Gold Market Radar (August 6, 2012)

Sunday, August 5th, 2012

Gold Market Radar (August 6, 2012)

For the week, spot gold closed at $1,603.48 down $19.42 per ounce, or 1.20 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 1.04 percent. The U.S. Trade-Weighted Dollar Index slid 0.48 percent for the week.

Strengths

• Central bank buying of gold continues to be a strong theme.  This week the Bank of Korea, which has the world’s seventh biggest foreign exchange reserves, announced it had purchased 16 metric tons of gold last month, increasing reserves to 70.4 tons. Central banks and the International Monetary Fund (IMF) are the largest bullion owners with 29,500 tons at the end of last year, or 17 percent of all mined metal, World Gold Council data shows.  Central banks have been net buyers for two straight years, the Council said.  Purchases this year will probably exceed the 456 tons added in 2011, the Council estimates.
• Although gold was down for the week we think the price action was positive.  Gold was down somewhat when the strong ADP jobs number came out on Wednesday morning, and then gold initially declined further after Federal Reserve Chairman Ben Bernanke held off on announcing new stimulus measures.  The selloff did not last long before buyers came back in and scooped up the metal.  The simplistic trade of shorting gold on no new Bernanke announcement for another round of quantitative easing has become quite crowded.
• Although global gold mine production has fallen -2.9 percent year-to-date and has registered year-over-year declines for eight months running may sound like bad news, and it has been for certain gold producers, this is certainly a positive for those companies that have maintained or grown their production.  Despite the 11 years of consecutively higher gold prices, gold production has been flat and this should bode well for higher prices in the future.

Weaknesses

• Kinross Gold replaced CEO Tye Burt this week.  This is the second senior gold company CEO to have been removed by their boards in the past month.  The replacement CEO is J. Paul Rollinson, a long-time associate of Mr. Burt. Mr. Rollinson is also a former investment banker, with a geology and engineering background.  In general, analysts lamented that they would have preferred a high profile manager with a proven track record of operating and/or building mines and/or turning companies around.
• Standard & Poor’s has downgraded Barrick Gold from “A-” to “BBB+” with a negative outlook.  The rating agency’s negative outlook on Barrick “reflects our view that the execution risks surrounding Pascua-Lama could potentially stretch the company’s credit measures and free operation cash flow generation beyond the levels we have assumed within our base case scenario.”
• The Indian market is still seeing no relief as the rupee remains weak, the arrival of the monsoon season has been disappointing and the multi-state electric grid collapse last week caused widespread blackouts across the region, obviously curtailing near-term economic activity.

Opportunities

• Nick Holland, CEO of Goldfields Ltd., recently addressed the Melbourne Mining Club and covered a 35-page presentation surveying all the things that gold miners have been getting wrong over the last decade and offering a few ways to solve some of them.   Nick Holland pointed out that one theme has run through the presentations of large gold producers at investor conferences over the last 15 years is that production is going to increase and this will result in the company increasing its earnings.  Nick notes that if the gold industry had actually met all its production promises over the last five years, then it would not have dropped output on a compound annual basis by 2 percent between 2006 and 2011.  Unfortunately gold miners have not met their production promises and investors have become skeptical.
• Nick also highlighted that gold miners need to think differently about costs.  “Who are we trying to kid?  We don’t kid the investors because they know how much cash we really generate after everything is accounted for.  The sell-side also understands this.  The only people we’re kidding are governments and communities, who, not surprisingly, say, okay, you’re making super profits, please pay up.  And before we know it we have windfall taxes, higher royalties and so on.  We’ve got to change the lens through which we and the world view this industry, and start talking about what it really costs to produce an ounce of gold.  I don’t care if we call it NCE or something else, but to talk about cash costs only is not telling the full story.”  We view this type of examination of the industry as a strong positive for management to take full notice of and start delivering on what the investor is expecting from gold mining companies.
• Bank of America Merrill Lynch noted that while the Federal Open Market Committee (FOMC) did not take any easing action at its current meeting, under its forecast, the economic data should weaken enough by the September 13 FOMC meeting to convince most Fed officials to support more QE and extend the forward guidance then.  But the call on further Fed easing remains very dependent on the path of incoming data.  We think only a small portion of recent gold buyers entered with the expectation of a Fed move this week but it is more likely a greater number are looking toward the Jackson Hole meeting at the end of August, and then the September FOMC meeting as key entry points into the gold market.

Threats

• While most governments are outright buyers of gold, Vietnam’s government has a different view on gold.  The problem is nobody wants to use their local currency, the dong but instead more and more rely on gold to settle transactions.  The Vietnamese people have a huge affinity with gold, but the country’s government is taking major steps to restrict the gold market and the practice of replacing the dong with gold in transactions.  These restrictions included banning gold as a medium of exchange and issuing seven directives which are designed to reduce “goldization” the practice of replacing the dong with gold in transactions.
• David Rosenberg, of Gluskin Shelf, pointed out that U.S. investors withdrew a net $11.5 billion out of equity funds in the prior week according to the Lipper data that includes ETFs, the sharpest outflow in two years.  Taxable bond funds attracted over $3 billion and that brings the year-to-date tally to $151 billion as the secular shift in investor behavior towards income-generation continues apace.
• Baby boomer investors looking forward to retirement have been burned by the tech bubble, the housing boom and ensuing credit crisis. Much of the shift in money flows has been to extreme risk aversion and government bonds have been the choice for the safety.  Unfortunately, the market has the uncanny ability to move in a direction that will disappoint the most investors.  It is unlikely, given the rising debt burden of governments, that the masses will be rewarded for seeking safety in bonds for the next five years. Under owned assets which are out of favor, such as gold, deserve some consideration for portfolio diversification.

Tags: Central Banks, Company Ceo, Dollar Index, Federal Reserve Chairman, Foreign Exchange Reserves, Gold Company, Gold Market, Gold Mine, Gold Miners, Gold Prices, Gold Producers, Gold Production, gold stocks, International Monetary Fund, International Monetary Fund Imf, Market Radar, Nyse Arca, Selloff, Spot Gold, World Gold Council
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Case for US and Global Recession Right Here, Right Now; Recognizing the Limits of Madness; Permabears?

Wednesday, July 11th, 2012

There is a big difference between making a claim the economy is in recession from a claim the economy is headed for one.

