Why Sovereign Defaults Matter… and Why Spain is a BIG Deal

Wednesday, May 9th, 2012

by Graham Summers, Phoenix Capital Research

The following is an excerpt from my latest client letter explaining why Spain is such a big deal and why when it defaults it’s game over for the EU.

I’ve received a number of emails asking me why Spain is such a big deal for the global banking system. To fully understand the implications of Spain, you first need to understand how the global financial system works “behind the scenes.”

We’ll start first with the US financial system, particularly the Primary Dealers which are the real controllers of the monetary supply (via lending).

If you’re unfamiliar with the Primary Dealers, these are the 18 banks at the top of the US private banking system. They’re in charge of handling US Treasury Debt auctions and as such they have unprecedented access to US debt both in terms of pricing and monetary control.

The Primary Dealers are:

1. Bank of America

?????2. Barclays Capital Inc.

3. BNP Paribas Securities Corp.

4. Cantor Fitzgerald & Co.

5. Citigroup Global Markets Inc.

6. Credit Suisse Securities (USA) LLC

7. Daiwa Securities America Inc.

8. Deutsche Bank Securities Inc.

9. Goldman, Sachs & Co.

10. HSBC Securities (USA) Inc.

11. J. P. Morgan Securities Inc.

12. Jefferies & Company Inc.

13. Mizuho Securities USA Inc.

14. Morgan Stanley & Co. Incorporated

15. Nomura Securities International Inc.

16. RBC Capital Markets

17. RBS Securities Inc.

18. UBS Securities LLC.

These are the firms that buy US Treasuries during debt auctions. Once the Treasury debt is acquired by the Primary Dealer, it’s parked on their balance sheet as an asset. The Primary Dealer can then leverage up that asset and also fractionally lend on it, i.e. create more debt and issue more loans, mortgages, corporate bonds, or what have you.

Put another way, Treasuries, or US sovereign bonds, are not only the primary asset on the large banks’ balance sheets, they are in fact the asset against which these banks lend/ extend additional debt into the monetary system.

A similar banking system exists in Europe though in that case there are no single unified EU bonds/ Primary Dealers. Instead we have 17 countries all of which issue sovereign bonds that their largest banks purchase and park on their balance sheets as assets against which they lend.

So, let us consider Spain.

According to data collected from the Bank for International Settlements, IMF, World Bank, UN Population Division, UK banks are sitting on €74 billion worth of Spanish sovereign debt while French banks and German banks are sitting on €112 billion €131 billion, respectively.

So, as a ballpark estimate, roughly €317 billion worth of Spanish sovereign debt is sitting on banks’ balance sheets in these three countries. This debt is then recorded as an asset against which these banks have leant out money to corporations, property developers, etc. at a ratio of more than 10 to 1.

?

Let me explain this last point. Basel III requirements which have yet to be implemented will require banks to have equity and Tier 1 capital equal to roughly 10% of risk weighted assets. Before this, Basel II only required equity and Tier 1 capital equal to 6% of risk weighted assets thereby permitting leverage of 16 to 1.

However, these ratios are only for risk-­?weighted assets. Let me explain this term: a bank’s risk weighted assets are determined on its in-­?house models based on how likely it is that a given asset (loan) will enter default.

In other words, the banks get to determine themselves how risky their loan portfolio is and then leverage their balance sheets accordingly. This is like asking an alcoholic to assess how much alcohol he should have.

Oh, and bank executives are highly incentivized to downplay the risks as their pay is often based on returns on equity (which in turn is based on leverage). So it shouldn’t be a surprise that EU banks are downplaying the risk to their portfolios.

What I’m trying to say here is that the entire EU banking system is based on capital requirements that are an absolute joke. The banks not the regulators determine how risky their assets are and leverage their balance sheets to the maximum levels possible based on their in-­?house assessments.

And to top it off, modern financial theory believes sovereign bonds to be “risk free.” So banks can use their sovereign bond exposure as a strength against which to balance out their riskier loans.

THIS is the fate that awaits the European banking system. Every single EU bank has leveraged itself based on financial models that consider sovereign bonds to be “risk free.” Moreover, EVERY EU bank is leverage to the hilt based on its OWN in-­?house assessment of the riskiness of its loan portfolio.

So… when Spain defaults (and it will) you will very likely find the entire Spanish banking system collapse. This in turn will bring the entire EU banking system to its knees as collateral calls and margin calls are made across the board when EU banks’ portfolios take a “haircut” on their senior most assets.

This is why Greece was a big deal and why the ECB and EU political leaders were so careful to manage its default… because they know that if anything resembling a messy default occurs, the ENTIRE banking system can be taken down.

With that in mind, the clock is ticking on Europe. On that note, I fully believe the EU in its current form is in its final chapters. Whether it’s through Spain imploding or Germany ultimately pulling out of the Euro, we’ve now reached the point of no return: the problems facing the EU (Spain and Italy) are too large to be bailed out. There simply aren’t any funds or entities large enough to handle these issues.

So if you’re not already taking steps to prepare for the coming collapse, you need to do so now. I recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.

This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com

Good Investing!

Graham Summers

PS. We also feature numerous other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.

Tags: Amp Company, Barclays Capital, Bnp Paribas, Bnp Paribas Securities, Cantor Fitzgerald, Citigroup Global Markets, Citigroup Global Markets Inc, Daiwa Securities America, Deutsche Bank Securities, Deutsche Bank Securities Inc, Goldman Sachs, Hsbc Securities, J P Morgan Securities Inc, Mizuho Securities Usa Inc, Nomura Securities International, Nomura Securities International Inc, Rbc Capital Markets, Securities America Inc, Sovereign Bonds, Ubs Securities
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U.S. Equity Market Radar (November 21, 2011)

Saturday, November 19th, 2011

U.S. Equity Market Radar (November 21, 2011)

The domestic stock market as measured by the S&P 500 Index was lower this week by 3.81 percent. All ten sectors of the S&P 500 declined. The best-performing sector for the week was consumer staples which decreased 1.16 percent. Other top-three sectors were utilities and telecom services. Financials was the worst-performer, down 5.57 percent. Other bottom-three performers were materials and energy.

Within the consumer staples sector the best-performing stock was Reynolds American, up 3.11 percent. Other top-five performers were Philip Morris International, PepsiCo, Sysco, and Lorillard.

Strengths

• The construction materials group was the best-performing group for the week, up 5 percent, led by its single member, Vulcan Materials. The largest producer of construction aggregates in the U.S. made a presentation this week at the Stephens Inc. Fall Investment Conference.
• The tobacco group outperformed, gaining 1 percent. Reynolds American and Philip Morris International both advanced during the week.
• The gas utility group outperformed, rising 1 percent on strength in its largest member, ONEOK, which made a presentation this week at the RBC Capital Markets Master Limited Partnership Conference.

Weaknesses

• The health care facilities group was the worst-performing group for the week, down 13 percent, led down by its single member, Tenet Healthcare. Health care providers are waiting to see what kind of budget cuts the “Super Committee” might make, or whether cuts would be made by sequestration. In September, Tenet Healthcare estimated that sequestration would result in a $40 to $54 million cut to its annual cash flow.
• The coal & consumable fuel group lost 12 percent. In a coal industry report this week, a major brokerage firm stated that, in its view, the stocks are discounting too high of a price for coking coal, and that thermal coal fundamentals are also showing signs of weakness that could surprise the market.
• The oil & gas refining & marketing group underperformed, losing 12 percent. U.S. refiners declined on an announcement that the direction of flow in the Seaway pipeline will be reversed. This may increase the cost of crude oil and thus decrease refining profit margins.

Opportunities

• There may be an opportunity for gain in merger & acquisition transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• A mid-cycle slowdown in the domestic economy would be negative for stocks.
• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.

Tags: Brokerage Firm, Coal Industry, Construction Aggregates, Construction Materials Group, Consumer Staples, Domestic Stock Market, Facilities Group, Fuel Group, Health Care Facilities, Health Care Providers, Market Pulse, Market Radar, Master Limited Partnership, Oneok, Partnership Conference, Performing Group, Philip Morris International, Rbc Capital Markets, Stephens Inc, Thermal Coal, Tobacco Group, Vulcan Materials
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Valuation Gap Makes Gold Miners Attractive But All Miners Aren’t Created Equal

Saturday, August 27th, 2011

Valuation Gap Makes Gold Miners Attractive But All Miners Aren’t Created Equal

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Goldwatchers were reminded gold’s volatility works in both directions this week, with prices falling more than $100 an ounce in just one day. We forecasted the selloff last week, explaining a 10 percent correction would be a non-event. Once again the CME Group hiked the exchange’s margin requirements for gold investment to shake out overleveraged speculation. This is a positive for long-term investors.

One market trend that seems to be attracting more and more attention is the large performance gap between gold bullion and gold stocks. The price of gold bullion has increased roughly 28 percent in 2011, while the S&P/TSX Gold Index was down 1 percent as of Monday. This shouldn’t come as news for subscribers to these weekly alerts; we first discussed this opportunity back on June 17: Will Gold Equity Investors Strike Gold?

A report this week from BMO Capital Markets offered one reason behind the performance gap, “The rate of change in the gold price has been high over the past decade, perhaps too high for investors to gain confidence in that price as sustainable for an equity investment decision.” BMO says it was hard to imagine gold prices could sustain a $1,000 an ounce levels five years ago, but “now it’s hard to see the gold price falling to that level.”

Using the implied value of a defined group of global gold stocks, it calculated the internal rate of return to measure how gold stocks have underperformed compared to the yellow metal. Over a period of nearly 20 years, BMO’s group of global gold stocks has never been this inexpensive. Only twice—during the Tech bubble in 2000 and the financial crisis of 2008—has the internal rate of return compared so closely with the price of gold bullion.

RBC Capital Markets also sees potential in unpopular, undervalued gold equities and urged readers to take “a fresh look” at gold companies in a report this week. RBC says gold companies currently have margins that are at record highs and it believes margins could be approximately $1,200 an ounce for the next 12 to 24 months. This is substantially higher than the 10-year average of $320 an ounce. Comparatively, many current projects were economically sound at $700-$1,000 per ounce gold prices, creating $300-500 an ounce margins.

Right now, BMO calculates the total cost to produce an ounce of gold at roughly $900 an ounce, while the company can turn around and sell that ounce for upwards of $1,400. This puts margins near 40 percent, roughly twice what they were in 2007 and four times higher than in 2000.

Increased profit margins put more money in gold company coffers and this is reflected in the unprecedented amount of free cash flow (FCF), RBC says. The firm says the industry has reached an inflection point with a “substantial wave of free cash flow” coming over the next 1 to 2 years.

You can see this incredible increase in Tier 1 producers, such as Barrick, Goldcorp, Kinross and Newmont Mining. Looking at their trailing 12 months of free cash flow over 10 years, FCF never rose above $2 billion. However, following the trend in gold prices, FCF among these Tier 1 companies stair-stepped up to $4 billion.

Looking forward over the next few years, RBC estimates that if the price of gold remains at $1,850, FCF should stair-step even further, reaching nearly $12,000 by the end of December 2013. BMO estimates the global gold companies will accumulate net cash of $120 billion by 2015 if gold prices remain elevated.

Rising FCF is especially relevant to shareholders, as it allows the gold company to use that money to invest in projects that should enhance shareholder value. This could include pursuing new projects, making acquisitions, reducing debt or paying dividends. Many gold companies are opting for the latter and increasing dividends but these increases haven’t kept up with the pace of rising earnings. The average payout ratio was roughly 20 percent in 2008 but currently sits around 10 percent in 2011.

BMO says, “A dividend policy linked to the financial performance of the company offers investors additional leverage to the gold price. The provision of a meaningful and sustained dividend has the potential to broaden investor appeal and to instill fiscal responsibility for management.” I’ve often echoed similar sentiments.

BMO says gold stocks are currently trading at historically cheap levels, which the company sees as an opportunity investors can take advantage of. RBC attempts to quantify that opportunity by saying “if gold prices remain elevated and/or investors accept a higher long-term gold price, we could see 25-50 percent upside in equities.”

