No QE3 – Yippee!

Thursday, March 15th, 2012

No QE3 … Yippee!

March 13, 2012

by Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.

Key Points

• The Fed made no major changes to its policy statement and announced a continuation of Operation Twist, but did not hint at or announce further quantitative easing.
• The Fed’s assessment of the economy did improve somewhat.
• Richmond Fed President Lacker’s dissent and Dallas Fed President Fisher’s pronouncements ring true.

In the policy statement released at the conclusion of its latest meeting, the Federal Reserve upgraded its assessment of the economy, noting improvement in labor conditions, and did not suggest imminent additional monetary easing, while keeping the fed funds rate in the 0-0.25% range it’s been in since the end of 2008. Key in the statement released by the Federal Open Market Committee (FOMC): “Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated.”

Lacker dissents … again

There was one dissenter, Richmond Fed Bank President Jeffrey Lacker, who did so for the second consecutive time and who “does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.”

As for financial conditions, “strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook.” The Fed made no change to what’s become the key sentence in its statements, noting that conditions would probably warrant “exceptionally low” short-term interest rates at least through 2014.

The Fed also subtly upgraded its assessment of the investment environment. Business investment spending is said to have “continued to advance,” whereas in its January 25 statement the FOMC said it “has slowed.”

Addressing energy prices

There wasn’t much new in the Fed’s statement other than addressing the short-term inflationary implications of the recent spike in energy prices. Inflation “has been subdued in recent months although prices of crude oil and gasoline have increased lately.” The increase in oil prices “will push up inflation temporarily, but the committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.”

Operation Twist continues, but no QE3

“The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September.” In other words, “Operation Twist” is ongoing, but there was no mention of extending it beyond its scheduled June expiration. That will likely be discussed and detailed at the next FOMC meeting in late April.

For those who’d been expecting a third round of quantitative easing (QE3)—and we were not among them—the reasoning is likely already noted above: the economy has not only picked up its pace of growth, but the unemployment rate has also begun to ease meaningfully. Remember, both price stability (inflation) and resource utilization (maximum employment) are the Fed’s mandates. With recent conflicting data on both, and the rarity of the Fed changing course amid conflicting signals, QE3 was unlikely in our opinion.

Personally, I disagree with the many who feel the only prop under this very strong market has been quantitative easing. I do believe the economy has entered the second phase of the recovery (the expansion phase) in which jobs will be more plentiful, small businesses will be greater participants, and even housing will be a positive contributor. The market’s recent strength—and importantly, its surge immediately after the Fed’s announcement into today’s close—supports this view.

Fisher speaks the truth

The subject of QE3 was likely discussed and debated, but we’ll have to wait until the minutes of the meeting are released in three weeks to get any details. I share the view of Richard Fisher, President of the Dallas Fed, who’s publicly said that economic conditions are improving and the underlying trend of inflation is “converging on the Fed’s 2% target.” Key to Fisher’s perspective is that the liquidity injected into the financial system via QE1 and QE2 hasn’t traveled into the real economy, but instead sits on banks’ balance sheets, invested in financial assets, parked in cash—or even parked at the Fed itself.

Why keep treating a recovering patient like it remains in the operating room? Fisher recently said, somewhat bluntly, that he sees “no need to administer additional doses unless the patient goes into postoperative decline.” He went on to suggest that if incoming data continues to show accelerating improvement in the economy, “the markets should begin preparing themselves for the good Dr. Fed to wean them from their dependency rather than administer further dosage.” Hear, hear.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Tags: Bank President, Charles Schwab, Chief Investment Strategist, Consecutive Time, Dallas Fed, Dissents, Downside Risks, Fed Funds Rate, Fed President, Federal Funds Rate, Federal Open Market Committee, Global Financial Markets, Investment Environment, Jeffrey Lacker, Key Sentence, Liz Ann, Open Market Committee, Richmond Fed, Senior Vice President, Unemployment Rate
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Time to Add the VIX to Your Equity Portfolio?

Tuesday, February 28th, 2012

The interim solving of the debt crisis in Greece has restored calm in the markets, with the CBOE S&P 500 Volatility Index (VIX) settling at 17.3 compared to its long-term average of 20.0. The big question now is whether the VIX will return to the low levels of 1991-1996 and 2004-2006.

Sources: CBOE; Plexus Holdings.

But why is it important? The two periods mentioned coincided with sustained strong rising equity markets. Let us take a look at the period 2004 to end 2006. The VIX fell to an average of approximately 13 over that period, while valuation levels as measured by Robert Shiller’s PE10 increased significantly. Please note that in the graph below I used the inverse of the PE10, which is in fact the earnings yield or EY10. The period was marked by strong steady global economic growth on the back of China’s fortunes, strong corporate profit growth and a significant increase in risk appetite.