Case for a Global Recession

I think the entire global economy is in recession and said so on July 6, 2012 in Plunging New Orders Suggest Global Recession Has Arrived

However, we need to define the term “recession”

Contrary to popular myth, recession does not mean two consecutive quarters of economic contraction. Rather, two consecutive quarters of economic contraction is a sufficient, but not necessary condition.

In the US, the NBER is the official designator of recession start and end points. Many recessions have started with GDP still growing.

The “Conditions for Global Recession” are even looser. “The International Monetary Fund (IMF) considers a global recession as a period where gross domestic product (GDP) growth is at 3% or less. In addition to that, the IMF looks at declines in real per-capita world GDP along with several global macroeconomic factors before confirming a global recession.”

Given current conditions are what one would expect from outright stagnation (if not worse), I am confident a global recession has begun.

What About a US Recession?

On June 21, I gave 12 Reasons US Recession Has Arrived (Or Will Shortly).

Tipping the Balance to Now (Not Shortly)

• The Third Consecutive Weak Payroll Report
• The pending Global Collapse In Auto Sales
• Plunge in China Import Growth (For discussion see China Import Growth Plunges, Trade Surplus Hits 3-Year High; Will US Response Be Protectionism? Is China Headed For a Deflationary Shock?)

That is enough for me. And I am not the only one to feel that way.

ECRI’s Achuthan: “I Think We’re in a Recession Already”

Link if video does not play: ECRI’s Achuthan Says U.S. Economy Is in Recession

Partial Transcript of Video

Achuthan on whether he can reaffirm his recession call from last year:

“Yeah…I think a lot of people forget what our call was. What we said back in December was that the most likely start date for the recession would be in Q1 and if not then, by the middle of 2012. I’m here to reaffirm that. I think we’re in a recession. I think we’re in a recession already. As I said back there, it is very rare that you know you’re going into recession when you’re going into recession. It often takes some big hit on top of the head. In the last recession, it took Lehman to wake people up and the recession before, it took 9/11.”

Those are exactly the kinds of things that irritate me about the ECRI. The fact of the matter is Achuthan was calling for a recession in September, not December, and not June.

For details, please see my September 30, 2011 post ECRI Calls Recession Based on “Contagion in Forward Indicators”; Just How Timely is the Call?

Tom Keen: “Single Sentence, why recession now”
ECRI’s Lakshman Achuthan: “Contagion in Forward-Looking Indicators”

That link clearly shows I thought a recession was imminent as well. Those are the facts. It is silly to try and hide them.

Yet, in December (after economic data firmed), Achuthan moved the date forward to June, wanting another 6 months to be proven correct.

My question in September “Just How Timely is the Call?” was a good one. The ECRI has been both very early and very late. Far from the perfect track record they claim.

That my friends is the nature of making predictions. No one is perfect, not me, not Achuthan, not anyone, and it is very foolish to pretend otherwise.

Actually, I have no problem at all with Achuthan moving the date forward. Conditions change. My problem, is revisionist history that makes it appear as if a recession call in September was a recession call for June (made in December).

All this nonsense goes away the moment Achuthan admits the ECRI does not have a perfect track record.

That said, I think Achuthan is now correct. However, I thought so in September. So be it. I was wrong. The solution when you were wrong is easy, simply say you were wrong.

The Other Extreme “Recession is Not Imminent”

Please consider the other extreme, Recession is Not Imminent by Dwaine van Vuuren.

Among the bearish voices I most respect is John Hussman, whose work I read regularly. He is thorough and quantitatively rigorous. Whenever I am convinced there will be no recession, I temper my enthusiasm by re-reading his articles to make sure I maintain a balanced view. One day he will be right and I will be wrong, but at least I won’t be blindsided.

But the data don’t show catastrophe. Looking at the Leading SuperIndex, we are a bit worse off than last summer and the summer before that. We just put in a leading SuperIndex peak on April 13 (10 days after the SP-500 peak) that is lower than the prior two peaks. This slowdown, if not checked in time, may well be the one that pushes us into recession. But even that worst-case scenario is still three to four months away, according to the SuperIndex recession-path projections in our regular weekly report.

Emphasis in italics added.

I disagree. The global data is an outright catastrophe. Moreover, the jobs reports in the US and the US ISM manufacturing numbers are  a catastrophe as well.

I am amused by van Vuuren’s statement “at least I won’t be blindsided”. I suggest he already is.

“We Have Reached the Point that Delineates an Expansion from a New Recession”

John Hussman asks What if the Fed Throws a QE3 and Nobody Comes?

With regard to the economy, I noted two weeks ago that the leading evidence pointed to a further weakening in employment, with an abrupt dropoff in industrial production and new orders.

Mike Shedlock reviews the litany of awful figures we’ve seen since then, focusing on the new orders component of global purchasing managers indices: U.S. manufacturing new orders and export orders plunging from expansion to contraction, Eurozone new export orders plunging (only orders from Greece fell at a faster rate than those of Germany), and an accelerating decline in new orders in both China and Japan.

Recall that the NBER often looks for “a well-defined peak or trough in real sales or industrial production” to help determine the specific peak or trough date of an expansion or recession. From that standpoint, the sharp and abrupt decline we’re seeing in new orders is a short-leading precursor of output. As the chart below of global output suggests, I continue to believe that we have reached the point that delineates an expansion from a new recession.

On the employment front, Friday’s disappointing report of 80,000 jobs created in June may be looked on longingly within a few months, as we continue to expect the employment figures to turn negative shortly. That said, it remains important to focus on the joint action of numerous data points, rather than choosing a single figure as an acid test. I noted last week in Enter, the Blindside Recession, GDP and employment figures are subject to substantial revision.

Lakshman Achuthan at ECRI has observed the first real-time negative GDP print is often seen two quarters after a recession starts. Earlier data is often subsequently revised negative. As for the June employment figures, the internals provided by the household survey were more dismal than the headline number. The net source of job growth was the 16-19 year-old cohort (even after seasonal adjustment that corrects for normal summer hiring). Employment among workers over 20 years of age actually fell, with a 136,000 plunge in the 25-54 year-old cohort offset by gains in the number of workers over the age of 55. Among those counted as employed, 277,000 workers shifted to the classification “Part-time for economic reasons: slack work or business conditions.”

Permabears?

