfor on OPEC and Saudi Arabia. On Sept. 9, OPEC will be holding one of its regular summits to decide what to do about their oil output quotas – raise them, lower them or keep them the same. The decision will be made with an eye towards Libya. When Libya descended into civil war a few months ago, it took about 1.8 million barrels per day of high-quality low-sulfur crude offline. There are many among the OPEC talks who are concerned what will happen in the aftermath of the fall of the Gadhafi government. If the replacement government, whatever that happens to look like, is able to bring oil back online quickly, oil prices could go into a tailspin, they fear.http://www.thetrader.se/2011/09/08/opec-meeting-overshadowed-by-saudi-arabia/

While doing some analytics last week I realized that there is a pure (not statistical) arbitrage situation in VXX options. By the time I noticed it was too small of an edge to try to trade manually so I did not do anything, and since this is something that is very unlikely to happen again I’ll disclose all the details that came up in my analysis. All data obtained fromNanex(nXCore) – a very high quality datafeed. This feed has all messages from exchanges, although to create the charts below I took 1 second snapshots. When VXX split in Nov 2010 OCC decided to leave the “old” unadjusted strikes, so one can trade both after-split VXX and before-split VXX which has quarter of its value. On August 30th some options were trading out of line with the others, I guess because some market-maker did not properly adjust volatility skews that day. Because options are so far OTM early exercise is not a consideration, and the mispricing is a pure arbitrage. http://www.thetrader.se/2011/09/08/volatility-arbitrage-still-exist/

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Handicapping QE3 (Hussman)

Monday, June 6th, 2011

by John Hussman, Hussman Funds

Last week, we observed a significant deterioration of market internals. On the slightly brighter side, from a valuation perspective, the pullback in the market has modestly increased our estimate of likely 10-year S&P 500 total returns from about 3.4% at the market’s peak to about 3.9% presently. That’s an improvement, but the muted extent of that improvement should provide some indication of the extent of market losses that would be required to restore meaningfully attractive prospective returns.

From the standpoint of market action, we presently see two lines of critical support. The first is right here at current levels. A week ago, I noted that “one or two more reasonably sloppy weeks would significantly damage market internals.” Last week’s market action was more than sloppy, with the result that even another modest down week would signal a measurable shift of investors toward risk aversion – and if history demonstrates one thing, the worst periods for the market are those where risk premiums are thin and risk aversion is increasing. A second line of support corresponds to the March lows, where a deterioration would throw a great number of technical trend-following methods simultaneously into sell mode. Whatever one thinks of those methods, investors should probably not ignore the prospect of a speculative liquidation in a market too overvalued for fundamentalists to be interested.

My guess (which we don’t trade on and neither should you) is that after several weeks of declines, the market has a good chance of stabilizing and possibly advancing from the present line of support, as investors try to “buy the dip” despite weakening economic data, divergent market internals, and limited prospects for further government stimulus. This is also the general picture for various ensembles of market conditions we examine – relatively neutral short-term (improved from quite negative a few weeks ago), but still with a negative average return/risk profile looking out more than a few weeks. For our part, our overall range of flexibility remains between a tight hedge and about 10-20% exposure to market fluctuations, with a strong line of downside protection still essential in any event. Again, this is because a break of various nearby support levels here would likely prompt an exodus by a large trend-following contingent of speculators, in an environment where value-conscious investors would not have much interest except at substantially discounted valuations.

In recent weeks, and particularly in last week’s ISM, employment claims and unemployment reports, we’ve observed a substantial weakening in measures of economic growth. At present, the evidence of economic deterioration is not severe – as I noted in 2000, 2007 and last summer, recession evidence is best obtained from a syndrome of conditions, including the behavior of the yield curve, credit spreads, stock prices, production, and employment growth. While all of these components have weakened, they have not deteriorated to the extent that has (always) accompanied the onset of recessions.

To a large extent, the current softening of economic conditions is really nothing more than the recrudescence of the deterioration we saw last summer. Basically, we’re coming up on the can that the Fed kicked down the road when it initiated QE2. While the Fed was successful in releasing a modest amount of pent-up demand, and was certainly successful in provoking speculative activity, there was never a realistic prospect of creating a beneficial “wealth effect” for the economy as a whole. The historical evidence is emphatic that people consume off of perceived “permanent income” – not off of volatile dollars. Wealth is driven by the creation of long-term cash flows through productive investment, not by boosting the valuation of existing cash flows by encouraging speculation. There was no reason for people to take much of a permanent signal from fluctuations in a stock market that has lost more than half of its value twice in a decade (and is likely to lose a good chunk of its value again if history is of any indication).