How to Pick Gold Miners
With gold miners, in general, so attractively valued relative to the gold bullion price, the question becomes: Which stocks are the most compelling and have the best leverage to robust precious metals prices?

First, an investor could begin the process through elimination. FINRA highlighted some of the key warning signs when analyzing gold stocks, such as claims of being a “buyout target,” or speculative claims about reserve growth, and grandiose predictions of exponential growth, to name a few. FINRA says investors should be wary of “free lunch” programs that claim profits in gold are “easy,” and we agree.

Research from geologist Robert Sibthorpe shows that only one in 2,000 (0.05 percent) companies would ever find 1 million ounces of gold, and that only a third of those would be able to turn that find into production. In addition, research from Barry Cooper at CIBC shows that these discoveries are becoming even more difficult. There were 51 gold/copper porphyry discoveries of +3 million ounces during the 1990s, but only 24 of such discoveries occurred during the 2000s.

In order to find the diamonds in the rough, I use what I call “The Five M’s” for mining stocks. I discussed this process thoroughly in The Goldwatcher: Demystifying Gold Investing, an investor’s guidebook to gold investing I co-authored with John Katz a couple of years ago.

The Five M’s are: Market cap, Management, Money, Minerals and Mine life cycle.

1) Market Cap
Market cap is simply the number of shares outstanding multiplied by the stock price. The gold sector is broken down into three sectors by market cap: Seniors (market caps >$10 billion), intermediates (between $2 and $10 billion) and juniors (<$2 billion).

If a gold company has 10 million shares outstanding at $1 per share, the company is valued at $10 million. The question any investor should ask is, “Is this company really worth $10 million?” If the market pays $25 per ounce of gold in the ground, the company should be valued at $25 million (1 million ounces in reserves X $25 an ounce). If the company’s market cap is only $10 million, it may look undervalued. Accordingly, if the company’s market cap is $50 million, it may appear to be overvalued.

For larger gold companies, an investor can measure a company’s market cap against its production level, reserve assets, geographic location and/or other metrics to establish relative valuation. For junior mining companies—an area of focus for our World Precious Minerals Fund (UNWPX)—we look for balance sheets with ample cash for exploration and development of prospective reserves, but we resist paying more than two times cash per share.

2) Management
Essentially, management of mining companies must have both explicit and tacit knowledge to be successful. Explicit knowledge is academic. How many PhDs or masters in geology/engineering does company management have?

Tacit knowledge is more personal in nature and much more difficult to obtain. It is acquired over time through first-hand observation, experience and practice. How many years have they worked in the industry? Has management ever successfully completed a project with similar geopolitical/environmental constraints?

Success in the mining sector, especially the juniors, relies on the ability to raise capital and communicate with investors. Often the heads of junior companies are geologists or engineers who have no relationships in the brokerage business. This lack of relationships impedes their ability to generate market support. Historically, companies with the highest number of retail shareholders have the highest price-to-book ratios and carry higher valuations than peers.

Some of the most successful company builders in the gold-mining industry are what I call the “financial engineers” – people who have the relationships and understand the capital markets and who know how to hire the best geological and engineering teams. We tend to have more confidence investing in them.

3) Money
Mining is an expensive business. Often, companies burn through substantial amounts of capital before generating their first $1 in cash flow. A gold exploration company has to deliver reserves per share to have a chance at another round of financing. It has to convince the capital markets that it is an attractive investment on a per-share basis.

We call this the “burn rate”—how long will the company’s current cash levels last before it has to return for additional financing. If a junior exploration company has $15 million in cash reserves and is spending $3 million a month, it has five months to deliver enough reserves per share to convince capital markets it is worth the risk.

This calculation can be done quickly. Exploration reserves are generally valued at one-third the reserve values of a producing mine—if producing reserves are valued at $150 an ounce, exploration reserves would be $50 per ounce.

The gold-equities market is generally efficient at judging reserves per share, so if the exploration company doesn’t come up with the results necessary to get an evaluation—find gold for less than $50 an ounce—investors quickly lose confidence. There is an old rule when it comes to exploration companies: don’t pay more than two times cash per share if there are no proven assets in the ground.

4) Minerals
Compared to the rest of the mining sector, gold companies have the highest industry valuations based on price to earnings, price to cash flow, price to enterprise value and price to reserves per share.

Companies operating mines that produce gold as well as industrial metals tend to have lower valuation multiples. For example, the current price-to-earnings ratio for Freeport-McMoRan (FCX), is 8x-times forward earnings. This is considerably lower than Yamana (20x), Goldcorp (21x) and Agnico-Eagle (36x). Investors can use the low relative valuations of copper/gold producers to increase their margin of safety in anticipation of an upward move in gold prices.

5) Mine Lifecycle
There are many delays and disappointments during the development and operation of a gold mine. Input costs can rise out of control (such as what happened in 2008 when oil hit $140 per barrel), labor workers can strike, and political/environmental policy shifts such as higher taxes or stricter environmental regulations can shrink margins.

During the exploration and development phase, the price of a gold stock often follows a course that ends up looking like a double-humped camel (see graphic). First there’s euphoria over exploration results that are better than expected. The stock price rises as investors race to buy shares. Then reality sets in – this gold discovery is still years away from being an actual producing mine. At this point, there’s a huge correction in the stock price.

Assuming the company continues down the path to development, its share price drifts sideways until around six months before the first ounce of gold is expected to be produced. At this point, the stock begins a strong new leg up when a more sophisticated set of shareholders come into the market. Eventually the price drops off and then levels as the speculative money moves on to the next hot opportunity and the company transitions from explorer to producer.

U.S. Global’s Expertise
Clearly, the task of picking which gold miners to invest in isn’t easy. We actively travel to mining projects in places such as Colombia, Panama and West Africa to “kick the tires” and ask tough questions of management. This is the value that our investment team at U.S. Global Investors provides for our shareholders and how we seek to generate alpha.

Tags: BMO Capital Markets, Chief Investment Officer, Equity Investors, Frank Holmes, Gold, Gold Bullion, Gold Equity, Gold Index, Gold Investment, Gold Miners, Gold Price, Gold Prices, gold stocks, Internal Rate Of Return, Margin Requirements, Performance Gap, Price Of Gold, Rbc Capital Markets, Strike Gold, Term Investors, U S Global Investors
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The Economy and Bond Market Cheat Sheet (June 20, 2011)

Saturday, June 18th, 2011

The Economy and Bond Market Cheat Sheet (June 20, 2011)

The yield on the 10-year U.S. Treasury note declined 3 basis points this week to end at 2.94 percent.

A fixed-income research report from RBC Capital Markets provided a positive note for municipal bonds, pointing out that the May 2011 employment data included a 30,000 reduction in state and local government employment for the month. The report states that general local government employment (which excludes education jobs) is back to mid-2006 levels, and state general government employment is at levels last seen in January 1999. The report notes that, when analyzed in terms of employees per one thousand population, state general government employment is now about 8.7 per 1,000, a figure which has not been this low since 1976. The report takes issue with “the glib pronouncements in the media about the precarious position of municipal credits.”

The graph below shows the producer price index for the U.S. on a year-over-year basis, not seasonally-adjusted. The last data point for May 2011 shows a rise of 7.3 percent, the fastest rise since September 2008. Excluding food and energy, the year-over-year rise was 2.1 percent.

Strengths

• Initial jobless claims declined by 16,000 to 414,000 in the week ended June 11, below the 420,000 consensus.
• Housing starts in May were at an annual pace of 560,000, above the 545,000 median forecast. Building permits were 612,000, above the 557,000 consensus.
• Retail sales fell 0.2 percent in May from April, less than the 0.5 percent decrease in the forecast.
• The Conference Board Index of Leading Economic Indicators rose 0.8 percent in May. Economists had forecast a 0.3 percent gain.
• The Mortgage Bankers Association’s index of mortgage applications increased 13 percent in the week ended June 10 from the prior week. This was the largest percentage gain since the week of March 4.

Weaknesses

• Wholesale costs in the U.S. rose more than forecast in May. The Producer Price Index rose 0.2 percent month-over-month, more than the 0.1 percent forecast, and it rose 7.3 percent year-over-year compared to the 6.8 percent consensus. Excluding food and energy, the index rose 2.1 percent year-over-year, in line with the forecast.
• The consumer price index in the U.S. rose more than forecast in May, up 0.2 percent month-over-month versus a forecast of up 0.1 percent. It was up 3.6 percent year-over-year in May compared to the 3.4 percent consensus. Excluding food and energy, it gained 1.5 percent year-over-year versus a 1.4 percent forecast.
• The University of Michigan Consumer Sentiment Index decreased to 71.8 in June from 74.3 in May, and it was below the consensus of 74.
• The Federal Reserve Bank of New York’s general economic index dropped to minus 7.8 in June, the lowest level since November. The forecast was for a positive 12.0.
• The Federal Reserve Bank of Philadelphia’s general economic index fell to minus 7.7 in June from 3.9 in May. Readings less than zero signal contraction. The median forecast was 7.
• The National Association of Homebuilders sentiment index for June fell to 13 from 16 in May. The consensus was 16. Readings below 50 mean more respondents said conditions were poor.

Opportunities

• The Fed may be forced into another round of quantitative easing if employment and the economy do not improve soon. This is not consensus and the market is applying low odds of this occurring, but if it were to come to pass, the fixed income markets would likely rally from here.

Threats

• Another Greek bailout appears inevitable and others are likely to follow which increases the eventual risk of default and is a potential threat to the global banking system.

Tags: Bond Market, Employment Data, Fixed Income Research, General Government, Government Employment, Index Of Leading Economic Indicators, Initial Jobless Claims, Leading Economic Indicators, Mortgage Applications, Mortgage Bankers Association, Municipal Bonds, Percentage Gain, Precarious Position, Producer Price Index, Rbc Capital Markets, Report States, State And Local Government, Treasury Note, U S Treasury, Wholesale Costs
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RBC’s Myles Zyblock: The Profitability Miracle? Main Street is Massively Under-Invested

Thursday, April 28th, 2011

RBC Capital Markets’ Chief Institutional Strategist, Myles Zyblock, discusses his insights on how American companies are sustaining their profitability in the post-financial-crisis era.

Myles Zyblock, Chief Institutional Strategist at RBC Capital Markets, talks to Bloomberg’s Tom Keene and Ken Prewitt on Bloomberg Surveillance.

APRIL 19, 2011

SPEAKERS: TOM KEENE, HOST, BLOOMBERG SURVEILLANCE,

MYLES ZYBLOCK, CHIEF INSTITUTIONAL STRATEGIST, RBC CAPITAL MARKETS

KEN PREWITT, BLOOMBERG NEWS

09:10

TOM KEENE, HOST, BLOOMBERG SURVEILLANCE: Now joining us Myles Zyblock, RBC Capital Markets. He’s the 75th equity strategist for RBC. Good morning, sir.

MYLES ZYBLOCK, CHIEF INSTITUTIONAL STRATEGIST, RBC CAPITAL MARKETS: Good morning, Tom. How are you doing?

KEENE: Very good. In there and bouncing off of Alan Blinder’s Wall Street Journal article today, the secretary talked and alluded to a guilded age of income distribution. This equity market recovery we’ve seen, does it talk about markets that are separate of the haves and the have nots? Do we have another guilded age upon us?

ZYBLOCK: You know, my sense here is if you just look at the survey of consumer finances out of the Federal Reserve itself, the ownership of equities obviously concentrated in the hands of the upper income distribution. So as we know, a near 100 percent rally in the stock market over the past couple years has definitely benefited some of the upper income class more so than the rest.

KEN PREWITT, BLOOMBERG NEWS: Well, isn’t that pretty much always the case though?

ZYBLOCK: That is indeed. Well, it is always the case to a degree, but I guess, you know, what a labor economist might look at as you said that the income distribution has never been more skewed as it is today. So in relative terms, I guess the benefits at the margin are going to the upper income class. They have always been going there in level terms, but increasingly so.