Hussman has been labeled a “permabear”. So have I. So has Dave Rosenberg. So have many others. It only seems that way. The reality is Hussman, I, and Rosenberg were bullish at the March 2009 bottom.

However, the market shot up so far, so fast, that valuations became quickly stretched.

I cannot speak for the others, but I surely underestimated the effect of global coordinated liquidity move by central bankers virtually everywhere (US, EU, UK, China, Australia, Canada, etc.).

The result was we had a 10-year stock market rally in three years. Those patting themselves on the back for their “no recession” call were correct only because of  a massive coordinated liquidity pump by central bankers worldwide.

Unless the “no recession” callers specifically counted on that, then they were lucky with their forecast.

What about now?

What if the Fed Throws a QE3 and Nobody Comes?
What if stock market valuations reach typical bear market valuations?
What if a recession is really at hand?

I do not believe the Fed is in control. Such ideas are a myth.

If the Fed could prevent recession we would never have them. Yet we do, don’t we?

The fact of the matter is Fed tail-chasing policies combined with fractional reserve lending and moral-hazard bailouts have amplified the crest and trough  of every boom and bust.

Deep Problems

Hussman comments …

Our economic problems run far deeper than what can be healed by more reckless bubble-blowing by the Federal Reserve. At the center of global economic turmoil is a mountain of bad debt that was extended on easy terms by weakly regulated lenders with a government safety net. Global leaders have done all they can to protect the lenders at the expense of the public – to make good on the bond contracts of mismanaged financial institutions by breaking the social contracts with their own citizens. The limit of this unprincipled madness is being reached.

The way out is to restructure bad debt instead of rescuing it. Particularly in Europe, this will require numerous financial institutions to go into receivership, where stock will be wiped out, unsecured bonds will experience losses, senior bondholders will get a haircut on the value of their obligations, and loan balances will be written down. Bank depositors, meanwhile, will not lose a dime, except in countries where the sovereign is also at risk of default. Even there, depositors will probably not lose any more than they would if they held sovereign debt directly. In the U.S., the pressing need continues to be mortgage restructuring, and an emerging recession is likely to bring that issue back to the forefront, as roughly one-third of U.S. mortgages exceed the value of the home itself

Recognizing the Limits of Madness

I agree. The key statement is “The limit of this unprincipled madness is being reached.”

The problem is not only recognizing the limits of “unprincipled madness” but also recognizing the market’s willingness to play along. It always lasts longer than one thinks possible.

At the end of the line, every possible person is sucked into belief current conditions can go on forever. We saw that in the 2000 dot-com bubble, the housing bubble, the commercial real estate bubble that followed the housing bubble, and we see it now in the “Fed is omnipotent belief bubble”.

The only reason we have escaped recession so far is the amazing effort central bankers and global governments have put forth to avoid what needs to be done. Congratulations to those who recognized this condition in advance.

However, no credit can be given to those with the misguided belief such policies and efforts will last perpetually. The end of the line always comes.

No Decoupling

There was no decoupling in 2008 and there will be no reverse decoupling now. For further discussion please see Will the US Economy Continue to Decouple From the Rest of the World?

Recession Has Begun

In this case, the data speaks for itself. We are at the end of the line. The recession is not coming, it is not down the road, it is not likely, it is not at even at-hand.

Rather, the recession has begun. Fiscal stimulus from Congress is not coming and no amount of QE is going to stop it.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: China Import, Consecutive Quarters, Current Conditions, Economic Contraction, GDP Growth, Global Collapse, Global Economy, Global Recession, Hussman, Import Growth, International Monetary Fund, International Monetary Fund Imf, Macroeconomic Factors, Nber, Necessary Condition, Partial Transcript, Payroll Report, Protectionism, Recessions, Trade Surplus, World Gdp
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Europe’s Currency Crisis: A Look at Possible Scenarios (Michel)

Friday, June 8th, 2012

by Tatjana Michel, Director, Currency Analysis, Schwab Center for Financial Research

Key points

• A Greek exit from the eurozone has gone from “unthinkable” to a distinct possibility. Years of steep economic decline and unsustainable public debt have increased the odds that the country will once again default on its debt and possibly return to the drachma.
• A Greek default/exit would present risks to the European banking system, could cause a severe downturn in the Greek economy and might trigger contagion that spreads to countries like Spain, Ireland and Portugal.
• The European Central Bank and other institutions theoretically have tools to lower contagion risk, but may lack the time and political will to use them.
• Ultimately, the exit of one country from the euro could lead to the exits of other countries and a breakup of the euro as it’s currently known.
• We suggest investors limit exposure to European bond markets and the euro, both of which are likely to experience more downside.

The May 6 elections in Greece ousted the party that had negotiated and agreed to the bailout package offered by the European Central Bank (ECB), International Monetary Fund (IMF) and European Commission (EC). This group, often referred to as the “troika,” provided bailout funding to the Greek government so that it could cover its debt payments in exchange for a promise that the country would bring its budget deficit and debt down by reducing spending and raising taxes. Greek voters have effectively rejected the agreement because of the negative impact that spending cuts have on their economy, which is already in deep recession. No party won a majority in parliament in the May elections and a coalition could not be formed. Therefore, new elections are scheduled on June 17.

If the new government insists on renegotiating the terms of the current bailout plan, new talks with the troika will have to take place shortly after the election. If there is no agreement, the troika could decide to deny Greece its next chunk of bail-out money, which would likely lead to a default on Greece’s sovereign bonds.

Greece needs to form a new government and reach an agreement with the troika before it runs out of money in July 2012. If they reach an agreement, Greece is likely to stay in the eurozone but would need to stick to the new austerity plan to continue receiving aid.

Greek opinion polls show elections are wide open

According to recent poll results, the June 17 elections are wide open and could very well lead to a government that meets Europe’s terms for keeping Greece in the euro. However, it could also put in power a coalition government that’s firmly against austerity—positioning Greece for an exit from the euro.

Scenario 1: Coalition around New Democracy keeps Greece in

Although traditionally powerful Greek political parties like the Pan-Hellenic Socialist Movement (PASOK) and New Democracy (ND) have seen their influence wane in recent years, ND has been catching up with the anti-austerity Coalition of the Radical Left (SYRIZA) party since May 6. Should ND be able to get the upper hand in the June 17 elections, it would increase the likelihood of an agreement with the troika.