Sources: Robert Shiller; CBOE; Plexus Holdings.

At this stage the market’s rating reflects the VIX, but where to now? While similar strong economic growth etc. may await us further down the road the same cannot be said for the next two years, let alone this year, as the weak global economic environment (a much weaker Chinese economy, the Eurozone’s continued woes and the relatively weak U.S. economy) is likely to persist. I am therefore of the opinion that a VIX of around 20 and a PE10 of 22 can be seen as fair value. These compare with the current VIX of 17.3 and PE10 of 22.6. Yes, optimism may drive the VIX down to 15 again and the PE10 to 25 but to me that will indicate a significant selling opportunity. Similarly, the more regular occurrence of black swans has led to a significantly changed investment environment. Yes, it has led to the VIX being more volatile than in the past.

So much for volatility, but what about the underlying economic fundamentals? I have often referred to the relationship between consumer confidence and market valuation. Consumer spending is the backbone of the U.S. economy and is therefore the reason why consumer confidence gauges are closely watched by the major market players. At this stage it is evident that the S&P 500 Index (SPX 1367.59 �‘0.00%) at a PE10 of 22.6 is fully reflecting the Conference Board Consumer Confidence Index and therefore the underlying economy as it stands.

Some may argue that the employment situation in the U.S. remains dire and is likely to lead to another fall-off in consumer confidence. Well, my research indicates that consumer confidence in fact leads the U.S. unemployment rate by approximately nine months. With the Conference Board Consumer Confidence Index at 61.1 in January, it points to an unemployment rate of approximately 8% in the third quarter of this year compared to 8.3% in January this year.

Sources: I-Net; FRED; Plexus Holdings.

The valuation levels of the S&P 500, or PE10, lead the unemployment rate by approximately six months and are currently pointing to an unemployment rate of below 8% in the third quarter of this year.

I still hold the view that consumer confidence will improve to approximately 80 through end 2012 and that the valuation of the S&P 500 Index will improve to a PE10 of 25, meaning further upside of approximately 10% from the current levels. The going will be tough, though, as I think volatilities will remain high, resulting in the VIX ranging between 15 and 30 and the PE10 between 20 and 25.

Time to add the VIX to your equity portfolio? I think so.

Tags: Black Swans, Cboe, Chinese Economy, Consumer Confidence, Corporate Profit, Debt Crisis, Earnings Yield, Economic Fundamentals, Eurozone, Global Economic Environment, Global Economic Growth, Investment Environment, Plexus, Profit Growth, Risk Appetite, Robert Shiller, Swans, Valuation Levels, Volatility Index Vix, Woes
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Jim Grant On Gold-Backed Bonds And ‘The Hope Leeches’

Wednesday, February 15th, 2012

James Grant, of Grant’s Interest Rate Observer makes some thought-provoking statements in his must-listen Bloomberg Radio interview with Tom Keene today. While noting America’s exceptionalism (h/t Clint Eastwood?), he perhaps doesn’t mean all Americans as he takes the Fed and Treasury to task over their actions in recent years (and in fact for decades). His long-held view that rates should be higher and follow generational cycles raises concerns for him that government intervention is in fact ‘prolonging the symptoms’ of the recession. In considering Tom Keene’s well-thought-out question of why the US does not take advantage of low rates and issue exceptionally long-dated bonds, Grant agrees with the odd premise that they do not but then goes on to what would be sounder policy.

“Why not issue bonds backed by gold bullion? Gold is a better money and is grounded in something besides the power of the people that print the dollar bills.” The interview goes on to discuss population growth as a more potent ‘fix’ for housing in the US than QE, that the US is a preferable investment environment (given valuations) than Germany or Japan, the drastic drop in NYSE volumes, and the “leeching out of excitement, hope, and expectation of improvement (particularly for the young).” His compare and contrast of the 1920-21 depression to the current Great Recession (which seems not to end), focused on the fiscal and monetary actions, is an eye opener that its just possible the present-day orthodoxy is wrong. Urging that we maintain our sense of shock at the size of our ‘peacetime’ deficits, Grant worries that we are in a secular stagnation.