KEENE: You have an incredibly powerful page, Myles, and it really goes again, not so much a gilded age, but let’s call it an industrial separation. You have the S&P 500 ex the financials. And you have a chart back 30 years of the net margin of the non-banks. I would just simply editorialize I’m observing a miracle here of profitability, aren’t I?

ZYBLOCK: A miracle – I’m not sure about a miracle, but I would say a lot of hard work and restructuring of corporate America through – Tom, I think the trend upwards, the 30 year trend upward the next financial net margins, is a function of a lot of things.

And a couple I could point to is labor cost savings efforts – some of that is good obviously and bad, like off-shoring and the declining unionization rates. And there is also a lot of innovative progress, like better inventory management systems. And I think these have all come together to push that long term trend higher.

PREWITT: Are we pretty much at the end of that cycle though?

ZYBLOCK: I think we are nearer to the end. I wouldn’t say the end, Ken. It’s – you know, can margins make some new highs over the next few quarters? I think so. You know, my sense here is obviously one of the big concerns that analysts are talking about are commodity price pressures or cost inflation through the commodity complex.

And I think that is going to be more a localized problem. What I mean by that is there are some industries or sectors within the market that are more susceptible to rising commodity prices than others. And some of those include the consumer related segments.

But, you know, talking about a broad-based margin compression, when we look back through time, what really drives margins – the primary driver of margins are still labor costs. And that is, you know, as we estimate, labor costs still account for something like 62 percent of the total cost of doing business.

So if you have an acceleration in wage growth on top of an acceleration in payrolls, that is where you usually see – within a quarter or two, that is where you usually see some more noticeable margin compression, not just the isolated stuff I’ve been hinting at. So in my opinion, I think the margin profile can make some modest gains here. But it will – in my sense, it will start to flatten out as we go into 2012.

KEENE: We’re going to come back with Myles Zyblock, RBC Capital Markets, after Secretary Geithner’s speech with our Peter Cook.

09:21

KEENE: We continue with Myles Zyblock, RCB Capital Markets, looking at equity investment, return of the fear trade. One little sentence here, Myles, really gets my attention. Main Street is massively under invested. What is it going to take besides healing to get Main Street back on Wall Street?

ZYBLOCK: Yes, I mean you make a great point, Tom. It is, you know, we have seen negative net flows into the equity market almost unabated. There has been some short periods of reprieve here, but almost unabated since 2008. And this is really – you know, obviously there has been a lot of psychological damage created as a result of too [two] big bear markets and the housing collapse in the last decade.

Tags: Alan Blinder, Bloomberg News, Federal Reserve, Financial Crisis, Good Morning Sir, Guilded Age, Income Distribution, Labor Economist, Myles Zyblock, Nots, Prewitt, Profitability, Rbc Capital Markets, Relative Terms, Stock Market, Strategist, Street Journal Article, Survey Of Consumer Finances, Tom Keene, Wall Street Journal
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A Bull Market is Underway (Bob McWhirter)

Friday, January 28th, 2011

by Bob McWhirter, Selective Asset Management, Sub-Advisor to NexGen Financial

In Canada the Financials, Energy and Materials subgroups accounted for 94% of the 14.5% gain in the S&P/TSX Composite in 2010. The S&P 500 Composite was up 9.0% in 2010 in Canadian dollar terms.

2010 was a strong year for equity markets as earnings continued to rebound from their recessionary lows.

Strong 2011 forecast earnings growth of 26% for the S&P/TSX companies and 13% for S&P 500 companies is expected to drive stocks higher in 2011. We expect 2011 to be the year when rising earnings momentum distinguishes the performance leaders versus the laggards.

Concerns about rising inflation and the U.S. budget deficit at 10% of G.D.P. are expected to hold back bond prices in 2011. As a result investors should shift their focus from bond to equity funds in 2011.

Growth vs. Value

We favour growth stocks over value stocks at this stage in the market. The S&P/TSX Composite index has outperformed the S&P 500 Composite Index in 7 of the past 8 years due to the strong performance of resource sector stocks. The S&P/TSX is expected to outperform again in 2011 as its over 50% resource stock weight benefits from rising global economic growth and particularly from the strong energizing market economies.

Oil

Ray Hanson, Technical Analyst at RBC Capital Markets, believes that the price of oil will rise above $120 U.S. in 2011 as oil appears to have broken out (to the upside) from an 18 month trading range.

Copper

We noted in the October commentary that “technical analysts forecast that if the price of copper rises above $4.00/pound it could rise 50% to $6.00/pound in the next 12 to 18 months.” Copper has risen above $4.00/pound and because of strong demand and limited growth in supply for the next 2 years it appears that the price of copper will be significantly higher by the end of 2011.

Consumer Spending

The U.S. household debt servicing cost is the lowest it has been in 20 years. This may lead to an upside surprise in U.S. consumer spending in 2011. Small businesses in the U.S. may be the driver of increased hiring leading to further reductions in the U.S. unemployment rate.

Rising energy and raw material costs in 2011 may lead to a squeeze in consumer oriented profit margins. This occurred in 2007/2008 but natural resource companies (the providers of the raw materials) benefited at that time and are expected to benefit in 2011 providing further support of our view that the S&P/TSX should outperform.

In Summary…

Since mid-November $20 billion has been withdrawn from U.S. bond mutual funds to pay for equity purchases. We expect flows from fixed income funds into equities to continue to drive demand for equities.

We see 2011 as a year of opportunity as we believe a new equity bull market is underway. A near term pull back of 5 to 10% would be viewed as an opportunity to increase resource stock holdings. In late August in the growth oriented portfolios we “increased the emphasis on a company’s ability to service its debt as well as reduce its debt.” This change has contributed to the significant performance that has occurred in the growth portfolios since the end of August.

Copyright (c) NexGen Financial

Tags: Bob Mcwhirter, Bond Prices, Budget Deficit, Canadian Market, Dollar Terms, Earnings Growth, Earnings Momentum, energy, Forecast Earnings, Global Economic Growth, Growth Stocks, Household Debt, Market Economies, Performance Leaders, Price Of Copper, Rbc, Rbc Capital Markets, Resource Sector, Resource Stock, Selective Asset Management, Technical Analysts, Tsx Composite, Value Stocks
Posted in Canadian Market, Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Nigel Rendell: Buy Brazil, Sell Eastern Europe

Tuesday, November 10th, 2009

Nigel Rendell, emerging market strategist of RBC Capital Markets, talks to Izabella Kaminska of FT Alphaville about a broad spectrum of emerging-market related issues.

Part 1:
Rendell talks about the differing fortunes of economies from Russia to Argentina. He says Brazil remains a great pick outside Asia.

Click here or on the image below to view the video.

Part 2:
With many analysts bullish on Chinese growth, the big challenge for investors is gaining exposure. Rendell says Korea and Taiwan offer the best proxy plays.

Click here to view Part 2 of the interview.

Part 3:
With interest at record lows in developed economies, investors are increasingly looking for yield in emerging markets. Rendell comments on whether this inflow of money is creating a fresh bubble.

Click here to view Part 3 of the interview.

Source: Izabella Kaminska, Financial Times (here, here and here), November 9, 2009.

Tags: Alphaville, Argentina, Best Proxy, Brazil, Broad Spectrum, Chinese Growth, Eastern Europe, Emerging Market, Emerging Markets, Financial Times, Fortunes, Ft Alphaville, Inflow, Interview Source, Kaminska, Market Strategist, Rbc, Rbc Capital Markets, Record Lows, Rendell, Russia
Posted in Brazil, Emerging Markets, Markets | Comments Off

Words from the (investment) wise for the week that was (January 12 – 18, 2009)

Sunday, January 18th, 2009

Investor sentiment around the globe was negatively impacted during 2009’s second full week of trading as a barrage of bleak economic and corporate news offered more confirmation of a deepening recession, bringing risk aversion to center stage.

The US dollar and government bonds (excluding emerging markets and countries on the periphery of the Eurozone) gained, but global equities and commodities were on the defensive as nervous investors tried to gauge the likely damage of the economic malaise.

Global bourses concluded a whipsaw week with hefty losses, but stemmed some of the downside as a relief rally came to the rescue towards the end of the week. The MSCI World Index and the MSCI Emerging Markets Index declined by 6.2% and 5.8% respectively.

The US indices all dropped over the week as shown by the major index movements: Dow Jones Industrial Index -3.7% (YTD -5.6%), S&P 500 Index -4.5% (YTD -5.9%), Nasdaq Composite Index -2.7% (YTD -3.0%) and Russell 2000 Index -3.1% (YTD -6.6%). As a matter of interest, the year-to-date returns at the same point last year (i.e. after 11 trading days) were -6.0% for the Dow and -6.5% for the S&P 500.

Adding a spark of hope on Thursday, the US Senate voted to release the second and final $350 billion tranche of the TARP funds, whereas the House Democrats unveiled a much-awaited $825 billion stimulus package aimed at halting the economic rot. Meanwhile, in a speech at the London School of Economics, Fed Chairman Ben Bernanke said Barack Obama’s economic package could provide a “significant boost” to the US economy.

Source: Daryl Cagle

But back to the stock market. The bar chart below shows the US sector performance for the past week, and specifically how defensive sectors such as consumer staples, healthcare and utilities outperformed other sectors on a relative basis.

The financial sector plummeted by 16.3% as several US banking shares fell to multi-year lows amid growing concerns that they will battle to cope with increasing credit losses as the global recession intensifies.

Source: StockCharts.com

The nascent earnings season saw a glut of fourth-quarter losses. These included larger-than-expected losses from Bank of America (BAC) and Citigroup (C), resulting in their respective share prices plunging by 44.7% and 48.2% over the week.

Citi announced plans to break up the bank into two businesses, following the decision to sell a controlling interest in the valuable Smith Barney brokerage to Morgan Stanley (MS). On the other hand, Bank of America will receive an additional $20 billion of TARP funds to bed down its troublesome acquisition of Merrill Lynch, as well as a guarantee on $118 billion of potential losses on distressed assets. Elsewhere, the Irish government nationalized Anglo Irish Bank, and HSBC was rumored to be seeking fresh capital of $30 billion.

As far as the US housing situation is concerned, I am keeping a close eye on the mortgage situation. According to Freddie Mac’s Primary Mortgage Market Survey, the national average rates for a US 30-year fixed mortgage last week declined to 4.96% from 5.33% two weeks ago and 6.46% in October last year. However, the rate is still 378 basis points higher than the three-month dollar LIBOR rate. This spread averaged 97 basis points during the 12 months preceding the crisis, indicating that lower rates are not being passed on to consumers.

Despite the interbank lending rates having declined from their peaks, banks have significantly curtailed the amount of money they are actually lending. The US Depository Institutions Aggregate Excess Reserves continue their ascent at levels far in excess of the amount that banks need to keep on deposit to meet their reserve requirements (see chart below). This measure indicates that the balance sheets of banks remain under pressure, especially in view of the fact that the value of some assets is not known. A peak in the Excess Reserves graph should coincide with a turning point in the recovery of banks. (Also see my post “Credit Market Watch“.)

Source: Fullermoney

Next, a quick textual analysis of my week’s reading. No surprises here with keywords such as “economy”, “market”, “bank”, “China”, financial” and “prices” featuring prominently.

On the issue of corporate bonds, I received a number of questions after referring to the iBoxx Investment Grade Corporate Bond Fund (LQD) and High Yield Corporate Bond Fund (HYG) in last week’s “Words from the Wise” review. In the short term, a further correction of both investment-grade and high-yield corporate bonds looks likely, but the sector is worth watching for opportunities arising at lower levels. Also, the high-yield instruments – under intense pressure because of an avalanche of defaults predicted by the ultra-wide spreads – could see spreads contracting markedly if the defaults are not as bad as priced in.

Turning to the outlook for the stock market, Bennet Sedacca (Atlantic Advisors Asset Management) issued a short-term buy signal on Thursday: “We are once again increasing exposure to equities from 0% to a near fully invested posture. I fully recognize the bad news that is out in the marketplace, but given Treasuries at 0-2.25% and Mortgage Backed Securities at 3-4%, high quality large cap growth stocks (self-financing companies purchased via IVW – the S&P large cap growth ETF) look attractive to me.