Source: Greek Ministry of Interior
*PASOK (Pan-Hellenic Socialist Movement), ND (New Democracy), DISY (Democratic Alliance), KKE (Communist Party of Greece), LAOS (Popular Orthodox Rally), SYRIZA (Coalition of the Radical Left), DIMAR (Democratic Left), ANEL (Independent Greeks), XA (Popular Union). ** Projected estimate of vote tally, after disregarding all blank votes and absentees, and after adjusting for the “likely votes” of “undecided voters.

Scenario 2: Coalition around SYRIZA precipitates Greece’s exit

SYRIZA, on the other hand, has denounced the current austerity plan. Party leader Alexis Tsipras believes Greece can stay in the euro and continue receiving money while cutting austerity measures—something Germany and other creditors probably aren’t going to like. If SYRIZA gains control, it would likely make the negotiations with the troika difficult and increase the risk of a Greek default and exit.

Tags: Bailout Package, Bailout Plan, Budget Deficit, Contagion, Currency Analysis, Currency Crisis, Debt Payments, Distinct Possibility, Drachma, Economic Decline, Elections In Greece, ETF, ETFs, European Banking System, European Bond Markets, Eurozone, Greek Economy, Greek Government, International Monetary Fund, International Monetary Fund Imf, Public Debt, Troika
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Gold Equities – Insider Buying Has Recently Soared – Time to Buy? (May 28, 2012)

Sunday, May 27th, 2012

Gold Market Radar (May 28, 2012)

For the week, spot gold closed at $1,573.03 down $19.96 per ounce, or 1.3 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, surged 7.88 percent. The U.S. Trade-Weighted Dollar Index gained 1.37 percent for the week.

Strengths

• Gold stocks strongly outperformed gold bullion this week.  As we have highlighted in the past there has been a significant disconnect between the price of gold and equity share prices.  The latest Canaccord Genuity Junior Mining Weekly highlights that one year ago, bullion was making new highs week-over-week with the price of gold rising up to $1,508 per ounce.  Based on Canaccord’s in-situ gold database, the market was valuing gold held by non-producers at about $129 per ounce.  One year later, while the price of gold is trading higher at $1,590 (5.4 percent higher than one year ago); the average in-situ value per ounce has dropped to $62 (52 percent lower than one year ago).  The junior miners have been put in the penalty box as capital markets have temporarily shut off the financing lifeline to these companies.
• With the S&P 500 now giving up more than half its gains for the year, much of the surge in gold stock buying over the past week came from generalist funds that may be diversifying in an uncertain market.  Another factor driving this buying may have been insider buying at the gold mining companies, which has recently soared according to the Market Ink Report.  The Market Ink Report notes that the stars may indeed be aligning for gold stocks as the eurozone faces the prospect of a full-blown banking crisis potentially taking hold over the next few weeks.  That would force the European Central Bank to provide further monetary easing.
• Despite gold being down this week it did get a lift in value as the International Monetary Fund (IMF) reported that central bank buying in gold was still proceeding at a brisk pace in April.  Turkey raised its reserves by 29.7 tons and Ukraine, Mexico and Kazakhstan also increased their holdings.  The Philippines, whose purchases actually date back to March but were slow in being reported to the IMF, reported gold purchases amounting to 32 tons of bullion–the biggest volume since Mexico bought around 78 tons a little over a year ago.

Weaknesses

• Feedback from the recent Bank of America Merrill Lynch 29th Global Metals, Mining and Steel conference in Miami showed there was very little interest in attending a gold company presentation, which could in itself, be interpreted as a buy signal.  Michael Jalonen, of BofA/ML noted he came to the conference with high hopes for news flow on capex reduction and a focus on capital returns but ultimately left feeling a little disappointed.
• Before a mining company has even applied for a permit for the Pebble Project Assessment in Alaska, the EPA stepped in and released its own report.  The EPA issued a heavy three-volume report on the possible impact of mining projects on the Bristol Bay watershed system but the agency insisted, “the draft study in no way prejudges future consideration of proposed mining activities.”  The U.S. Corps of Engineers is the primary permitting authority for dredging and filing permits for mining projects.  However, Senate Energy and Resources Committee Member Lisa Murkowski, R-Alaska, and others noted the EPA is determined to wrestle the mining permitting authority for itself, using the power it believes was granted by the Clean Water Act.
• Indian retail gold demand has been poor as the rupee has fallen significantly in value due to inflation and this has made gold more expensive in local currency terms.

Opportunities

• Ray Dalio was interviewed by Barron’s recently.  Dalio is one of the most successful hedge fund managers in the world, overseeing $120 billion in assets.  Dalio was asked if he is still a fan of gold.  Dalio noted it could be a bumpy ride temporarily because Europeans will have to sell gold in order to raise funds because they are squeezed but recommended that most people should have in the vicinity of 10 percent of their assets in gold, not only because he thinks it will be a good investment longer term, but because he thinks it is a very effective diversifier against the other 90 percent.  He also explained that he is viewing gold as an alternative currency.  “The big issue is debtor-developed countries, the U.S., Europe and Japan, all have a lot of debt and will have to print money or they will have credit problems.  I don’t want to have all of my money in those currencies.”
• Technical studies by Institutional Advisors show that the Philadelphia Stock Exchange Gold and Silver Index (XAU)/Gold Ratio has hit an extreme reading of less than 25 and such lows have only been seen around the important lows of September-October 2008, October-November 1948, the double bottom of March and October 1942 and June 1924.  Their work indicates these types of readings have historically marked turning points in the relative performance of gold versus the gold stocks and the current readings support stronger gold stock prices.
• Chris Wood, in his latest Fear and Greed report, said that gold has been acting like a risky asset lately, and it is only a matter of time before it resumes its safe haven status.  In the near term, so long as there are investors who own gold on leverage via ETFs or futures, there is always the risk of gold correcting further in a classic deleveraging trade.  But in the long run, gold is the only real hedge against both deflation and hyperinflation.  The ongoing experiment in unorthodox monetary policy from Western central banks will not end well.  While rising energy costs have hurt gold companies’ profit markets, CLSA says that with U.S. crude oil inventories rising, rising gold and falling oil prices are “a perfect ‘combo’ for gold-mining shares.”