Click below to listen to the interview…

Jim Grant On Bloomberg Radio by user5452365

Tags: Bullion Gold, Compare And Contrast, Dollar Bills, Drastic Drop, Exceptionalism, Eye Opener, Generational Cycles, Gold Bullion, Government Intervention, Interest Rate Observer, Investment Environment, Issue Bonds, James Grant, Jim Grant, Leeches, Nyse, Peacetime, Population Growth, Radio Interview, Tom Keene
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2012 Outlook: Remain Tactical and Keep Risk in Check (Lee)

Friday, January 13th, 2012

2012 Outlook: Remain Tactical and Keep Risk in Check
Monthly Strategy Report January 2012

by Alfred Lee, CFA, CMT, DMS,
Vice President & Investment Strategist,
BMO ETFs & Global Structured Investments
BMO Asset Management Inc.
alfred.lee[@]bmo.com

Investors will likely be relieved that a turbulent 2011 is now behind us with the new year hopefully bringing a more forgiving investment environment. While there have been a number of positive developments, such as the continued strength of U.S equities and the defensive and yield oriented sectors, investors must remember that we are far from being out of the woods. The European sovereign debt concerns that plagued the markets last year – the single most crucial factor to determining how assets perform this year – remain unresolved. In addition, the many global macro-economic risk items, such as continued deleveraging in developed economies and a potential slowdown in emerging markets, leaves equity markets vulnerable for yet another soft-patch in 2012, particularly if policy response continues to dictate market moves. With an increasing amount of push-pull factors in the market, we expect market volatility to return.

Considering this expectation, investors should dedicate a portion of their portfolio (the “Core”) to a strategic asset allocation mix, enforcing discipline in the portfolio construction process. The remaining portion of the portfolio (“Satellite”) can be used to tactically allocate to sectors and themes that are expected to display relative strength at any particular time. The constant and rapid changes in investor sentiment that we experienced in the second half of 2011 will likely continue this year, and as a result, we are dedicating an increasing allocation to our tactical themes to methodically generate potential alpha and systematically control risk. Though the following are the themes we are currently recommending, we are expecting a faster paced market in 2012 and our goal is to inform investors of major tactical changes in our BMO ETFs Monthly Strategy and Trade Opportunity Reports, although some tactical themes may have changed intra-month.

Asset Allocation Themes

- Volatility shocks will AGAIN be common: In mid-December, the CBOE Implied Volatility Index (VIX) dipped below its 200-day moving average for the first time since last July. Although a positive development, since a lower VIX tends to indicate lessened nervousness, the VIX tends to display seasonality where it has a tendency to drop in December and increase in the month of January. Moreover, its term structure in the futures market currently sits in “contango1,” meaning further dated future contracts are higher priced than closer dated contracts. This suggests the market is pricing in an expectation for higher volatility in the future. As equity prices still remain extremely sensitive to negative
headlines and there remains a large number of headline risk items out there, we believe volatility shocks (“volatility-squared”) to remain a constant theme in 2012.

- Slightly overweight bonds: Since last August, we have recommended an overweight to fixed income relative to equities. That’s not to say we are bearish on equities as we have recently seen some positive developments in the equity markets, and we would advise a higher allocation to equities as we did last August. However, we continue to favour bonds over Canadian equities at least over the first quarter. The greenback, which remains in a secular decline, is gathering strength over the short term and we expect this to cause headwinds for the commodity heavy S&P/TSX Composite Index (S&P/TSX). Unlike U.S. equities, which have broken out and are looking increasingly bullish, the S&P/TSX is testing but has yet to break its downtrend pattern. As we anticipate commodity and equity markets to be volatile in the first several months of the new year, investors should not neglect bonds despite lower than historical yields for their volatility mitigation qualities. We do believe equity markets could rally later in the year, if and when the market begins focusing on the micro-economics rather than the macro-economics. We will however be looking to increase our equity weighting, if and when the TSX is able to break its downward pattern over the last several months. Below we highlight areas in fixed income and equity markets that we believe to be attractive.

Equity Themes

- Low beta trades continue to fare well: As we anticipate volatility-squared to be elevated in the first half of 2012, stocks that are less sensitive to market movement, or those with a lower beta, will likely outperform. Although lower beta stocks participate less on the upside, they also capture less of the downside, which is critical when equity market volatility is elevated. Cyclical stocks on the other hand, tend to have a higher beta and outperform when the market is trending higher as they capture more upside and downside market movements. As the year progresses, however, and should the market get further clarity on a resolution to the European sovereign debt issues, that may be a more opportune time to rotate to more cyclical stocks. The BMO Low Volatility Canadian Equity ETF (ZLB) is an efficient way for investors to get exposure to a diversified portfolio of lower beta large-cap Canadian equities.

Potential Investment Ideas:
- BMO Low Volatility Canadian Equity ETF (ZLB)
– BMO Equal Weight Utilities ETF (ZUT)
– BMO Covered Call Utilities ETF (ZWU)
– BMO Global Infrastructure Index ETF (ZGI)

- U.S. equities outperform in first half of year: Similar to our position throughout 2011, we remain favourable on U.S. equities, particularly blue-chip multinational names. The Dow Jones Industrial Average (Dow), which was our top-pick for U.S. equity exposure last year, remains our preferred exposure as it still trades at an attractive valuation with a price-to-earnings (P/E) ratio of 12.7x, well below its 10-year average of 16.6x and equivalent to the MSCI World’s current P/E of 12.7x.