“We also like healthcare via PPH (pharma holders ETF), USO (oil ETF), XLV (broader healthcare ETF), but have a negative bias towards bonds and have taken substantial profits in recent days in the Mortgage Backed Securities space, where government intervention has led to artificially high bids. We also added a smallish position in XLF (financials). We believe quality is king and that ‘a’ low , but not THE low has been reached in stocks.”

Key resistance and support levels for the major US indices are shown in the table below. The immediate upside target is the 50-day moving average, followed by the November 4 highs about 16% to 18% from current levels (not shown on table). On the downside, the December 1 and all-important November 20 lows must hold in order to prevent considerable technical damage.

An analysis of the number of stocks trading above their 50-day moving averages makes for interesting reading. “With the S&P 500 back into oversold territory and even approaching its November lows, it’s actually surprising to see this breadth measure at 40%,” said Bespoke. “At the prior lows, the number got down to zero! The fact that the overall declines have been limited to a smaller area of the market is a positive for those hoping that the lows will hold.”

“As January goes, so goes the year”, is one of the most frequently quoted seasonal trends of the stock market. With the S&P 500 down by 5.9% after two weeks of the month, January is not off to a promising start. According to Jeffrey Hirsch (Stock Trader’s Almanac), every down January since 1950 has been followed by a new or continuing bear market or a flat year. Further research is provided by Jay Kaeppel of Optionetics.
The last word goes to Charles Kirk (The Kirk Report): “With the market closed Monday to observe Martin Luther King Jr., we are set to have another four-day work week and, in my experience, they tend to be some of the toughest. Not only will we have Obama’s inauguration, but lots of earnings reports to sort through.

“While the market managed to end the week above S&P 850, we still have a lot of work to do to confirm that we can manage at least a decent counter-trend rally during earnings season. We are still oversold, but we need to see the buyers return in force and with confidence. Both have been missing so far in 2009.”

For more discussion about the direction of stock markets, also see my post “Video-o-rama: Gloomy news batters investor sentiment“.

Economy
“Global business confidence remains very negative, but has improved a bit since hitting bottom at the very end of 2008. It is still too early to conclude that sentiment is improving in any measurable way,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Businesses are nearly equally pessimistic across the globe and across all industries. Hiring intentions have turned particularly negative in recent weeks. Pricing power has collapsed, suggesting that deflation is a significant threat.”

As far as the US is concerned, the Fed’s January Beige Book indicated continued and broad-based weakening throughout the nation. The latest round of economic data also confirmed that the recession was intensifying.

- Industrial production declined by 2% in December, with output falling in all three major categories – utilities, mining and manufacturing – for the first time since October. For the fourth quarter as a whole, industrial production fell at an annual rate of 11.5%, more than twice as fast as at any time during the 2001 recession. All indications are that manufacturers will further reduce production in order to bring inventories in line with free-falling final sales.

- Retail sales in December were significantly worse than expected, plunging by 2.7% – the sixth consecutive month of falling sales.

- The US trade deficit narrowed substantially to $40.4 billion (consensus $51.5 billion) in November, marking the fourth straight month of declining gross exports and gross imports.

News on the US inflation front was relatively good with both the PPI and CPI continuing to retreat in December, falling by 1.9% and 0.7% respectively. Core prices barely managed to stay in positive territory, with core CPI rising by 0.1% for 2008 – the lowest increase since 1954.

Jamie Dimon, chief executive of JPMorgan Chase, predicted in an interview with the Financial Times that the US financial and economic crisis would worsen this year as hard-hit consumers default on credit cards and other loans. “The worst of the economic situation is not yet behind us. It looks as if it will continue to deteriorate for most of 2009,” said Mr Dimon.

Source: Daryl Cagle

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

- In a sign that the decline in economic activity in Japan was worsening, core machinery orders by Japanese businesses slumped by 16.2% in November – the sharpest monthly contraction since records began in 1987.

- Germany’s coalition parties agreed on a second economic stimulus package totaling €50 billion (including €36 billion in infrastructure investment and tax cuts), to be put into place in an effort to pull the economy out of its worst recession since the end of the Second World War, according to CEP News. The package also includes a €100 billion “Germany fund” that would guarantee the debt raised by cash-starved businesses.

- The European Central Bank on Thursday cut its main policy interest rate by 50 basis points to 2% – the lowest level ever. The total reduction since mid-October amounts to 225 basis points and highlights the Eurozone slipping deeper into recession and inflation dropping sharply.

- Eurozone manufacturing continued to fell for the seventh straight month in November, amounting to a decline of 7.7% in year-ago terms.

Source: Moody’s Economy.com

The International Monetary Fund’s managing director, Dominique Strauss-Kahn, “chided European leaders for failing to grasp the depth of the coming slump in their region, creating the risk of social upheaval,” said Bloomberg.

RGE Monitor reported that China had revised its 2007 GDP growth up to 13% from the 11.9% it previously reported. “With Chinese exports, industrial production and other economic indicators slowing sharply, there is speculation that Chinese officials might smooth growth statistics. Uncertainty about Chinese economic statistics has led many analysts to use proxies for economic output which are more difficult to doctor. These proxies include electricity demand, construction, etc. However, there is a consensus that Chinese economic statistics have improved,” said Nouriel Roubini’s research team.

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

Source: Yahoo Finance, January 16, 2009.

In addition to the Bank of Japan’s interest rate announcement (Thursday, January 22), the US economic highlights for the week, courtesy of Northern Trust, include the following:

1. Housing starts (January 22): Permit extensions for new homes fell 15.8% in November, inclusive of a 11.9% drop in permits issued for single-family homes. The weakness in permits is indicative of fewer housing starts in December (595,000 versus 625,000 in November). Consensus: 615,000.

2. Other reports: NAHB Survey (January 21).

Click the links below for the following reports:

- Wachovia’s Weekly US Economic & Financial Commentary (January 16, 2009)

- Wachovia’s Global Chartbook (January 2009)

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

Source: Wall Street Journal Online, January 16, 2009.

Chinese philosopher Lau-Tzu said: “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” Wise words indeed, but hopefully thorough research and a dose of common sense will cast some light on the lie of the investment land.

On Tuesday a new President will be inaugurated in the US, but the old concerns about financial markets will unfortunately still be around. In the meantime, have a great long weekend in the US!

That’s the way it looks from Cape Town.

Source: Daryl Cagle

Clusterstock: Roubini – you’re all fools for buying into a sucker’s rally
“Yesterday Nouriel Roubini weighed in on the recent rally and said anyone that thought the worst was behind us is ‘delusional’ and as a matter of fact the worst is yet to come, citing the gruesome macro data that’s been released as of late, and the fact that that trend won’t reverse until at least the fourth quarter of 2009.

“RGE: For a few weeks since late November equity markets ignored the onslaught of much worse than expected macro news (and all the news were really worse than awful) and had a nice 25% bear market sucker’s rally. But the drumbeat of terrible – and worse-than-expected – macro news and earnings news and financial news has finally taken a toll on the delusional market belief that the worst was over for financial markets and for equity markets and that the US and global economy would recover in the second half of 2009. So equity prices have already reversed more than half of their most recent bear market rally as the lousy macro news have finally shocked in the last week the wishful thinkers.

“Indeed, the retail sales figures published today confirmed a shopped-out, saving-less and debt-burdened US consumer is now faltering as job losses, income losses, fall in home wealth, fall in equity wealth, high and rising debt and debt servicing ratios and a severe credit crunch take a severe toll on the ability of consumers to spend. And reduction in spending and deleveraging of the US consumer will take years to rebuild the savings rate of a household sector now hit by a severe shock to its net worth (as equity and home values fall while debts have been rising) and shocked in its ability to generate income as job losses mount and the unemployment rate surges.

“Our research at RGE Monitor suggests that the US and global recession will continue at least all the way until Q4 of 2009 (a nasty 24 months U-shaped recession) and that the recovery in 2010-11 will be very weak with growth in the 1% range that is well below a potential of 2.75%. And we cannot rule out that a more severe L-shaped stag-deflation (as in Japan in the 1990s) will take hold.”

Click here for CNBC video.

Source: Jay Yarow, Clusterstock, January 15, 2009.

CNBC: Pimco’s El Erian on the markets
“Discussing the global economic situation, with Mohamed El-Erian, Pimco co-CEO and Michael Spence, Philip H. Knight economics professor/Nobel Laureate.

Source: CNBC, January 15, 2009.

Barron’s: Roundtable – hang on tight
“Our go-to group of investment experts sees tough times for the economy – but good fortune for stockpickers.”

Click here for full article.

Source: Barron’s (via Fullermoney), January 13, 2009.

Grace Cheng (Daily Markets): Exclusive interview with Jim Rogers
Do you think the period of forced liquidation has ended or does it still have a ways to go?

Rogers: I’m sure it has not ended. It certainly has not ended for many asset classes and it probably has not ended for most. It may be over for a few things but it still has a long way to go.

As you’ve said many times, the US government is printing a lot of money right now, when do you think inflation will come around and bite us?

Rogers: Well there is inflation now in many things. There’s temporary deflation in raw material prices and in some property. But throughout history, whenever you’ve had gigantic printing of money and spending of borrowed money, it has always led to higher prices. Unless something is dramatic, it’s going to happen again. When I don’t know. It’s already happening in some things. I don’t know if you’ve bought any sugar recently or some other things, prices are up and that will continue and it will get worse.

You’ve been bullish on commodities for a long time, recently you said you’re buying the Rogers Metal Index. Do you think that the Obama stimulus plan will create more demand for commodities?

Rogers: Well of course, anything that causes a revival of economic activity causes a revival of demand for everything including commodities. I mean if you’re gonna build bridges you’ve got to build them out of something you cannot build virtual bridges you have to build real bridges, etc.

You’ve said that over the long term, the US dollar is doomed. What are your thoughts on the British Pound?

Rogers: More doomed. It will disappear sooner. If it weren’t for the North Sea, the British Pound would have already disappeared. It’s more doomed. The UK has been exporting oil for 26 years; within the decade, the UK will be a net importer of oil again, and they have nothing else to sell to the world once the oil dries up.

Do you think China will scale back on buying US bonds? And if that happens, how will it affect the US economy and the US dollar?

Rogers: Well if I were China, I would scale back. If I were everybody, I would scale back. The US bonds yield virtually nothing, the dollar is a flawed currency, inflation is coming, higher interest rates are coming. I would think everybody would be scaling back including China. We’re going to have higher interest rates down the road because somebody’s gonna scale back. If not China, Japan or Korea, or who knows, somebody.

Source: Grace Cheng, Daily Markets, January 15, 2009 (hat tip: Investorazzi).

Bloomberg: Bernanke urges “strong measures” to stabilize banks
“Federal Reserve Chairman Ben Bernanke speaks about the possible need for more capital injections and guarantees to further stabilize and strengthen the financial system. Bernanke, speaking at the London School of Economics, warns that a fiscal stimulus won’t be enough to spur an economic recovery and that the government may need to buy or guarantee banks’ tainted assets to revive growth. Bernanke also discusses the Fed’s balance sheet, inflation expectations and US unemployment.”

Click here for Financial Times article.

Source: Bloomberg, January 13, 2009.

Asha Bangalore (Northern Trust): Bernanke explains Fed’s options
“In the context of financial market stability, Bernanke calls on history to stress that a ‘modern economy cannot grow if its financial system is not operating effectively’. Bernanke noted that in order to support and mend the fragile financial system ‘more capital injections and guarantees may become necessary to ensure stability and normalization of credit markets’.

“He suggested that purchases of troubled assets, a provision of asset guarantees, and/or purchase of assets from financial institutions in exchange for cash and equity in bad banks are other avenues through which fiscal policy could support the financial system. Also, reducing preventable foreclosures would be useful in reducing mortgage losses and promoting financial stability.

“In sum, the conclusion we draw here is that additional fiscal policy stimulus is necessary to ensure the working of the financial system and revival of economic activity.”