Threats

• Don Coxe noted there is essentially a backroom political ban on investing in companies deemed impure by environmental NGOs and this is unfairly depressing the prices of some of the leading gold mining stocks, and hurting pension funds.  Coxe says pension funds are succumbing to political pressure, resulting in “more and more corporate pension funds…being impaled on their own funding swords due to inadequate investment returns.”  Coxe suggests that commodity stocks are “victims of a new form of persecution from two groups–those with contempt for capitalism, along with those who resent what mining and oil and gas companies do for a living.”
• To stop the development of several new mines that are being contemplated in Minnesota, a couple of NGOs recently went on the offensive to highlight that sulfide mining presents many more risks to their environment than traditional iron ore mining that has taken place in their state and the citizens need a broad conversation about this issue.
• The Canadian mining industry is seeing a couple of headline risks this week with the Teamsters strike, which shut down Canadian Pacific Railway freight lines early Wednesday with no end in sight.  This leaves mining and other resource companies in Canada faced with supply and fuel disruptions.  Also, forest fires in Canada have surfaced as a problem as some power lines to the mines have been damaged while other areas are shutting in to make sure air quality underground is free of smoke.

Tags: Banking Crisis, Brisk Pace, Dollar Index, energy, Equity Share, ETF, ETFs, Eurozone, Gold Bullion, Gold Database, Gold Equities, Gold Market, Gold Miners, Gold Mining Companies, Gold Stock, gold stocks, India, International Monetary Fund, International Monetary Fund Imf, Market Radar, New Highs, Nyse Arca, Penalty Box, Price Of Gold, Spot Gold
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The Income Hunt: Opportunities Abroad

Wednesday, May 2nd, 2012

by Russ Koesterich, Chief Investment Strategist, iShares

Investors often have a home country bias when it comes to their fixed income portfolios, which means they are generally too reliant on domestic issues. Today, however, there are a number of reasons why investors should consider maintaining a strategic benchmark allocation to emerging market debt.

In recent posts, I’ve highlighted some of these arguments, including the increased stability and improving fundamentals of emerging market countries. But since so many investors are asking me lately about emerging market debt, I figured I’d expand on the case for this asset class in this post. Here’s a bit more on four arguments favoring exposure to emerging market fixed income.

Better fiscal positions: Emerging markets exited the financial crisis in a far better position than their developed market counterparts. The average debt burden of emerging markets is less than 40% of gross domestic product, while developed market debt has soared to more than 100% of GDP on average. This greater fiscal stability is partly why emerging market bonds should now be less volatile relative to their developed counterparts than in the past.

Fading inflation risk: While investors in emerging markets were reasonably concerned about inflation in 2011, inflation appears to be a fading risk in most of the large emerging market countries, the exception being India. Chinese inflation is currently running at 3.6%, roughly half the level of last July. In Russia, inflation has fallen to 3.7% in March from nearly 10% last May. Even in Brazil, a country with a history of stubbornly high inflation, consumer price inflation has dropped to 5.2% in March, down from 7.3% in September. International Monetary Fund estimates suggest that this trend should continue, with emerging market inflation expected to fall throughout 2012.

High premium: Despite emerging markets’ improving fundamentals, emerging market bonds are offering a significant, and historically high, premium over most developed market debt. Currently, emerging market bonds are yielding roughly 350 basis points over the 10-year Treasury, close to a record high.

Diversifying hedge: Emerging market bonds add diversification and a hedge on the dollar, although they are more volatile than domestic bonds. And for those wishing to avoid the foreign currency exposure associated with international bonds, there are dollar denominated emerging market bonds and funds that offer the incremental yields without the foreign currency risk.

In short, most investors are arguably underweight emerging market bonds in their fixed income portfolios though there’s a strong case for considering increasing exposure to this asset class through vehicles such as the iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSEARCA: EMB) and the iShares Emerging Markets Local Currency Bond Fund (NYSEARCA: LEMB).

Source: Bloomberg

Disclosure: Author is long EMB

Diversification may not protect against market risk. Bonds and bond funds will decrease in value as interest rates rise. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Narrowly focused investments typically exhibit higher volatility and are subject to greater geographic or asset class risk. The Fund may be subject to credit risk, which refers to the possibility that the debt issuers will not be able to make principal and interest payments.

Tags: asset class, Bias, BRICs, Chief Investment Strategist, Consumer Price Inflation, Counterparts, Debt Burden, Emerging Market Bonds, Emerging Market Countries, Emerging Markets, Estimates, Financial Crisis, Fiscal Positions, Fiscal Stability, Fixed Income, GDP, Gross Domestic Product, Inflation Risk, International Monetary Fund, Portfolios, Russ
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Energy and Natural Resources Market Radar (April 30, 2012)

Sunday, April 29th, 2012

Energy and Natural Resources Market Radar (April 30, 2012)

The S&P 500 Energy Index has decreased about 8 percent over the past 12 months. This decline represents a one-sigma event in standard deviation terms. Historically, this has occurred only 18.5 percent of the time in the past 10 years. As shown in the chart below, there were only two episodes when performance was worse on a one-year rolling basis: During the 2002-2003 period and during the global financial crisis in 2008-2009 when the U.S. was in a recession. To us, the S&P 500 Energy stocks represent a buying opportunity, as adding to core positions after a correction is a prudent way to invest.

Strengths

• According to the World Steel Association, global steel production rose 1.8 percent year-over-year to 132 million tonnes in March and China produced 46.6 percent of the world’s crude steel.
• Emerging market oil fundamentals continue to improve with Indian oil demand in March higher year-over-year by 5.4 percent (175 thousand b/d) to a record high of 3.403 mb/d. Diesel demand was higher year-over-year by a strong 10.8 percent (143 thousand b/d) to 1.464 mb/d, buoyed by higher diesel penetration in automobiles and strong growth in the power sector too.
• Central bank gold buying in March was confirmed by a data release from the International Monetary Fund on Tuesday. Mexico’s central bank purchased 541,000 ounces during the month, Russia added 532,000 ounces, Turkey bought 369,000 ounces and Kazakhstan’s reserves rose by 138,000 ounces. Although the buying is not large relative to central bank purchases over the same period in 2011 (for Mexico in particular), confirmation that central banks are still net buyers should be overall positive for the market.
• According to the China Electricity Council (CEC), electricity consumption in the country grew by 6.8 percent year-over-year in first quarter 2012 to 1,166 billion kWh. Meanwhile, March’s growth rate was 7 percent year-over-year, with a decent pickup from manufacturing industry consumption at 7.6 percent year-over-year compared with 2.1 percent year-over-year for the quarter as a whole. Copper hit a three-week high on Friday as tight supplies of the metal outside China kept prices supported, although there are worries about the escalating debt crisis in Europe following a Spanish credit downgrade.
• In a sign of tightening supplies, copper inventories in LME-registered warehouses fell to their lowest levels since November 2008 at 251,825 tonnes, with cancelled warrants – the metal earmarked for delivery – at 39.5 percent of total stock. In Shanghai, copper stockpiles fell to the lowest since February to 204,762 tonnes.