On a global macro-economic level, as we expect European sovereign debt issues to remain in the first several months, investors may look to avoid higher volatility areas such as emerging markets and commodity intensive markets as global growth will be uncertain until later in the year. From a technical perspective, the Dow entered a golden-cross where its 50-day moving average (MA) crossed above its 200-day (MA), leading to further buying, thus creating a tailwind. A break above last April and June’s highs would be seen as further confirmation of a U.S. equity breakout. Investors that are looking to enhance income and potentially mitigate some volatility may want to consider a covered call strategy on the Dow.

Tags: Alfred Lee, Asset Management Inc, Cmt, Control Risk, Economic Risk, Global Macro, Investment Environment, Investment Strategist, Investor Sentiment, Market Moves, Market Volatility, Paced Market, Policy Response, Portfolio Construction, Pull Factors, Rapid Changes, Relative Strength, Sovereign Debt, Strategic Asset Allocation, Strategy Report, Structured Investments
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Africa: Opportunities in Nigeria, Ghana and Kenya (Mobius)

Thursday, April 28th, 2011

by Mark Mobius, Vice Chairman, Franklin Templeton Investments

Those who are optimistic about Africa say that after many years of colonialism, it is beginning to demonstrate its potential. The continent does have its detractors, who say that while it may have been free of colonial rule for 60 years, the continent continues to battle poverty, corruption, AIDS and armed conflict. However, while Africa does have challenges, I am encouraged by another side of Africa that is gradually emerging with the development of capital markets, consumerism and technology.

(Mark Mobius visits a paper factory, in photo)

I believe the opportunities for the development of Africa’s markets are appealing primarily because of the strong growth numbers now emerging out of the continent. Africa is expected to grow more than 7% annually in the next 20 years, due to an improving investment environment, better economic management and China’s rising demand for Africa’s resources.[1] More than 100 African companies have revenues in excess of $1 billion.[2] Africa also has impressive stores of resources, not only in minerals but also in food — 60% of the world’s uncultivated arable land is found in Africa.[3] As global demand for hard and soft commodities continues to grow, I believe Africa is in an enviable position with its vast natural resources. The potential for long-term growth in consumer-related areas is also very attractive, with around 1 billion inhabitants on the African continent.[4] These are people, just like many others all over the world, with aspirations to own their own homes and buy possessions such as cars, refrigerators, washing machines and the like.

Within Africa, Nigeria is one of the frontier markets that I like. The country has a population of about 155 million people.[5] It is rich in oil and gas reserves and raw materials such as iron ore, coal and bauxite. In addition, its climate and large areas of fertile land lend themselves favorably to agriculture. Nigeria’s economy has benefited from strong commodity prices; it is estimated to have grown 7.4% in 2010 and is forecasted to grow 7.4% again in 2011.[6] The highly-anticipated Nigerian presidential election may be seen by many as a measure of the country’s progress and stability despite the clashes and unrest running up to the election. Our local sources remain confident about the elections overall and are not expecting any significant derailing event. We share this sentiment for the most part, given the current positive economic environment, fueled by high oil prices, as well as more tangible reforms in the country. Moreover, banks in Nigeria are particularly interesting. In our view, the government’s recent bailout of banks has made the nation’s bank stocks cheap, creating some very interesting investment opportunities.

I also see a lot of potential in markets such as Ghana and Kenya. Ghana was the first sub-Saharan country in colonial Africa to gain independence. Although it endured an extended period of military rule, a new constitution and multi-party politics were introduced in 1992. Currently, Ghana is seen by many as one of the most politically stable democracies in sub-Saharan Africa. We are excited about the prospects for consumer-related sectors in this market, given its relatively young and dynamic population of more than 20 million.[7] The country is also rich in natural resources such as oil and gold. Oil production in the offshore Jubilee field commenced in December 2010 and is likely to make a significant contribution to the country’s economic growth going forward. Of course, related investment in infrastructure is also likely to require financing, so we are looking closely at the financial sector as well.

The Kenyan economy appears to be doing well at the moment. The post-election violence in late 2007 and early 2008 took many by surprise, but it culminated in the establishment of a coalition government and the adoption of a new constitution in 2010, creating a solid foundation for future stability and growth. Kenya’s position on the east coast of Africa allows it to act as a hub for trade and investment flows from the east into the rest of the continent. Exports, predominantly tea and horticultural products, have recovered strongly, and the tourism sector is also seeing a strong rebound in the form of incoming foreigners.