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

Financial Times: Democrats unveil $825 billion stimulus package
“Democratic lawmakers on Thursday unveiled a much-awaited $825 billion stimulus package to halt America’s vertiginous economic slide which Nancy Pelosi, the speaker of the House, said was only the ‘first step’ in a process that could take weeks to pass into law.

“The bill, which Barack Obama, the incoming president, wants enacted before mid-February when Congress goes into a short recess, comes in at $50 billion higher than the initial ceiling set by his transition team. But economists said they expected it to climb towards the important psychological threshold of $1,000 billion by the time it becomes law.

“The package was divided between $275 billion in tax cuts, mostly going towards a $1,000 tax credit for middle-class families and $500 for individuals, and $550 billion in public spending, which includes money for ‘shovel-ready’ infrastructure projects, aid to state governments and investments in information technology upgrades for healthcare and a drive to make federal buildings energy-efficient.

“Thursday’s bill coincided with Mr Obama’s announcement that he would hold a ‘fiscal responsibility’ summit next month that would address entitlement reform – an issue that has long been avoided by leaders from both sides of the aisle. ‘We’ve kicked this can down the road and now we are at the end of the road,’ he told an editorial board meeting of the Washington Post. ‘We need to send a signal that we are serious.’

“He said he did not know how long it would take for the proposed fiscal stimulus to take effect. ‘We are in uncharted waters here. I don’t have a crystal ball,’ he said.”

Source: Edward Luce, Financial Times, January 15, 2009.

Economix (The New York Times): Stimulus pie chart

Source: Catherine Rampell, The New York Times – Economix, January 15, 2009.

The New York Times: Senate releases second portion of bailout fund
“President-elect Barack Obama’s economic agenda advanced rapidly in Congress on Thursday as the Senate voted to release the second half of the financial industry bailout fund and House Democrats unveiled an $825 billion fiscal recovery plan aimed at putting millions of unemployed Americans back to work.

“The Senate action, by a vote of 52 to 42, spares Mr. Obama a messy legislative fight just as he takes office and gives him a $350 billion war chest to further stabilize the financial sector. The vote came amid renewed distress in the banking industry, including further deterioration of Citigroup and a pitch for more government aid by the Bank of America.

“Mr. Obama had personally lobbied reluctant senators to release the money. His top economic adviser, Lawrence H. Summers, made three visits to the Capitol and sent two letters to reassure lawmakers that the program would be better managed.

“In a statement, the president-elect applauded the outcome.

“‘I know this wasn’t an easy vote because of the frustration so many of us share about how the first half of this plan was implemented,’ Mr. Obama said. ‘Now my pledge is to change the way this plan is implemented and keep faith with the American taxpayer.’”

Source: David M. Herszenhorn, Financial Times, January, 2009.

Bloomberg: Seattle FHLB short of capital on mortgage ebt
“The Federal Home Loan Bank of Seattle said it will suspend dividends and ‘excess’ stock repurchases, becoming the second of the government-chartered lending cooperatives to say its capital may be running low.

“The likely capital shortfall as of December 31 was caused by ‘unrealized market value losses’ on residential mortgage bonds without government backing, the bank said in a US Securities and Exchange Commission filing today. Washington Mutual and Merrill Lynch had been the biggest stakeholders and borrowers in the Seattle Federal Home Loan Bank, or FHLB.

“Seattle joins the San Francisco FHLB in taking steps to guard its reserves after the US housing market collapse sent mortgage-backed bonds tumbling. The declines may leave as many as eight of the 12 FHLBs below capital requirements, Moody’s Investors Service has said, eroding a below-market rate source of about $1 trillion in financing for Citigroup, JPMorgan Chase and other companies that participate in the cooperatives.”

Source: Jody Shenn, Bloomberg, January 13, 2009.

BCA Research: It’s called credit easing, not quantitative easing
“Fed Chairman Bernanke argued in a key speech recently that the Fed’s current policy will not lead to an inflation problem.

“Bernanke explained how the Fed’s current policy, which he dubbed ‘Credit Easing’, differs from ‘Quantitative Easing’ (QE), as pursued by the Bank of Japan (BoJ) earlier this decade. Under QE, the BoJ set targets for excess bank reserves in the hope that the banks would increase lending. In contrast, the Fed is targeting an improvement in the functioning of the credit markets, an increase in the flow of credit, and lower private sector borrowing costs. There is no target for the size of the Fed’s balance sheet or the monetary base; both will fluctuate with the liquidity needs of borrowers who are using the Fed’s facilities.

“To the extent that banks keep excess liquidity on deposit at the Fed, Bernanke argued that there is little inflation risk in the near term. In terms of the exit strategy from the current policy, the Chairman explained that excess reserves and the monetary base will naturally decline when credit market conditions improve and recourse to the Fed’s liquidity facilities wanes.

“The Fed also plans to eventually sell the private sector assets it is purchasing, which will also soak up excess liquidity.

“Bottom line: The Fed’s ‘Credit Easing’ policy will not necessarily be inflationary, as long as the excess reserves are re-absorbed in a timely manner once the economy resumes growing.”

Source: BCA Research, January 14, 2009.

Paul Kedrosky (Infectious Greed): Dramatic changes in credit quality
“A fairly remarkable sea-change in Fitch Ratings’ view of rated companies/countries/sectors over the last two years. The stresses in Europe, in particular, caught my eye.”

Source: Paul Kedrosky, Infectious Greed, January 16, 2009.

BBC News: US banking giants in tie-up deal
“Struggling US banking giant Citigroup and its rival Morgan Stanley have agreed a deal which sees the tie-up of their brokerage operations. Morgan Stanley is paying Citigroup $2.7 billion for a 51% stake in the joint venture while Citigroup will have a 49% stake.

“Observers say the deal showed how much Citigroup wanted to slim down its operations and build up cash reserves. It received the largest government bail-out of any US bank last year.

“Citigroup’s retail brokerage, Smith Barney, was formerly a key part of its wealth management business.

“The new unit – to be called Morgan Stanley Smith Barney – will have more than 20,000 advisors, $1.7 trillion in client assets, and serve 6.8 million households around the world, the firms said.

“The Financial Times reports Citigroup will separate its higher risk US consumer finance and securities businesses from its global commercial banking operations.

“Analysts suggest that the government will end up buying some struggling parts of the business with the next tranche of its financial rescue programme. ‘I think within 12 months, Citigroup no longer exists. The new CEO of this company is the government,’ said William Smith of Smith Asset Management.”

Source: BBC News, January 13, 2009.

Barry Ritholtz (The Big Picture): The 45 billion dollar club
“The United States of Wall Street just added another major holding to its portfolio of financial garbage: Bank of America.

“Like Citi, B of A has now received MORE IN BAILOUT MONEY than its actually worth (BAC = $53B; C = $21B). How this can ever be a profitable investment, as some mathematically challenged Congress-critters have suggested, is all but impossible to imagine.

“Blaming ‘previously undisclosed losses from its Merrill Lynch’, B of A threatened to kill their purchase of Mother Merrill. Treasury made an emergency capital injection of $20 billion, on top of the $15B and $10B already received by B of A and MER respectively. The taxpayers will also backstop $118 billion of assets, setting up what is likely to be a jumbo money losing trade.

“What should have happened in both instances was an orderly liquidation, selling off the pieces to competent managers who understand risk, and can manage smaller portions of the firm. Instead, the same idiots who helped destroy all of companies involved are still running the show.

“The amazingly bad Bank of America plan mirrors an even worse bad deal made by the Feds with Citigroup in November. There, the taxpayers explicitly insured the bank against losses on 90% of $306 billion of toxic assets – Citigroup’s real-estate loans and securities.

“Like Citi, the B of A monies are a terrible deal for the taxpayer – not a lot of bang for the buck, and leaving the same people who created the mess in charge.

“Organ transplant medicine understands certain truths: You do not give a healthy liver to a raging alcoholic, as they will only destroy the organ via their disease/bad judgment/lifestyle.

“Why do we give billions of taxpayer dollars to incompetent managers who failed to protect their assets, who destroyed shareholder value? These people have demonstrated a marked INABILITY to run these firms. Why reward them with 10s of billions of dollars?

“Its nothing short of madness …”

Source: Barry Ritholtz, The Big Picture, January 16, 2009.

CNBC: Bair – banks in crisis
“Discussing big problems for big banks including Citi and Bank of America, with Sheila Bair, FDIC chairman.”

Source: CNBC, January 16, 2009.

Bloomberg: Shilling says banks may need “a lot more” government help
“Gary Shilling, president of A. Gary Shilling & Co., talks with Bloomberg’s Betty Liu about the potential for additional government aid for US banks. Shilling also discusses the future of Citigroup Inc. and Bank of America Corp., the state of the US economy, and the outlook for stocks.”

Source: Bloomberg, January 16, 2009.

CEP News: Trichet – central bankers see global economic recovery in 2010
“Central bankers expect the global economy to recover in 2010 according to European Central Bank President Jean-Claude Trichet speaking as head of the Bank for International Settlements on Monday morning.

“While the central banker declined to comment on the European Central Bank’s monetary policy ahead of the rate decision this Thursday, Trichet said that the global economic slowdown was due to a lack of confidence and pledged that the group would ‘do whatever is appropriate to reinforce [it].’

“He also said that attending members had not discussed exchange rates at the meeting, but agreed that emerging market growth continues to play an important role for the global economy.

“Earlier on Monday, in an interview with Bloomberg, IMF Managing Director Dominique Strauss-Kahn said that Europe is ‘behind the curve’ regarding stimulus packages, and that governments are underestimating how such measures are needed to help economies recover.”

Source: CEP News, January 12, 2009.

Financial Times: Larry Fink on what could derail recovery
“Larry Fink chief executive and chairman of BlackRock, talks to Henny Sender, FT’s international financial correspondent, about monetary policy, securities and risk management. He also discusses corporate governance, oversight and stabilizing troubled assets.”

Source: Financial Times, January 8, 2009.

Financial Times: JPMorgan chief says 2009 will be bleak
“The US financial and economic crisis will worsen this year as hard-hit consumers default on credit cards and other loans, Jamie Dimon, chief executive of JPMorgan Chase, has predicted in an interview with the Financial Times.

“Mr Dimon, whose bank will report fourth-quarter results on Thursday, gave his bleak assessment as shares on both sides of the Atlantic tumbled on rising fears that banks would need more capital and a larger-than-expected fall in US retail sales.

“‘The worst of the economic situation is not yet behind us. It looks as if it will continue to deteriorate for most of 2009,’ said Mr Dimon. ‘In terms of our sector, we expect consumer loans and credit cards to continue to get worse.’

“Mr Dimon told the FT that JPMorgan was prepared for an expected deterioration in consumer-oriented businesses but added that if things were to get worse than expected it would have to cut costs again.

“Mr Dimon said the bursting of the credit bubble would force the banking industry to refocus on its traditional businesses of advising on deals and lending to companies and individuals.

“‘When we look back at industry excesses in areas such as highly leveraged lending and securitisation, it is clear that some of these markets will never come back,’ he said. ‘In the next few years, the industry will go back to basics: serving individual and corporate customers as best as we can.’”

Source: Francesco Guerrera, Financial Times, January 14, 2009.

Charlie Rose: A conversation with Lee Scott, CEO of Wal-Mart

Source: Charlie Rose, January 14, 2009.

CNBC: Nobel debate on the economy
“Weighing in on the economy with Edmund Phelps, 2006 Nobel Prize winner from Columbia University, and Michael Spence, 2001 Nobel Laureate from Stanford University.”

Source: CNBC, January 15, 2009.

Times Online: Leading economist fears decade of weakness in US
“One of the world’s leading economists has given warning that the United States is facing a decade of financial misery, with the number of unemployed Americans set to continue to rise for years.

“Robert Shiller, Professor of Economics at Yale University, who predicted the end of the internet bubble seven years ago, said: ‘We could have many years of a very weak economy. Big recessions are followed by years of weakness and typically unemployment keeps rising.

“‘To say that this will last years is not a dramatic statement. What is happening now is much worse than 1990. We could be facing a decade of real weakness. This is no ordinary recession. There are signs that people see this as a different story. People are talking about a depression, something that we haven’t seen previously.’