Weaknesses

• World Steel (WSA) published its updated Short Range Outlook for apparent steel use. The 2012 forecast was revised down by 3.5 percent to 1,422 million tonnes. Tonnage wise, this is mainly driven by China where the 2012 forecast was revised down by 33 million tonnes, or 4.8 percent. The global revision was 51 million tonnes. The forecast for the EU-27 was revised down by 5 percent and the NAFTA estimate is up slightly by 0.6 percent. 2012 growth is expected to be 3.6 percent, down from 5.6 percent in 2011. Steel use in 2013 is expected to grow 4.5 percent. Growth in China is expected to be 4 percent both in 2012 and 2013. These forecasts from WSA regarding Chinese steel use growth are the lowest ones yet. Chinese steel usage is expected to be 45.6 percent of global usage in 2012. The EU-27 is the only region where steel use is expected to fall in 2012, by 1.2 percent.
• According to the National Development and Reform Commission, China’s crude oil output fell 1.4 percent year-over-year to 50.03 million tonnes in the first three months of 2012.

Opportunities

• Credit Suisse estimates that Chinese total oil demand will rise to 12.2 million barrels per day by 2015, up from approximately 10 million barrels per day currently and will reach 15 million barrels per day by 2020 as China’s car fleet grows to record levels.
• Japan will continue using U.S. coking coal as an alternative to major suppliers such as Australia, but for the longer term, countries such as Mozambique and Russia will play a larger role in the Asia-Pacific coking coal market, the head of Japan’s steel association said this week. Coking coal imports by Japan from its top supplier in Australia will fall sharply in April and May due to force majeure declared on April 2 by BHP Billiton Ltd. and Mitsubishi Corp. at mines they jointly own, Hayashida said. This was due to strikes and heavy rain. Japan’s imports of U.S. coking coal surged in March, rising 57 percent on the year, while its imports from Australia dropped 17 percent, government data showed.

Threat

• Peru’s miners plan to start a national strike on May 14 to protest worker layoffs at mines and refineries, said Luis Castillo, General Secretary of Peru’s Mining Federation. Miners are protesting the dismissal of workers at Gerdau unit Empresa Siderurgica del Peru SAA and Shougang Corp.’s Hierro Peru iron mine, as well as a decision by creditors to liquidate Renco Group Inc.’s zinc smelter, Castillo said. Union officials will meet for talks with President Ollanta Humala, he said.

Tags: Bank Gold, Bank Purchases, Central Banks, Core Positions, Crude Steel, Diesel Penetration, Electricity Consumption, Energy Index, energy stocks, Global Financial Crisis, Global Steel, Indian Oil, International Monetary Fund, Market Radar, Oil Demand, Power Sector, S Central, Steel Association, Steel Production, World Steel
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Currency Wars: Gambling With Other Peoples’ Money

Thursday, April 19th, 2012

by Axel Merk, Merk Funds

April 19, 2012

If running out of your own money wasn’t bad enough, policy makers are increasingly spending other peoples’ money to bail their country out. At the upcoming G-20 meeting, finance ministers from around the world will contemplate an increase to the resources of the International Monetary Fund (IMF). At stake for politicians is whether they can continue to do what they know best – to play politics. In contrast, at stake for investors may be whether currencies will retain their function as a store of value.

Let’s highlight Spain, as the country may be the key to understanding how dynamics may play out. Last November, Spaniards voted for change by electing conservative Prime Minister Rajoy, handing him an absolute majority in parliament, displacing the previous, socialist government. The election may cause former British Prime Minister Thatcher to change her view, that socialism is doomed to fail, as ultimately you run out of other people’s money. It doesn’t take a socialist to run out of money. In the case of Spain, if you run out of your own people’s money, there may always be other peoples’ money.

One of the major concerns is Spain’s regional government debt. Spain consists of 17 autonomous regions, whose total debt almost doubled in the past three years, due to economic recession and a housing market collapse. In many ways, Spain reflects a microcosm of how the Eurozone as a whole is structured:

- Spanish regions have the power to issue public debt. The central government has little ability to interfere with regional government spending and is prohibited by Spanish law to bailout regional governments.
- While regions enjoy high autonomy on spending, the central government retains effective control over regional government revenue.
- Spain has its own peripheral problems: the most indebted region, Catalonia, recorded 20.7% debt-to-regional-GDP ratio and 3.6% deficit-to-GDP ratio in 2011. Its 10-year bond yield recently breached 10%, far beyond the yield on 10-year Spanish government bonds, which yield around 6%. In 2011, the total debt of 17 regional governments rose to €140 billion, accounting for 13.1% of Spain’s GDP. This number is up from 6.7% by 2008.
- Spanish law forbids the central government from rescuing regional governments (in much the same way that the Maastricht Treaty prohibits bailouts of EU countries). In practice, the central government appears to have implicitly helped Valencia, Spain’s 2nd most indebted region, with a €123 million loan repayment to Deutsche Bank.

More broadly known are Spain’s banking woes. Unlike much of Europe, a housing boom propelled much of Spain’s recent growth, causing Spain’s regional banks, in particular, to become overly exposed to the mortgage sector. Spain’s banks are very dependent on liquidity provided by the European Central Bank (ECB). The recent 3 year long-term refinancing operation (LTRO) by the ECB at first took pressure of the Spanish banking system, but has since been seen more critically, as Spain’s banks may be using the liquidity to buy Spanish government debt, thus increasing inter-dependency and potentially making nationalization of Spanish banks (read: the Spanish government taking on the obligations of its banks) more, rather than less likely.