There are also many challenges to investing in Africa. In my next post, I will discuss these further as well as my overall outlook on the region.

Tags: Africa Nigeria, African Continent, Arable Land, Armed Conflict, Bauxite, Colonial Rule, Colonialism, Detractors, Economic Management, Fertile Land, Franklin Templeton Investments, Frontier Markets, Gas Reserves, Global Demand, Gold, Growth Numbers, Infrastructure, Investment Environment, Iron Ore, Mark Mobius, Nigeria Ghana, Soft Commodities
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The Death of Equities = The Birth of a New Bull?

Tuesday, October 26th, 2010

The Fundamentals of Recoveries (October 2010)

Commentary on the health of equity markets today and the perils of investing while looking backwards. Will McKenna interviews Tim Armour and Jim Dunton, portfolio managers, with Capital Research and Management Company.

Featuring:
Tim Armour, Portfolio manager, Capital Group*
Jim Dunton, Portfolio manager, Capital Group*

*Portfolio manager with Capital Research and Management Company; does not manage Capital International portfolios.

1. Recovery off to a slow start – but it’s just the start (VIDEO, 5:12)
2. The perils of investing while looking backwards (VIDEO, 3:04)
3. Opportunities across a wide swath of companies (VIDEO, 3:29)
4. Strong corporate fundamentals an encouraging sign (VIDEO, 3:01)
5. Reflections on the presidential cycle (VIDEO, 1:53)

You may watch all of the above videos by clicking HERE, or on the image below. To view all 5 chapters visit “Select Chapter.”

The fundamentals of recoveries

by Capital International Asset Management

1. Recovery off to a slow start — but it’s just the start

Craig Strauser: Hello. I’m Craig Strauser. Welcome to this edition of Capital International Perspectives. In this program, you’ll hear the latest insights from veteran portfolio counselors Tim Armour and Jim Dunton. When my colleague Will McKenna sat down with Tim and Jim to talk about market recoveries, the topics ranged from company fundamentals and investment opportunities today to presidential cycles and the tendency of investors to gaze into the rearview mirror when calculating their next move.

To start things off, Will asked Jim and Tim to assess the current recovery.

Will McKenna: Let’s start by talking about the current investment environment. Jim, you’ve invested through a number of full market cycles in your more than 40 years in the business. How would you characterize where we are at this stage of the recovery, and where do you see us going from here?

Jim Dunton: There’s a large body of economic evidence on a worldwide basis that any kind of recession that emanated from a financial crisis [like the one] that we’ve just gone through was going to evolve into a deeper recession than any that we would typically experience; there would be a longer recession than any that you typically experience, and, what’s more, the recovery itself would be much slower than normal.

Well, that’s exactly what we’re going through. We now are one year into the [U.S.] recovery, and it’s been very slow — like 3% real GDP. But it’s also important to bear in mind that it is underway. And once recoveries get started, they typically go a long time. The last cycles were seven years, 10 years, nine years; the one before that, eight. The typical cycle is seven to 10 years long, not one year long. So, one year into the recovery — which is where we are now — is not exactly the time to get overly concerned that the recovery has ended. We, in fact, just started.

But I think if you look also at the details, you would feel comforted by the fact that [U.S.] employment is, in fact, gaining ground; it has been all year. The number of hours that are worked is increasing. The number of people employed is increasing. And, importantly, the temporary workers are probably up sixfold from what they normally are in a recovery, which means that a lot of companies are hiring temporary people until they find out what the full status of the current economic programs are, the stimulus programs, the tax programs, the health programs — as to what all that is going to cost corporations before they want to fully employ people.

We’re through, I think, the worst of the recession, and we’re in a recovery mode, which I believe, from my point of view, is going to go on for the next eight or 10 years. So, I think we are slowly gaining ground — slowly gaining ground — but gaining ground nonetheless.

And it’s important that you recognize that what the end of the cycle looks like is more inflation [and] higher interest rates; that’s the typical end of a cycle many years from now. But it does suggest that between here and there are rising corporate profits, rising inflation, rising interest rates and probably a very healthy stock market over that period.

Tim Armour: The overarching issue, I really think — as with any recovery — is that it will be an up-and-down process. There’ll be bits of information or bits of data that come out that are either positive or data that appears that we’re either slowing down again or retrenching, which looks negative. I think one really has to keep an eye on the long run and see what’s happening with corporations, what’s happening with consumers. In the U.S., there’s been a reliquification on the consumer end of things. Consumers went into this period pretty indebted. The savings rate is up a lot in short order, and consumer spending — although not strong by any definition — certainly has maintained a reasonable level.