“Some economists, such as Kenneth Rogoff, the former chief economist at the International Monetary Fund and now a Professor of Economics at Harvard University, believe that America will be lucky if unemployment peaks at 9% of the workforce and that there is a high chance that it will reach at least 10%.

“Professor Shiller, who said that he has talked to the incoming Obama Administration about possible solutions to the housing crisis in the US, took a swipe at the Federal Reserve.

“He said: ‘This recession is by no means mechanical. People have lost a sense of confidence, a sense of trust in institutions and in each other. It is very hard for a central bank to address that by just cutting interest rates.’”

Source: Suzy Jagger, Times Online, January 12, 2009.

PRNewswire: Foreclosure activity increases 81% in 2008
“RealtyTrac today [Wednesday] released its 2008 US Foreclosure Market Report, which shows a total of 3,157,806 foreclosure filings – default notices, auction sale notices and bank repossessions – were reported on 2,330,483 US properties during the year, an 81% increase in total properties from 2007 and a 225% increase in total properties from 2006. The report also shows that 1.84% of all US housing units (one in 54) received at least one foreclosure filing during the year, up from 1.03% in 2007.

“Foreclosure filings were reported on 303,410 US properties in December, up 17% from the previous month and up nearly 41% from December 2007. Despite the spike in December, foreclosure activity for the fourth quarter was down nearly 4% from the previous quarter but still up nearly 40% from the fourth quarter of 2007.

“‘State legislation that slowed down the onset of new foreclosure activity clearly had an effect on fourth quarter numbers overall, but that effect appears to have worn off by December,’ said James J. Saccacio, chief executive officer of RealtyTrac. ‘The big jump in December foreclosure activity was somewhat surprising given the moratoria enacted by both Freddie Mac and Fannie Mae, along with programs from some of the major lenders and loan servicers aimed at delaying foreclosure actions against distressed homeowners.

“‘Clearly the foreclosure prevention programs implemented to-date have not had any real success in slowing down this foreclosure tsunami. And the recent California law, much like its predecessors in Massachusetts and Maryland, appears to have done little more than delay the inevitable foreclosure proceedings for thousands of homeowners.’”

Source: PRNewswire, January 14, 2009.

Richard Russell (Dow Theory Letters): Campbell – housing to trough in 2012
“I read a great deal about real estate, and I follow real estate trends closely. By far the best real estate guidance that I’ve come across is Robert Campbell’s ‘The Campbell Real Estate Letter’. Nothing I’ve read compares with Campbell’s great record.

“Robert uses an unusual and unique combination of fundamental and historical material along with his own specialty of technical analysis in real estate timing. Bob Campbell called the exact top of the real estate cycle in his report of August, 2005.

“What does Bob Campbell say now? He notes that historically, housing prices fall by an average of 35% after a financial crisis. He further states that he believes housing across the land will fall by another 8% from here to the final low of the housing cycle. And when will the low come? Campbell states that using five years as the average length of a housing downturn, ‘we can expect the US housing market to trough in the year 2012. Robert expects housing to fall to the prices that existed back in 2001.

“Writes Campbell, ‘And as I’ve stated in previous letters, this is where the problem arose: borrowers took on far more mortgage debt than they could ever pay back, and that’s why the real estate prices are crashing, and we are witnessing the destruction of the biggest credit bubble in history. And in the absence of dramatic increases in household incomes that are needed to service this massive amount of mortgage debt – all the bailouts in the world are unlikely to stop housing prices from eventually reverting back to the 2001 pre-bubble years – or close to it.’”

Source: Richard Russell, Dow Theory Letters, January 15, 2009.

Bespoke: Expected change in home prices
“The CME housing futures that track the S&P/Case-Shiller median home price indices of 10 major cities offer a clue into how much more investors think home prices have to fall.

“In the chart below, we highlight the percentage difference between the October ‘08 actual Case-Shiller numbers (the most recent set of numbers) and the current price of the November ‘09 futures contracts. The composite 10-city November ‘09 contract is currently trading 12% below its October ‘08 level. San Francisco is expected to fall the most in 2009 at -18%, followed by Los Angeles (-16.6%), and Las Vegas (-13%). The rest of the cities are expected to fall less than the composite, with Boston home prices expected to fall the least at -6%. Miami, Denver, DC, and San Diego are all expected to see home prices fall by less than 10% from 10/08 to 11/09.”

Source: Bespoke, January 12, 2009.

MarketWatch: 30-year mortgage under 5%
“The benchmark 30-year mortgage fell below 5% for the first time ever in Freddie Mac’s weekly rate survey as economic weakness continued to push interest rates lower, the mortgage agency said Thursday.

“The national average rate on the 30-year loan fell to 4.96% in the week ending January 15, down from 5.01% a week ago. That is the lowest on record. Freddie Mac began its rate survey in 1971. A year ago the loan averaged 5.69%.

“The 15-year fixed-rate mortgage, a popular refinancing choice, edged up to 4.65% from 4.62% a week ago. Last year at this time the loan averaged 5.21%. Refinancing activity has been strong as mortgage rates have plumbed historic lows.

“The two fixed-rate loans required the payment of an average 0.7 point to achieve the interest rate. A point is one percent of the loan amount, charged as prepaid interest.”

Source: Steve Kerch & Amy Hoak, MarketWatch, January 15, 2009.

Asha Bangalore (Northern Trust): Dreadful retail sales in December
“Retail sales in December were abysmal on every front. Total retail sales during December plunged 2.7% from 2.1% in November. Nearly all sub-components posted significant declines in sales.

“Retail sales have dropped at an annual rate of 24.6% in the fourth quarter versus a 5.1% drop in the previous quarter, a large part of it is due to the drop in gasoline prices. The weakness in retail sales supports expectations of a weak headline GDP number for the fourth quarter and also arithmetically consumer spending and GDP of the first quarter of 2009 are at a disadvantage.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 14, 2009.

Asha Bangalore (Northern Trust): Lower prices and weak non-oil imports translate to smaller trade gap
“The trade balance of the US economy narrowed to $40.4 billion in November from $56.7 billion in October. A 12.0% drop in nominal imports of goods and services partly due to lower imported oil prices was the main reason for the reduction in the trade gap. Weak economic conditions in the US have resulted in lower imports, while a similar status abroad has led to a 5.8% drop in nominal exports of goods and services.”

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

Asha Bangalore (Northern Trust): Energy and food prices bring down headline wholesale price index
“The Producer Price Index (PPI) of Finished Goods fell 1.9% in December after a 2.2% drop in the prior month, reflecting lower prices for energy (-9.3%) and food (-1.5%). In 2008, the PPI fell 0.9% versus a 6.2% jump in 2007. The 20.3% drop of the energy price index was the main reason for a sharp reversal of the wholesale price index in 2008. The food price index climbed 3.7% in 2008 versus a 7.6% gain in 2007.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 15, 2009.

Asha Bangalore (Northern Trust): Inflation – issue of little importance, for now
“The Consumer Price Index (CPI) dropped 0.7% in December, the third consecutive monthly decline and the fourth drop in the last five months. During the twelve months ended December the CPI moved up only 0.1% (CPI rose 4.1% in all of 2007), which is the smallest gain on record in the post-war period with the exception of a 0.7% drop in the twelve months ended December 1954. The reversal of the energy price index (-21.3% versus +17.4% in 2007) is largely responsible for the significant deceleration of the CPI. The food price index fell 0.1% in December and advanced only at an annual rate of 1.4% during the three months ended December versus a 4.0% annualized increase in the prior three-month period.

“… going forward, given the projections of weak economic conditions, inflation could move below levels that are consistent with price stability for a short period. At the same time, we should bear in mind that the large fiscal and monetary stimulus in place, and more in the pipeline, inflation could once again be problematic but much farther down the road.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 16, 2009.

Jim Sinclair (MineSet): The unavoidable face of hyperinflation
“It is horrifying what the Fed and Treasury injected in percentage terms. A true measure of comparison can be seen in the three months of 2008 when the Fed accomplished more than in the seven years from 1929 to 1937.

“This is beyond all reason, having its own new and terrible consequences well in excess of the consequences of the 1929 and 1932 breaks.

“Markets have been run now for years by algorithms, manipulators and seeded interests that are like summer thunderstorms. They are loud and scary, but quite short term and in the end quite meaningless and non-productive.

“The dollar cannot and will not remain strong, nor can a planetary Weimar experience now be avoided.”

Click here or on the image below for a larger chart.

Source: Jim Sinclair, MineSet, January 14, 2009.

Bloomberg: Hedge fund assets fell record 36% in 2008
“Hedge fund assets fell a record 36% to $1.84 trillion in 2008 as tumbling global markets prompted investor withdrawals and fund liquidations, according to industry researcher HedgeFund.net.

“Hedge funds lost $512 billion through withdrawals and fund closures, while performance losses totaled $535 billion, the New York-based unit of Channel Capital Group said in an e-mailed statement. The decline is the biggest since Hedgefund.net began tracking the data in 2003.

“Funds suffered losses and client withdrawals last year, with some selling assets at fire-sale prices as the global credit crisis forced banks to withdraw loans to the industry. While defections and closures reached a record in December, a benchmark of performance rose for the month after declining in previous months, Hedgefund.net said.

“‘Investor asset flows lag performance, and the sharp rise of outflows in the fourth quarter are the result of yearlong aggregate losses,’ Hedgefund.net said in the statement. ‘Positive performance in December may be an indication that the biggest wave of investor outflows has passed.’”

Source: Tomoko Yamazaki, Bloomberg, January 15, 2009.

Bespoke: S&P sector returns year to date
“Below we highlight S&P 500 sector performance year to date through about noon today. As shown, just three sectors are underperforming the market so far this year, and the Financial sector is weighing heavily on the overall index’s declines. Energy, Health Care, Technology, Materials, and Utilities have actually held up pretty well.”

Source: Bespoke, January 16, 2009.

CNBC: Doll’s outlook for 2009
“A look ahead of the possible double-digit equities growth in 2009, with Bob Doll, BlackRock vice chairman/global CIO.”

Source: CNBC, January 12, 2009.

CNBC: Hendry – bonds still best bet
“Government bonds are still the safest bet for investors in these uncertain times, and the euro will face an uphill battle as weak economies will need more flexibility, Hugh Hendry from Eclectica told CNBC.”

Source: CNBC, January 12, 2009.

BCA Research: US employment will cap Treasury back-up
“The US December employment report was grim and included further downward revisions to prior months. Our forecast for the next six months is equally bearish, which implies that Treasury yields will be capped for a long time.

“The contraction in payrolls were roughly in line with expectations, with a broad-based decline in all industries. Our Model forecasts significant weakness in the first half of the year, with no bottom in sight. Labor and income insecurity will continue to keep consumers from spending, and the already deflationary retailing environment will continue to worsen.

“Historically, Treasury yields sustainably rebound only once the annual growth in payrolls turns up significantly. Thus, any back-up in government bond yields over the next few months will prove short lived. Deflation and a contracting economy will be the primary drivers of trends in the Treasury market, underscoring that fears of higher yields driven by mushrooming budget deficits are premature.”

Source: BCA Research, January 12, 2009.

Ambrose Evans-Pritchard (Telegraph): The bond bubble is an accident waiting to happen
“The bond vigilantes slumber. As the greatest sovereign bond bubble of all time rolls into 2009, investors are clinging to an implausible assumption that China and Japan will provide enough capital to keep the happy game going for ever.

“They are betting too that debt deflation will overwhelm the effects of near-zero interest rates across the G10 and nullify a £2,000 billion fiscal blast in the US, China, Japan, Britain, and Europe.

“Above all, they are betting that the Federal Reserve chief Ben Bernanke will fail to print enough banknotes to inflate the US money supply, despite his avowed intent to do so.

“Yields on 10-year US Treasuries have fallen to 2.4% – a level that was unseen even in the Great Depression. This is ‘return-free risk’, said bond guru Jim Grant.

“It is much the same story across the world. Yields are 1.3% in Japan, 3.02% in Germany, 3.13% in Britain, 3.26% in Chile, 3.47% in France, and 5.56% in Brazil.