So while the Fed has been successful in fostering speculation, further impoverishing the world’s poor through commodity price increases, and subsidizing banks by driving funding costs to zero (at the expense of the risk averse and the elderly), QE2 has clearly failed from an economic standpoint. This failure is not because we haven’t given it enough time, or because monetary policy works with a lag. Rather, the policy has failed because it focused on easing constraints (bank reserves, short-term interest rates) that weren’t binding in the first place. Very simply, neither the Fed’s policy, nor the fiscal policy initiatives to date, address the central challenge that the U.S. economy faces, which is the debt burden on households.

The salient problem in the U.S. economy isn’t the precise level of already low mortgage rates. It isn’t “uncertainty” about taxes or health care. The problem is that people aren’t spending as they did in recent decades, because that spending was largely debt-financed, and the pressures now run in the opposite direction. We still haven’t restructured mortgage debt on millions of homes that are underwater. Property values are hitting new lows. Hundreds of thousands of properties are delinquent and yet the mortgages are being carried by the banking system at face value. Banks, knowing this, are clearly reluctant to extend their balance sheets further. Government deficits of nearly 10% of GDP are presently required to cover the gap in private incomes and spending. Indeed, most of what we observe as personal income growth is attributable to transfer payments from government.

To be clear, I believe that about 90% of the economy is functioning reasonably well (in the typical range of what is experienced over an economic cycle), but 10% of it is in extreme difficulty well outside what is seen in the normal cycle, and is only floating thanks to deficit spending that is unsustainable in the long-term and increasingly under pressure in the short-term. The problem is that we measure severe recessions as declines in GDP on the order of 2% or so. Without addressing the central problem of household indebtedness and underwater mortgages, the economic growth we get may not be robust enough to avoid more frequent recessions and near-recessions.

Handicapping QE3

As disappointing economic news mounted last week, the attention of market participants immediately turned to policy responses, the most obvious one being – will the Fed embark on QE3?

In my view, there are three central questions relevant to this issue. The first is simply this: Has QE2 been successful in a way that the economy should desire more of it?

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Fixed or Variable?

Tuesday, November 9th, 2010

Fixed or Variable?

November 8, 2010

By Tom Bradley

Last week a friend asked me what his daughter should do with her mortgage. The bank was giving her the option of going with a variable rate mortgage at 2.85% or a 5-year fixed at 3.5%.

Investment professionals get asked this question all the time by friends and family. I’ve come to learn that the askers have way more interest in this topic than anything I could ever tell them about our funds or their portfolio. This is ‘food on the table’ stuff.

So how did this investment professional answer the question?

With regard to the lower variable rate, there is no free lunch here. Research reveals that going variable saves money over the long run (Note: 30 years of declining rates has a huge influence on the numbers), but it comes with the risk that monthly payments will go through the roof if rates rise significantly. A borrower should only go the variable route if she/he has the resources and stomach to absorb a big increase for an extended period of time.

As for the fixed rate mortgage, we have to keep in mind that 3.5% for 5 years is an UNBELIEVABLE rate. Yikes! Knowing you’re going to have low monthly interest payments until 2015 sounds pretty good. We shouldn’t forget that we’re living in an artificially low rate environment right now. It won’t always be like this.

As an investor, I’m always comparing reward versus risk. There is a good chance that a variable rate mortgage will win over the next 5 years, but the potential risk is substantial. It seems to me the borrower has a chance of winning small or losing big. Go fixed.

(Note: With regard to the numbers, I’m simplifying grossly here. Rates and conditions are different in each situation. And I’m told that variable mortgages are available at lower rates.)

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Year-End/New-Year Indicators: Progress Report

Saturday, January 30th, 2010

An old stock market saw tells us if the month of January is higher, there is a good chance the year will end higher, i.e. the so-called “January Barometer”. On the other hand, every down-January since 1950 has been followed by a new or continuing bear market or a flat year. “As January goes, so goes the year,” said Jeffrey Hirsch (Stock Trader’s Almanac).

The result for January is in, and it is not a good one: The Dow Jones Industrial Index closed 3.5% down on the month and the S&P 500 Index 3.7% lower.

Also, according to Hirsch, the “December Low Indicator” says that should the Dow Jones Industrial Index close below its December low anytime during the first quarter, it is frequently an excellent warning sign. The key number to watch was the low of 10,286 (December 8) – now history with the Dow down to 10,067.

Although this is not particularly scientific research, it is clear we are not seeing a good start to 2010 and should at least be mindful of these indicators.

Considering the short-term technical picture of the Nasdaq Composite Index, Adam Hewison (INO.com) provides a short analysis showing a rather negative downside break. Click here to access the presentation. (He also recently analyzed the Dow Jones Industrial Index and the S&P 500 Index. Click here and here.)