At some point here, we need to see employment growth in the U.S. pick up and consumers return to spending at a somewhat higher rate if we’re going to really see GDP [gross domestic product] growth here in the U.S. be stronger. But my expectation is that will happen ultimately; it’s more a question of time. And looking at past cycles, you can find any experience along that spectrum of either a more rapid recovery or a slower one. Having lived through some of these in the past, I think, makes us more comfortable that, really, the way to invest in this kind of period is identify the best companies out there, with good fundamentals, and don’t worry so much about the economic backdrop.

2. The perils of investing while looking backwards

Will McKenna: Given what they’ve been through over the past couple of years, a lot of investors are nervous about putting their money in the stock market today. What perspective could you offer, given your experience, about the wisdom of investing in stocks in this environment?

Jim Dunton: Cycles generally develop as I’ve outlined, and that is that you go from paranoia and fear through the evolution of employment growing again, of business getting back together, of resources being used up. And as they’re used up, inflation appears, and the [U.S.] Fed needs to control that. The standard cycle — it’s happened that way every time. There’s no reason to expect this time to be any different.

It is true, of course, that in the last 10 years, the average investor has been hit by two terrible recessions and two very significant stock market declines. It’s enough to scare the average person, for sure. And in the current period, of course, there’s just a plethora of commentary about the difficulty of getting the economy going, of the difficulty of getting people back to work and so forth. But that happens every time. That is what the bottom of a recession — the early part of the recovery — looks like. So, it doesn’t feel any different to me, having been through a lot of them.

Stock market participants are generally always chasing the last good story. And, of course, the last good story is the [U.S.] bond market — which, in fact, has had positive returns for the last 10 years and the equity market has not. Unfortunately, people seem to invest by looking in a rearview mirror. And that’s very unfortunate, because we saw the same thing happen in the period in the late 1990s in the tech blow-off, or in the Nifty Fifty in the 1970s, in the oil run-up in the 1980s. I mean, all these things were chased by people looking backwards.

Tags: Armour, Brazil, Capital Group, Capital Research And Management Company, China, Colleague, Company Fundamentals, Counselors, Dunton, Economic Evidence, Group Portfolio, India, International Asset Management, International Group, International Perspectives, International Portfolios, Investment Environment, Investment Opportunities, Market Cycles, Mckenna, oil, Perils, Portfolio Manager, Portfolio Managers, Rearview Mirror, Silver, Video 3, Wide Swath, Worldwide Basis
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Ira Sohn Conference Notes: Investment Ideas from Arbess, Grantham, Einhorn, Zell, Klarman, Ferguson, Tepper

Thursday, May 27th, 2010

The Annual Ira Sohn Conference plays host to some of the most prolific hedge fund managers and other keynote guests each year. This article is a summary of the thoughts of some of this year’s guest speakers.

This article is a guest contribution from BTIG’s Mike O’Rourke, courtesy of ZeroHedge.com.

Jonathon Jacobson, Highfields Capital Management

Highfields is a long term value investor. Jacobson is worried about the current investment environment. Despite all of the looming macro headwinds the biggest threat is the “Clowns & Climate in Washington D.C.” Several states are hovering on the edge of bankruptcy and we the taxpayers will wind up paying for those losses. The administration has embarked upon a process of rolling vilification of industry after industry, Health Care, financial Services, Energy, Cable, Soft Drink, etc. The perception in Washington is that if someone has done well in this country, it was done at someone else’s expense. Rather than address the issues politicians will continue to “kick the can down the road.” Fundamentals are hard to handicap when the rules are constantly changing.

Jacobson is bullish on Sallie Mae (SLM). The company is currently misunderstood by the market because it is in transition from being a lending based company to a fee based company. The key point is if Sallie Mae were strictly in a run off mode as the government ends cuts back the FFELP program (which they are not) it would be worth $15, even with a conservative 12% discount rate. It currently has a $5 Billion market capitalization and is trading 2x pre-tax, pre-provision earnings and is trading 4x pre-tax earnings. Most competitors have gone out of business or in the process of exiting the business. Jacobson believes Sallie Mae is worth somewhere between $15-$25 per share. In 2011 he is forecasting $0.80 -$1.00 in earnings power. Additionally the company is well positioned to acquire additional servicing rights as competitors exit the business. Sallie Mae is larger than the 3 other government approved student loan servicers combined. Management is acquiring stock and aligning their interests with shareholders. 87% of the balance sheet is funded to term. Credit losses peaked in Q3 2009. Main risk is regulatory, but if management believes the best move for shareholders is to liquidate the company, they will.

Sam Zell

The theme of the election was change. A major change has occurred within the American economy. One party political dominance is changing how investors will act in the future. It is an environment of survival of the fittest. Zell presented a music video that was an ode to Charles Darwin. Extinction is for those who do not adapt and evolve. The winner is the one who builds the better boat, not the one who rearranges the deck chairs. He who adapts succeeds.