“‘Get out of Treasuries. They are very, very expensive,’ said Mohamed El-Erian, the investment chief at the Pimco, the world’s top bond fund, in a Barron’s article last week.

“It is lazy to think that China, Japan, the petro-powers and the surplus states of emerging Asia will continue to amass foreign reserves, recycling their treasure into the US and European bond markets.

“These countries are themselves bleeding as exports collapse. Most face capital flight. The whole process that fed the bond boom from 2003 to 2008 is now going into reverse. Woe betide any investor who misjudges the consequences of this strategic shift.”

Click here for the full article.

Source: Ambrose Evans-Pritchard, Telegraph, January 12, 2009.

David Fuller (Fullermoney): Government bond bubble will burst
“Objectively, there is no doubt that government debt yields in the UK, USA and a number of other countries have moved well outside their historic, normal price ranges and values. This indicates a bubble, which some have described as a ‘return-free risk’.

“We need no reminding today that dire economic circumstances have contributed to these ultra-low yields. Indeed, governments have encouraged the move, with rate cuts and talk of quantitative easing, as part of their reflationary efforts. We also know that governments need to issue considerably more debt to finance their programmes, and they want to do this as cheaply as possible.

“My conclusion is that those who are lending to governments at record or at least near-record low yields, are walking into a trap. The government bond bubble has yet to burst, judging from the charts, but it will burst. With bubbles, it seldom pays to delay one’s exit until the downtrend is evident to all.”

Source: David Fuller, Fullermoney, January 14, 2009.

CNBC: Credit – still a good bet if yield curve steepens?
“Investment-grade credit looks very attractive to Richard Urwin, MD & head of asset allocation & economics research team at BlackRock. But what happens if the yield curve steepens by year-end? He gives his take CNBC’s Amanda Drury & Martin Soong.”

Source: CNBC, January 16, 2009.

Eoin Treacy (Fullermoney): 10-year Treasuries show negative real yield
“It is interesting that this is the first time since 1980 that the US 10yr has shown a negative real yield. The fact is that it has not had anything close to the size of the move, relative to CPI, as seen in 1974 or 1980 is also worthy of notice. Of course back then, high inflation expectations were much more of a factor in the movement of the spread, but that is certainly not the case today.”

Source: Eoin Treacy, Fullermoney, January 13, 2009.

Financial Times: Bond issuance by emerging nations surges
“Emerging market sovereign bond issuance has surged this week as governments take advantage of the dramatic drop in yields because of the sharply improving sentiment since the start of the year.

“The Philippines, Turkey, Brazil and Colombia have all issued debt in the past few days, raising a total of $4.5 billion. This compares with just one deal worth $2 billion from Mexico issued in the entire fourth quarter of 2008.

“Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, said: ‘Sentiment has improved a great deal since January 1 in the emerging market space, so these countries see this as a window of opportunity to issue debt.’

“Since January 1, emerging market bond yields have fallen about 40 basis points compared with US Treasuries, the international benchmark for debt, close to eight-week lows, according to JP Morgan’s Embi+ Index. Emerging market bonds are now trading about 650 basis points above US Treasuries. Emerging market governments are also rushing to issue debt as they fear they could be ‘crowded out’ of the primary bond markets because of the record volumes of sovereign debt due from the industrialised nations.

“These emerging market countries need the cash, like their industrialized counterparts, to stimulate their economies.”

Source: David Oakley, Roel Landingin and John Aglionby, Financial Times, January 9, 2009.

Bespoke: US dollar testing resistance
“The US Dollar index has made a nice comeback after its free-fall from late November to mid December. The dollar is up 6.76% from its low on December 17, but as shown in the chart below, it is bumping up against key resistance at its 50-day moving average. If the dollar is able to break above its 50-day, a resumption of its multi-month uptrend will be solidified. If it fails to break through, however, the current level will be one peak of a newly formed downtrend.”

Source: Bespoke, January 14, 2009.

Edmund Conway (Telegraph): Shipping rates hit zero as trade sinks
“Freight rates for containers shipped from Asia to Europe have fallen to zero for the first time since records began, underscoring the dramatic collapse in trade since the world economy buckled in October.

“‘They have already hit zero,’ said Charles de Trenck, a broker at Transport Trackers in Hong Kong. ‘We have seen trade activity fall off a cliff. Asia-Europe is an unmitigated disaster.’

“Shipping journal Lloyd’s List said brokers in Singapore are now waiving fees for containers travelling from South China, charging only for the minimal ‘bunker’ costs. Container fees from North Asia have dropped $200, taking them below operating cost.

“Industry sources said they have never seen rates fall so low. ‘This is a whole new ball game,’ said one trader.

“The Baltic Dry Index (BDI) which measures freight rates for bulk commodities such as iron ore and grains crashed several months ago, falling 96%. The BDI – though a useful early-warning index – is highly volatile and exaggerates apparent ups and downs in trade. However, the latest phase of the shipping crisis is different. It has spread to core trade of finished industrial goods, the lifeblood of the world economy.”

Source: Ambrose Evans-Pritchard, Telegraph, January 12, 2009.

Bloomberg: Frontline says ships storing the most oil in 20 years
“Frontline Ltd, the world’s biggest owner of supertankers, said about 80 million barrels of crude oil are being stored in tankers, the most in 20 years, as traders seek to take advantage of higher prices later in the year.

“Traders are seeking to profit from a market situation called contango where futures prices are higher than the cost of immediate supplies. A purchaser could buy oil now, keep it for months at sea and fetch better prices by selling oil futures that are higher than the spot price.

“‘In this current financial situation I guess it’s one of the more safe bets to do,’ Jens Martin Jensen, Singapore-based interim chief executive officer of the company’s management unit, said by phone today. Thirty to 35 very large crude carriers, each designed to haul 2 million barrels of crude, are storing oil, with the rest on ships half the size called suezmaxes, he said.

“The contango pricing structure has been caused by excess near-term oil supply as demand slows and speculation that output cuts by the Organization of Petroleum Exporting Countries will reduce the glut later this year.”

Source: Alaric Nightingale, Bloomberg, January 14 2009.

Victoria Marklew (Northern Trust): Eurozone – interest rates, inflation, the economy – all fall down
“As widely expected, the European Central Bank (ECB) lopped another 50 bps off its refi rate this morning [Thursday], taking it to 2.0%. Rates have now come down by 225 bps in four successive steps, including a 75 bps cut in December, as the Eurozone economy hits the skids and inflation drops sharply.

“In his subsequent press conference, President Trichet acknowledged that economic data and surveys over the past month point to ‘a further weakening of economic activity around the turn of the year’ and warned that Eurozone demand is likely to be ‘dampened for a protracted period’ with growth risks to the downside. He also acknowledged that the slowing economy has reduced inflation risks, and that the rate of inflation is likely to ‘fall significantly’ in mid-year, in part because of base effects.”

Source: Victoria Marklew, Northern Trust – Daily Global Commentary, January 15, 2009.

Financial Times: German GDP contracts sharply
“Germany’s economy could have contracted by as much as 2% in the final quarter of 2008, the country’s statistical office warned on Wednesday, deepening a recession that looks likely to be the worst since the second world war.

“The sharp contraction in Europe’s largest economy would sound alarm bells across Europe because of Germany’s role as Europe’s economic powerhouse.

“German exports had benefited from strong global growth in recent years ‘but now that process has gone dramatically into reverse’, said Andreas Rees at Unicredit in Munich.

“The latest data came just hours after Berlin unveiled a two-year $66 billion package of growth-boosting measures. Michael Glos, economics minister, argued on Wednesday that the plan would have a ‘noticeable effect’ by later this year.

“Gross domestic product increased by 1 per cent in 2008 as a whole, after a 2.6% rise in the previous year, the federal statistics office reported. But in the final three months of the year, preliminary estimates suggested that GDP fell between about 1.5% and 2%, it said.”

Source: Ralph Atkins, Financial Times, January 14, 2009.

CEP News: Germany’s coalition parties agree on €50 billion stimulus package
“Germany’s coalition parties have agreed on a second economic stimulus package totalling approximately €50 billion, to be put into place over the course of the next two years in an effort to pull the economy out of its worst recession since the end of the Second World War.

“The package of measures will include approximately €36 billion in infrastructure investment and tax cuts. The announcement was made following six hours of talks between the Christian Democratic Union, the Christian Social Union and the Social Democratic Party in Berlin late on Monday.

“The second stimulus package follows a €31 billion plan already in existence.”

Source: CEP News, January 13, 2008.

Financial Times: Spain hit by public finance warning
“The growing dangers for Europe’s sharply slowing economies were highlighted yesterday as Spain became the third eurozone country to be warned over its deteriorating public finances in the space of three days.

“Standard & Poor’s, the rating agency, said Spain’s top-notch triple A credit ratings could be downgraded because of pressure on its public finances after it entered what is likely to be a deep recession in the fourth quarter. On Friday, Greece and Ireland were also warned by the agency that their ratings could be downgraded as economic conditions worsen. The warning is likely to help drive up borrowing costs for those countries.

“The euro weakened against the dollar and the yen after the announcement, which underlined the challenges facing European countries seeking to stimulate their battered economies and pay for bank bail-outs. Analysts say other European countries could face warnings in the coming days or weeks as governments take on record debt levels, which could jeopardise the sustainability of their public finances.”

Source: David Oakley and Victor Mallet, Financial Times, January 12, 2009.

Financial Times: China sees “success” in offsetting crisis
“Wen Jiabao declared China’s efforts to offset the effect of the global economic slowdown an ‘initial success’ on Sunday as the economy performed ‘better than expected’ last month.

“The premier’s hints that the country’s economy might not be locked in a downward spiral will be seen as good news in the rest of the world, where Chinese growth is viewed as a potential palliative for the global recession.

“Speaking during a three-day visit to industrial regions in eastern China, Mr Wen said sales at some companies had begun to rebound, stockpiles were falling and electricity consumption was rising.

“‘We have achieved initial success from the policies we adopted to counter the financial crisis,’ the premier said, according to China National Radio.

“Beijing announced an economic stimulus package of Rmb4,000 billion ($585 billion) in November, heavily weighted towards construction and heavy industry. It was not expected to improve economic growth until the middle of this year but some industries, such as steel, have already shown more confidence since the stimulus package was announced. Scores of Chinese steelmakers have resumed production in the hope that it will lead to a sustained recovery in steel prices.

“Mr Wen vowed that the central government would take other measures, including large investments, to combat the crisis before the legislature’s annual meeting in early March, according to a speech published separately.”

Source: Patti Waldmeir, Financial Times, January 11, 2009.

US Global Investors: Rebound in Chinese bank lending
“A significant rebound in money supply growth and bank lending in China during December suggests that the government’s stimulating policies may have achieved some success. However, challenges for the economy are likely to be sustained in the foreseeable future.”

Source: US Global Investors – Weekly Investor Alert, January 16, 2009.

Bloomberg: China passes Germany to become third-biggest economy
“China’s economy overtook Germany’s in 2007 to become the world’s third largest, underscoring the nation’s increasing economic and political clout.

“Gross domestic product expanded 13% from a year earlier, more than a previous estimate of 11.9%, to 25.731 trillion yuan ($3.38 trillion), the statistics bureau said on its website today. That topped Germany’s 2.424 trillion euros ($3.32 trillion), using average exchange rates for 2007.

“China’s economy is 70 times bigger than when leader Deng Xiaoping ditched hard-line Communist policies in favor of free-market reforms in 1978. After overtaking the UK and France in 2005, China became the third nation to complete a spacewalk, hosted the Olympic Games and surpassed Japan as the biggest buyer of US Treasuries.

“The figure was released as China faces the weakest economic expansion since 1990 after exports collapsed because of the global recession.”

Source: Nipa Piboontanasawat and Kevin Hamlin, Bloomberg, January 14 2009.

Financial Times: Jim O’Neill on the Bric economies
“Jim O’Neill, Chief Economist at Goldman Sachs, tells David Oakley about the reasons to be positive on China, finding value in Bric economies, and the problems facing Russia.”