The tensions between Spanish regions and its national government are nothing new. And that’s really the main lesson here: it’s business as usual in Spain! As of late, Rajoy’s government appears to be reining in regional control over budgets in earnest. However, Spaniards are used to eternal debates on where subsidies should come from, how to stop regions from spending, and – conversely – how to find ways around restrictions. In brief, Spaniards are pros at this battle. Not surprisingly, when there’s a threat of market headwinds, Rajoy is publicly committing to reform. The moment the pressure abates, it appears those promises are forgotten. Spain is proof that the only language policy makers may be listening to is that of the bond market.

As painful as it is, volatile markets are necessary to keep policy makers focused. Whenever Spanish bonds come under pressure, Spain moves further from talk and closer to action, with respect to implementation of more austerity measures, as well as the pursuit of structural reforms. Spain – like so many developed countries – has rigid bureaucracies aimed at protecting the old (companies and employees) at the cost of preventing the new, stifling innovation and fostering massive youth unemployment. Structural reform is politically painful. What is striking about Spain is that it has an enviable position of a government with an absolute majority. Yet, even such a seemingly strong government is dragging its feet in implementing reform. In the process, political support is eroding, thus making it increasingly difficult to pursue reforms as the economic environment worsens.

Politicians always appear to consider the cost of acting versus the cost of inaction. As long as more money is lined up: be that from the central government for the regions; be that from a European stability fund for the government; or be it from the IMF, incentives for reforms are taken away. In many ways, Catalonia should be getting the message that its budget is unsustainable, but with help on the way from Madrid, the region may continue its bad habits.

As Europeans have convinced themselves that they have done plenty of the heavy lifting, the next stop is the IMF, where member countries are expected to pledge billions more. The critics may be forgiven for pointing out that Europe could be doing more before tapping into purses of other, less affluent countries. Unfortunately, politicians treat this as politics rather than a serious debate about money. The good news here may be that we don’t think this is a European problem. The bad news is that this is a global problem. Spain is not unique. In the U.S., we have many of the same challenges, but we have a bond market that has allowed policy makers to get away with spending ever more money. Different from the Eurozone, the U.S. has a significant current account deficit. As such, should the bond market impose austerity on U.S. policy makers, it may have far more negative implications on the U.S. dollar than it has had on the Euro to date.

In the meantime, as policy makers around the world continue to hope for the best, but plan for the worst, expect monetary policy to be most accommodating: the U.S., Eurozone, UK and Japan all have eased in some form or another in recent months. Beneficiaries in the medium term may be precious metals and commodity currencies. For now, those currencies have been held back by a generally somber mood about global growth. What has done well – and we expect will continue to do well – are the currencies of countries that realize such policies will foster inflationary pressures. Singapore should be praised in this context, as the Singapore Monetary Authority tightened monetary policy last week, allowing the Singapore Dollar to appreciate. Those countries that can afford to are taking note that all this easy money may have significant side effects and are taking action to combat it. However, such countries are few and far between. We have long argued that there may not be such a thing anymore as a safe asset and investors may want to take a diversified approach to something as mundane as cash.

Please click here to register for the Merk Webinar: Quarter 1 Update on the Economy and Currencies which will take place on Thursday, April 19th at 4:15pm ET / 1:15pm PT. Please also subscribe to Merk Insights by clicking here to be informed as we analyze the global dynamics playing out. We manage the Merk Funds, including the Merk Hard Currency Fund. To learn more about the Funds, please visit www.merkfunds.com.

Axel Merk

Manager of the Merk Hard Currency Fund, Asian Currency Fund, Absolute Return Currency Fund, and Currency Enhanced U.S. Equity Fund, www.merkfunds.com

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies.

The Merk Hard Currency Fund (MERKX) seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Merk Asian Currency Fund (MEAFX) seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Absolute Return Currency Fund (MABFX) seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.

The Merk Currency Enhanced U.S. Equity Fund (MUSFX) seeks to generate total returns that exceed that of the S&P 500 Index. By employing a currency overlay, the Merk Currency Enhanced U.S. Equity Fund actively manages U.S. dollar and other currency risk while concurrently providing investment exposure to the S&P 500.

The Funds may be appropriate for you if you are pursuing a long-term goal with a currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit www.merkfunds.com.

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds’ website at www.merkfunds.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

Since the Funds primarily invest in foreign currencies, changes in currency exchange rates affect the value of what the Funds own and the price of the Funds’ shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, emerging market risk, and relatively illiquid markets. The Funds are subject to interest rate risk, which is the risk that debt securities in the Funds’ portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities, such as for- ward contracts, which can be volatile and involve various types and degrees of risk. If the U.S. dollar fluctuates in value against currencies the Funds are exposed to, your investment may also fluctuate in value. The Merk Currency Enhanced U.S. Equity Fund may invest in exchange traded funds (“ETFs”). Like stocks, ETFs are subject to fluctuations in market value, may trade at prices above or below net asset value and are subject to direct, as well as indirect fees and expenses. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds’ prospectuses.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice. Foreside Fund Services, LLC, distributor.

Tags: Absolute Majority, Autonomous Regions, British Prime Minister, Conservative Prime Minister, Economic Recession, Effective Control, Eurozone, Finance Ministers, Gdp Ratio, Government Revenue, International Monetary Fund, International Monetary Fund Imf, Market Collapse, Peripheral Problems, Prime Minister Thatcher, Regional Government, Regional Governments, Socialist Government, Spanish Law, Spanish Regions
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Europe’s Scariest Chart Just Got Scarier

Monday, March 12th, 2012

The last time we plotted European youth unemployment in what was dubbed “Europe’s scariest chart” we were surprised to discover that when it comes to “Arab Spring inspiring” youth unemployment, Spain was actually worse off than even (now officially broke) Greece, whose young adult unemployment at the time was only just better compared to that… of the United States. Luckily, following the latest economic (yes, we laughed too) update from Greece, it is safe to say that things are back to normal, as Greek youth unemployment is officially the second one in Europe after Spain to surpass 50%. In other words, Europe’s scariest chart just got even scarier.

And so while the Greek economy is in tatters, following another downward revision to its GDP as reported last week, this time dragging Q4 GDP from -7.0% to -7.5%, that’s only the beginning, and it now appears that a terminal collapse of not just the Greek financial sector, but its society as well, has commenced, as the number of people unemployed in the 11 million person country is now 41% greater than its was a year ago. From Athens News:

The average unemployment rate for 2011 jumped to 17.3 percent from 12.5 percent in the previous year, according to the figures, which are not adjusted for seasonal factors.