Dan Arbess, Perella Weinberg Partners

The foundations of the global economy are shifting. Fiscal imbalance and sovereign risk are only symptoms of the problems that will fuels this change. The trend of deficit spending over-consumption in the west and the export driven production of the east needs to reverse. Consumption in the east must rise and the west must exercise restraint to bring a semblance of balance back. Macro squalls can wreak havoc on a portfolio, so effective hedging strategies are important. The key them Arbess proposed was “Shaking hands with China.” The way to play the theme is to be long those companies who sell China what it needs and short those who make products that the Emerging Markets can make better. Consumption is only 35% of GDP in China, half of what it is here and the Chinese save half of what they make. China alone will increase its urbanization rate from 46% to 58%, adding 210 million urban residents in 70 million households. They need a lot of stuff to urbanize 20 million people a year, and Arbess wants to be long the guys who will be selling it to them.

Arbess believes weaker currencies and weaker sovereign credits should be sold. He is bearish on the Euro and on EU sovereign debt. This is the endgame of the debt supercycle and confidence in fiat currencies will erode, as such he likes Gold. The deflationary economic environment will lead to monetary debasement. The irony today is post-Maoist China has no entitlements and needs to create some to boost domestic consumptions and the U.S. more entitlements than ever.

He likes commodities and the commodity nations in the G-20 and even Africa, both fundamentally and as a currency debasement hedge. He says own junior mining companies that own big assets close to their customers. These will often start out trading at discounts as much as 90% to their cash flow potential, and often show less downside beta than large caps.

Tags: Bill Gross, Brazil, Canadian Market, China, Commodities, Einhorn, Emerging Markets, Ffelp Program, Gold, Government Ends, Guest Speakers, Health Care Financial, Hedge Fund Managers, Highfields Capital Management, Industry Health, Investment Environment, Investment Ideas, Ira Sohn, Ira Sohn Conference, Jacobson, Key Point, Klarman, Market Capitalization, O Rourke, Sallie Mae, Soft Drink, Student Loan Servicers, Tax Earnings, Value Investor, Vilification, Zell
Posted in Bonds, Brazil, Canadian Market, Commodities, Energy & Natural Resources, Gold, Markets, Oil and Gas, US Stocks | Comments Off

Howard Marks: “I’d Rather Be Wrong”

Sunday, March 28th, 2010

This article is a guest contribution by Howard Marks, Oaktree Capital.

I’d Rather Be Wrong

Today’s positions seem unusually unyielding.  The Republicans’ conservative base demands adherence to the no-tax pledge, while liberal Democrats demand that their representatives prevent cuts in spending for domestic programs. These hardened (and polar) positions greatly narrow the possible grounds for problem-solving.

Just a few weeks ago, I published “Tell Me I’m Wrong,” my latest list of things in the investment environment that I find worth worrying about.  I’m going to devote a few pages here – I promise this’ll be the shortest memo in years – to a point I touched on in “What Worries Me” (August 28, 2008) but omitted from the more recent piece.

This memo will be about one of the inarguably most depressing topics of our time: the seeming inability of governments and politicians to solve – or even tackle – the financial problems we face. Here’s the situation in Washington:

• Many of our most sweeping financial problems, such as deficits, national debt, healthcare costs, Social Security and Medicare, are long-term problems.
• It’s important that we tackle them early, since limiting their further growth can reduce the eventual cost and difficulty of fixing them.
• But the process of solving them will be unpleasant in the short term, entailing bad-tasting medicine, while the benefits will only be seen in the long term, when today’s politicians will have left the stage.
• Finally, most politicians’ main concern seems to be getting themselves and other members of their party elected.  Voting for short-term pain in order to solve long-term problems is generally viewed as the wrong way to go about that.

This memo is inspired by two excellent newspaper articles that appeared within the last month: “Party Gridlock Feeds New Fear of a Debt Crisis,” by Jackie Calmes (The New York Times, February 17)[*] and “Perils of the California Model” by David Wessel (The Wall Street Journal, March 4).[†] Indicating their importance, The Times piece ran in the upper right-hand corner of the front page, always the place for the top story of the day, and the Journal story was carried on page A2.  I’ve included links below in the hope they’ll increase your likelihood of reading them.  As Calmes wrote in The Times (in both cases below, emphasis added):

After decades of warnings that budget profligacy, escalating health care costs and an aging population would lead to a day of fiscal reckoning, economists and the nation’s foreign creditors say that moment is approaching faster than expected, hastened by a deep recession that cost trillions of dollars in foregone tax revenues and higher spending for safety-net programs.