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Be mindful of Santa Claus Rally and other year-end/new-year indicators

Friday, December 25th, 2009

If Santa has not yet made his way to your investment portfolio, don’t despair. According to Jeffrey Hirsch (Stock Trader’s Almanac), the “Santa Claus Rally” normally occurs during the last five trading days of a year and the ensuing first two trading sessions of the new year. During this seven-day period stocks historically tend to advance (by 1.5% on average since 1950), but when recording a loss, they frequently trade much lower in the new year. Well, yesterday marked the official beginning of the Santa Claus Rally period, with the Dow Jones Industrial Index off to a 0.5% start.

hold-sold

Another old stock market saw tells us the first five trading days of January sets the course for January (known as the “First Five Days Early Warning System”), and if the month of January is higher, there is a good chance the year will end higher, i.e. the so-called “January Barometer”. Every down January since 1950 has been followed by a new or continuing bear market or a flat year. “As January goes, so goes the year,” said Hirsch.

Lastly, according to Hirsch, the “December Low Indicator“ says that should the Dow Jones Industrial Index close below its December low anytime during the first quarter, it is frequently an excellent warning sign of lower levels ahead. The number to watch is the low of 10,286 recorded by the Dow on December 8.

Time will tell whether the year-end/new-year indicators play out according to the historical pattern. Meanwhile, we’ll have some fun tracking how it pans out.

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Carry Trades Make and Break Markets

Monday, December 21st, 2009

Financial markets have been swept up during the last nine months by the Fed’s easy money policies, particularly its zero-interest-rate policy, which fostered a carry-trade in the dollar. Now, as the dollar rallies, and the Japanese economy and yen falter, the short term appointment of the dollar as the primary funding currency may be ending. Some say that it will be dire for markets. Perhaps the best news right now for the US and Canada is the bad news from Japan, of record deflation, and the BoJ’s need to devalue the yen. There’s a good chance the yen will replace dollar, and resume its decade-plus-long position as the world’s primary funding currency, and that’s good news for the market in the longer term. In the near-term transition period, however, markets will be volatile, as one carry unwinds, and the other re-winds.

Read more here:  Carry Trades Make and Break Markets, GlobeAdvisor.com, December 21, 2009

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Longer Term Bond Indicators Flash Sell

Friday, November 6th, 2009

The yield of ten-year US Treasury Notes has surged by 34 basis points since the middle of October as market participants started adopting a more upbeat outlook on the economy and shied away from safe-haven assets.

Unsurprisingly, the following comes from the minutes of the meeting of November 4 of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association: “Several members noted the graph discussing net fixed income supply in 2009 and 2010, and how issuance will ramp up dramatically in 2010. Federal Reserve purchases have taken an enormous amount of supply out of the market this past year across fixed income markets, but next year, financial markets should expect even greater issuance with no support. Such an outcome could pressure rates.” With quantitative easing set to expire during Q1, it is difficult not to see long-term rates rising, unless the economy falls back into the morass.

Turning to technical analysis, the chart below shows monthly data for the ten-year Treasury Note yield since 1998 and conveys an important message when considering the two momentum-type oscillators at the bottom (ROC and MACD). The ROC has just reversed course (crossing the zero line) for the first time since a buy signal was given at the beginning of 2007 and now indicates a primary sell signal. The MACD provided a similar indication six months ago.

tnx

Source: StockCharts.com

In conclusion, I concur with Bill King (The King Report) who said: “There is a very good chance that 2010 will see a horrid global bond market.”

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Make Sure You Get This One Right

Friday, July 3rd, 2009

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

As investors we are faced with the consequences of our decisions every single day; however, as my old mentor at Goldman Sachs frequently reminded me, in your life time, you won’t have to get more than a handful of key decisions correct – everything else is just noise. One of those defining moments came about in August 1979 when inflation was out of control and global stock markets were being punished. Paul Volcker was handed the keys to the executive office at the Fed. The rest is history.

Now, fast forward to July 2009 and we (and that includes you, dear reader!) are faced with another one of those “make or break” decisions which will effectively determine returns over the next many years. The question is a very simple one:

Are we facing a deflationary spiral or will the monetary and fiscal stimulus ultimately create (hyper) inflation?

Unfortunately, the answer is less straightforward. There is no question that, in a cash based economy, printing money (or “quantitative easing” as it is named these days) is inflationary. But what actually happens when credit is destroyed at a faster rate than our central banks can print money?

Let’s begin by setting the macro-economic frame for the discussion. I have been quite bearish for a while, suspecting that the growing optimism which has characterised the last few months would eventually fade again as reality began to sink in that this is no ordinary recession and that “less bad” doesn’t necessarily translate into a quick recovery. I still believe there is a good chance of enjoying one, maybe two, positive quarters later this year or early next; however, a crisis of this magnitude doesn’t suddenly fade into obscurity, just because the economy no longer shrinks at an annual rate of 6-8%.

Click here for the full report.

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

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