Youth were particularly hit. For the first time on record, more people between 15-24 years were without a job than with one. Unemployment in that age group rose to 51.1 percent, twice as high as three years ago.

Budget cuts imposed by the European Union and the International Monetary Fund as a condition for dealing with the country’s debt problems have caused a wave of corporate closures and bankruptcies.

Greece’s economy is estimated to have shrunk by a about a fifth since 2008, when it plunged into its deepest and longest post-war recession. About 600,000 jobs, more than one in ten, have been destroyed in the process.

Things will get worse before they get better, according to analysts. “Despite some emergency government measures to boost employment in early 2012, it is hard to see how the upward unemployment trend can be stabilised in the first half of the year,” said Nikos Magginas, an economist at National Bank of Greece.

A record 1,033,507 people were without work in December, 41 percent more than in the same month last year. The number of people in work dropped to a record low of 3,899,319, down 7.9 percent year-on-year.

When will the Greeks ask themselves if the complete and utter destruction of their society is worth it, just to pretend that life as a European colony is worth living. Especially now that pension funds have been vaporized?

Tags: 24 Years, Athens News, Average Unemployment Rate, Bankruptcies, Budget Cuts, Collapse, Debt Problems, Downward Revision, Financial Sector, Greece Economy, Greek Economy, Greek Youth, International Monetary Fund, Post War, Q4 Gdp, Recession, Seasonal Factors, Tatters, Young Adult, Youth Unemployment
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Spain Forecasts 24.3% Unemployment In 2012, 1.7% GDP Contraction

Friday, March 2nd, 2012

Nothing good here for our Spanish readers: while speaking at a news conference, Deputy Prime Minister Soraya Saenz de Santamaria said that Spain’s economy will contract by 1.7 percent this year as the government carries out drastic austerity measures. The forecast matched the International Monetary Fund’s outlook for Spain’s economy this year and was less optimistic than the outlooks from the country’s central bank and from the European Commission. Earlier, Spain also defied the European Union, setting a 2012 deficit target at 5.8 percent of gross domestic product, a far softer goal than the 4.4 percent agreed with Brussels. More importantly, the country now anticipates that its unemployment rate will hit 24.3%. Frankly, while horrendous and worse even than in Greece (as it also implies a youth unemployment rate well into the 50%s), this is an overoptimistic number, because as noted before, Spain’s unemployment soared from 21.5% to 23.3% in Q4 alone. When all is said and done, look for Spain’s 2012 YE unemployment to be well over 25%. So as the economic deterioration across the PIIGS accelerates, at least the banks are “safe.”

Spain’s historical unemployment:

And other forecast highlights via Bloomberg, citing Spain’s De Guindos:

• *SPAIN GROWTH MAY BE NEGATIVE UNTIL THIRD QUARTER INCLUDED
• *SPAIN HOUSEHOLD SPENDING TO DECLINE IN 2012, DE GUINDOS SAYS
• *SPAIN GOVERNMENT FORECASTS 24.3% UNEMPLOYMENT RATE IN 2012
• *SPAIN GOVERNMENT FORECASTS 24.3% UNEMPLOYMENT RATE IN 2012
• *SPAIN HOUSEHOLD SPENDING TO CONTRACT 4 PERCENT IN 2012
• *SPAIN 2012 SPENDING LIMIT SET AT EU118.6BLN
• *SPAIN 2012 SPENDING LIMIT DOWN 4.7% FROM 2011

As we said, nothing good.

Tags: Austerity, Contraction, De Santamaria, Deficit Target, Deputy Prime Minister, Economic Deterioration, Government Forecasts, Gross Domestic Product, Household Spending, International Monetary Fund, Outlooks, Q4, S Central, Saenz, Soraya, Spain Economy, Spain Government, Spanish Readers, Unemployment Rate, Youth Unemployment
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China & India PMI Measures Rebound To a Degree

Friday, March 2nd, 2012

Overnight reading for Purchasing Managers Indexes in China and India were released.  As always China has two reports, one from the government which focuses on large and state owned companies, and one by private firm HSBC which has a broader focus – both increased month over month, although the latter still shows a slight contractionary reading.  Meanwhile, India’s measure rose to an 8 month high.

Via Bloomberg:

• In China, the purchasing managers’ index rose for a third month to 51.0 from 50.5 in January, the statistics bureau and logistics federation said in a statement today. In India, a PMI released by HSBC Holdings Plc and Markit Economics was close to an eight-month high.
• Today’s data, along with a surprise gain in Japanese companies’ capital spending and South Korea’s biggest increase in exports in six months, add to signs that global growth prospects are improving as the U.S. recovery strengthens and Europe works to contain its debt crisis.
• In China, the PMI’s level, above the expansion-contraction dividing line of 50, was the highest since September and compares with the 50.9 median estimate in a Bloomberg News survey. Economic data in the first two months are distorted by the weeklong Chinese New Year holiday.
• A separate manufacturing index released today by HSBC Holdings Plc and Markit Economics rose to 49.6 in February from 48.8 the prior month, the third straight improvement and the highest since October.
• Meanwhile, the Indian gauge was at 56.6 in February from 57.5 in January, HSBC and Markit said.
• A fourth-quarter slowdown in exports was probably “transitory” and economic-growth forecasts for Asia “are too low,” said Condon, who previously worked at the International Monetary Fund.

Of course the numbers are very noisy in January and February due to seasonal effects from the Chinese Lunar New Year.

• The subindexes of both PMIs tracking input costs suggested inflationary threats.  The government-backed survey of input prices rose to 54 in February from 50 in the prior month, while HSBC’s survey showed average input costs ticking up for the first time in four months.
• Analysts said the surge was a result of higher energy costs and rate hikes by utilities

Keep in mind U.S. ISM Manufacturing will be released today at 10 AM – it is still one of the few reports that can be market moving in the haze the central bankers have over markets.

Tags: Bloomberg News, Chinese New Year, Condon, Contractionary, Debt Crisis, Dividing Line, Economic Data, Economic Growth Forecasts, Global Growth, Growth Prospects, Hsbc Holdings, Hsbc Holdings Plc, International Monetary Fund, Japanese Companies, Markit, Median Estimate, Medium Sized Companies, Private Firm, Purchasing Managers Index, Statistics Bureau
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