Yet rarely has the political system seemed more polarized and less able to solve big problems that involve trust, tough choices and little or no short- term gain. The main urgency for both parties seems to be about pinning blame on the other, before November’s elections, for budget deficits now averaging $1 trillion a year, the largest since World War II relative to the size of the economy.

Two weeks later, Wessel put it this way in The Journal:

The stalemate over health-care legislation, despite widespread acknowledgment that the status quo is unsustainable, underscores the inability of the political system to cope with complex, long-term fiscal issues. . . .

Today, the deficits projected are bigger than ever, baby boomers are beginning to retire, health-care costs keep rising and, surely, we’re closer to the day when Asian governments grow reluctant to lend ever-greater sums to the U.S. Treasury at low interest rates.

The Congressional Budget Office projects current policies would take the deficit from today’s 10% of gross domestic product to over 20% by 2020 and over 40% by 2080.  Yet today’s politics appear more toxic, and the ranks of congressional leaders with the skill and desire to fashion compromises instead of talking points are depleted.

Here we have remarkably similar themes voiced in what some would call “a Democrat newspaper” and in a stalwart of the pro-business Republican establishment.  Both articles complain that the current trends in politics reduce the likelihood that major problems will be tackled and solved . . . a rare example of agreement across the aisle.

That brings me to the subject of one of today’s greatest stumbling blocks, the absence of that elusive ideal: bipartisanship. Let’s discuss this issue in principle.  It’s likely that the “ins” always think the fact that voters gave them control means they should mostly get their way, and that “bipartisanship” consists of the “outs” going along with them.  The outs, on the other hand, don’t take the election results to mean the minority has no rights, and they feel perfectly within their rights to use Congress’s rules and processes to fight for their point of view (which, on us-versus-them issues, equates to thwarting the efforts of the ins).

The Times article points out ironically that when control of government is divided between the two parties, they both feel some responsibility for solving problems, while today, with full control seemingly in the hands of the Democrats, the Republicans are free to view their only role as dissenting and obstructing.  And as the party in control, the Democrats evidently feel no obligation to yield on their positions.

Frankly, I wouldn’t be so unhappy if I were sure today’s battles were being fought over principles.  What worries me most is the appearance that, instead, they’re being fought for personal and political advantage and to win elections.

Today I think few legislators from either party will vote for anything that would let members of the other party claim to have accomplished something.  That may be an exaggeration, but I think it’s more true than false.  And I think that’s behind the recent decisions by a number of senior legislators not to run for re-election.  I’ve had the privilege of getting to know Byron Dorgan, the senator from North Dakota, and I have no trouble believing that was behind his decision.  We’ve spoken about his frustration with the contentious environment in Washington.  More recently, Evan Bayh of Indiana also said he wouldn’t seek another term in the Senate because it’s impossible to get anything done in dysfunctional Washington.  Here’s how he put it in a February 21 Op-Ed piece in The Times:

There are many causes for the dysfunction: strident partisanship, unyielding ideology, a corrosive system of campaign financing, gerrymandering of House districts, endless filibusters, holds on executive appointees in the Senate, dwindling social interaction between senators of opposing parties and a caucus system that promotes party unity at the expense of bipartisan consensus.

Today’s positions seem unusually unyielding.  The Republicans’ conservative base demands adherence to the no-tax pledge, while liberal Democrats demand that their representatives prevent cuts in spending for domestic programs. These hardened (and polar) positions greatly narrow the possible grounds for problem-solving.

Read the whole article here.

Tags: Adherence, Calmes, Debt Crisis, February 17, Gridlock, India, Investment Environment, Liberal Democrats, Medicare, National Debt, New York Times, Oaktree Capital, Perils, Politicians, Republicans, Seeming Inability, Social Security, Social Security And Medicare, Tax Pledge, Topics Of Our Time, Wrong Way
Posted in India, Markets | Comments Off

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

Sunday, December 28th, 2008

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

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

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

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

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

Source: Daryl Cagle

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, December 22, 2008.

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

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

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

Week’s economic reports

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

Source: Yahoo Finance, December 26, 2008.

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

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

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

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

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

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

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

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

Source: Daryl Cagle

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

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

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

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

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

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

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

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

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

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

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

Source: CNBC, December 22, 2008.

BNN: Conversation with BMO’s strategist Don Coxe

Source: BNN, December 23, 2008.

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

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

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

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

Source: CNBC, December 26, 2008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Fox News, December 16, 2008.

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

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

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

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

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

Click here for the full article.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Marketplace, December 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: CNNMoney.com, December 26, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, December 24, 2008.

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

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

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

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

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

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

Source: Bespoke, December 23, 2008.

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

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

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

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

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

Source: Bespoke, December 22, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: CNBC, December 23, 2008.

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

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

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

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

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

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

Source: Commodity Online, December 27, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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