Source: Financial Times, January 9, 2009.

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Interview: Nick Barisheff, Bullion Management Group Inc.

Tuesday, June 17th, 2008

Exclusive Interview
Nick Barisheff,
President and CEO,
Bullion Management Group Inc.

This week we interview Mr. Nick Barisheff, President & CEO, Bullion Management Group, and discuss with him the importance of gold bullion. Mr. Barisheff founded Bullion Management Group Inc. in 1997, and is the portfolio manager of BMG BullionFund, Canada’s only open-ended fund investing purely in gold, silver, and platinum bullion.

For a PDF version, click here:[PDF] Interview with Nick Barisheff, BMG Inc.  Here is the interview: 

GreenLightAdvisor.com: What’s the most important thing people need to understand about gold?
 
Nick Barisheff: Many people think gold is a commodity like copper, zinc or pork bellies, but it has 3,000 years of history as money. It was money that no government created by edict.  It was just adopted for usage by itself, and it was and still is the best form of money.  Currently, we have a 37-year global experiment in paper money.  All prior paper money experiments ended in hyperinflation, with the currencies becoming worthless.  All previous hyperinflations were contained within a single country, but this time, because of the reserve status of the US dollar, it is likely to be global in nature.

Right now, the price of gold is rising while most currencies are losing purchasing power as well as their value against gold.  Gold comes back into its monetary role when there’s a loss of confidence in the financial system or in paper money, and that’s when people are attracted to it.
Before 1971, the monetary system was governed by the Bretton Woods Agreement. Under that agreement, the US dollar was backed by gold, and other currencies were pegged to the dollar.  Other countries could trade their US dollars for gold.  Essentially, US gold indirectly backed all other currencies. Then things changed.  As the US was getting into the Vietnam War and into President Johnson’s policy of guns and butter, US gold reserves started declining.  Countries holding dollars were presenting their US dollars and asking for gold in return, and that led to US gold reserves dropping from a peak of 22,000 tonnes to 8,800 tonnes. On August 15, 1971, President Nixon “closed the gold window” and stopped the exchange of US dollars for gold.  Closing the gold window was a euphemism, but basically the US declared bankruptcy. When you can’t meet your obligations when they are due, that’s what it is. So from that point in time, we’ve had 37 years where the entire world has been on a global fiat currency monetary system.

Since 1971, when the dollar was freed from the constraints imposed on a currency backed by gold, the US has experienced increasing federal government and current account deficits.  The US is now borrowing $800 billion annually to fund its consumption of foreign-made goods and commodities, and the federal government is running a deficit of almost $350 billion.  At some point, foreigners will become unwilling to continue funding US expenditures, forcing the Federal Reserve to expand the money supply at a faster pace.  This will result in rising inflation, rising interest rates and a continuous decline in the US dollar.
 
GLA: We’ve had the fastest money supply growth in almost 40 years that’s resulting in increased inflation. Why would an investor want to go into T-bills, given that interest rates don’t even cover half of the stated inflation rate, which we know isn’t even the real inflation rate?
 
NB: For the first time in history, we have an unlimited ability, by all central banks, to print,  however much money we want, so to speak.  Apart from the US M3 money supply growing at about 20%, we also have India and China growing theirs at about the same rate. China is at 18%, India is at 20%, and Russia is at 45%. As China or India sell goods to the US, they take in US dollars and they print yuan or rupees against those US dollars.  Japan’s a little different; there, individuals and corporations can take their US dollars and buy US assets themselves. In China you have to turn your US dollars in to the central bank.

In today’s inflationary environment, many who invest in fixed income investment do not appreciate that instead of being “safe” investments, they are in fact guaranteed losses of purchasing power when you take inflation and taxation into account.  We have done some analysis into a systematic withdrawal from our Fund for those investors requiring income.  Based on the fact that precious metals have a long track record of staying ahead of inflation, an investor would be far better off in precious metals in terms of maintaining principal after inflation and having more after-tax cash flow to spend.
 
GLA: What did you think of John Embry’s (Sprott Asset Management) recent article about the manipulation of the price of gold? His assertion was that the central banks are deliberately keeping gold below $1,000 per ounce.
 
NB: John and Eric Sprott have recently written an extensive report called Not Free, Not Fair.  The report brings forth a great deal of evidence that the precious metals markets may be manipulated.  While it may seem like there’s a conspiracy to suppress the gold price, I think it’s simpler than that.  It’s a well know fact that it is the job of central banks to manage their country’s currency, that’s part of their mandate.  Central banks understand that gold is a currency, but one that they can’t expand as easily as paper money.  I don’t think there is any lack of understanding on the part of central bankers that gold is an alternative currency.
 
GLA: Isn’t gold considered to be just a commodity with no real monetary role anymore?
 
NB:  I’d like to refer to an article by Tony Fell , and it’s particularly interesting, given that he was chairman of RBC Capital Markets at the time of writing. He talks about how gold has three attributes: it’s a commodity, a store of value and a currency. He says so many people now think of gold only as a commodity or jewellery, or as an archaic relic, that there’s a feeling of “who needs it anymore?”  People don’t think of it as money.
 
However, the daily sales volume gives a conclusive indicator that gold is much more than an industrial commodity. The physical turnover of gold by members of the UK’s London Bullion Marketing Association is about *$25 billion per day. We’re talking about net turnover between the LBMA members. The volume is estimated at 7-10 times that amount. 
 
It’s pretty clear that these are currency transactions. That’s why gold, silver and platinum trade on the currency desks of all the banks and brokerages, not the commodity desks.
What people need to know is that gold is a currency [like dollars or euros or yen]. Gold is not trading at these volumes as a commodity or as some archaic relic.
 
GLA: What are your thoughts on technical analysis, given that gold is a currency?
 
NB: Technical analysis works if you’re looking at widely distributed stocks like the S&P 500, for example, where there are many, many transactions that accurately reflect public sentiment. The price of gold, however, can be impacted by one country, or one very wealthy individual who wakes up one morning and decides to buy, and then you can throw the charts away. Or when a government decides to sell or a government intervenes. I’ve looked at technical analysis for gold in the past and tried to back-test with various techniques and found that they don’t work more often than they do.  In the most recent case, there is no justification for the drop in gold price; it should have been rising because nothing has fundamentally changed. In fact, the fundamentals got worse and the gold price should have rallied.  None of the problems went away; nothing was solved; the conditions are as bad as or worse than they were previously. So the drop in gold’s price has been a false decline.
 
GLA: So, it’s the value of paper currency that changes, not the value of gold [so to speak]?
 
NB:  One of the attributes of gold as money is that you can’t simply create it at will, like paper money. It’s no one else’s promise of performance and it’s not someone else’s liability. It’s not going to zero, no matter what.  And, whether we’re moving the measuring stick of inflation or deflation really doesn’t matter, because the way gold should be measured is in terms of purchasing power.  It doesn’t matter if gold is priced at $1,000 in paper money per ounce or $2 in paper money per ounce, it will retain its purchasing power in either circumstance.
 
The first important step in the big picture of understanding gold is that it is a store of wealth with a 3,000 year history, and it’s money. Over the long term, it retains its purchasing power. That’s why they say that an ounce of gold will always buy a man’s suit.
 
Apart from that, the US dollar is down 85% in purchasing power since 1971. In 1971 you could buy a car with 100 ounces of gold; a car was about $3,500 and gold was $35 an ounce.  With 1,000 ounces, or about $35,000, you could buy a house. Today, you could buy several cars or a luxury car with 100 ounces, and a mansion with 1,000 ounces.  You could also buy more units of the Dow Jones Industrial Average with your ounce today than you could in 1971. So that ounce has preserved its purchasing power while currencies have lost over 80% of their value.
 
GLA: Apparently, in the last 40 or 50 years, there’s only been three years that there was net selling by gold investors, three years out of almost half a century. Is this true?
 
NB: People who hold bullion tend to hold it for a long time, as the core of their entire wealth.  It’s not sold once you understand its basic characteristics, because you have to have a reason to sell it, you have to use it to buy something better.  I tend to look at investment performance as to whether I end up with more gold ounces or less gold ounces rather than percentage returns; you get a different conclusion then. For example, if you had invested 44 ounces in the Dow in 2000, you would now get back only 14 ounces.
 
This current cycle is not a conventional bull market in precious metals; I think we’re in the midst of a change in the global monetary system. This is not going to be like a typical commodity cycle where we go up for four years and down for four years; I think we’re witnessing a transition into another monetary system, whatever form that may take. At the end of this period the US dollar will no longer be the world’s reserve currency.
 
GLA: What happens if the US dollar ceases to be the standard?
 
NB: What happened when the British pound ceased to be the standard?  It just ceased to be the standard.  Its decline in value is still ongoing.  It’s happened to every empire throughout history: the British, the Roman, the Greek, the Spanish, the Persian, and the Chinese. Every single empire ended up debasing their currency in order to maintain the empire.
 
GLA:  Is gold likely to increase further going forward or has it topped and investors have missed out?
 
Currently, we have a lot of noise in terms of the credit contraction, real estate bubble, record high debt at all levels, dangerous derivatives vulnerabilities and unsustainable US current account and trade deficits.  These could still blow up into bigger problems at any time. However let’s hope they get resolved or at the very least postponed somehow.
 
But there are two factors that are not changeable in all of this.
 
First: The US has to print money on an accelerating basis. Has to – because of the underfunded Social Security and Medicare obligations – which at present are about $60 trillion. If you took all of the net earnings of US individuals and companies it would not be enough to pay that off. You can’t tax people enough and politically you cannot tell everybody, “Sorry, we can’t give you your Social Security – we don’t have the money. And no Medicare either.” So they have to keep printing money.
 
Second: The issue of Peak Oil – it used to be a debate as to when the production of oil would peak. Now it looks like that has already happened, in March 2006.  As a result we have a situation where oil production is declining while demand is increasing, particularly from India and China.  This will result in ever-increasing oil prices, and also increasing prices for almost every product and service.
 
As these two forces – increased money printing and peak oil – interact, the result is a declining dollar alongside constantly increasing oil prices.  This leads to even greater oil price increases in an effort to offset the dollar decline.  These two highly inflationary factors are working in tandem, and they can’t be changed.
 
Therefore, as oil rises and the dollar declines, commodities – and particularly precious metals – will continue to rise.
 
GLA: What’s the relationship between oil and gold?
 
NB: There’s not necessarily a great deal of correlation between the two in the short term. However, in the longer term, the correlation has been in the order of about 16 barrels of oil for every ounce of gold.
 
GLA: Has that been consistent long term and what is the outlook for precious metals?
 
NB: With only short-term fluctuations, this ratio has held up over the long term. At this point the price of gold is undervalued compared to the price of oil. Gold should be closer to $1,500 an ounce if you use this measure.
 
On top of this kind of inflationary issue eroding financial confidence, we’re at peak production in gold. When the price of gold was low, miners employed high-grading to get the most easily attainable gold out of the ground. As the price rises, miners resort to lower-grade mining, which has become worthwhile – but in some cases you have to sift through tonnes of ore for each ounce.
Platinum, for instance; it takes six months to get an ounce of platinum out of roughly 10,000 tonnes of ore. Right now, almost all the platinum produced originates in South Africa, and the mines are miles underground, and electricity intensive. Power shortages in South Africa are interfering with production and slowing things down. All these forces are coming together, slowing production and driving up prices.
With silver, most of the aboveground reserves have been depleted – most of the silver that is produced is consumed each and every year. Silver also has two demand drivers – monetary and industrial. The number of industrial applications are growing every year while the monetary demand has also been growing in the past few years. It is important to remember that “silver” means “money” in several languages.
 
GLA: Why is gold so important as an element of diversification for investors?
 
NB: Take a look at the cycle from 1968 to 1982 – during that time it took stocks the whole 14 years to break even.  If you factor inflation into it, it actually took until 1995. So stocks didn’t look so good in the past cycle, and they are not looking very good now. The DJIA is well below its inflation-adjusted highs. Its performance is much worse when measured in gold ounces. The DJIA has declined from a high of 44 ounces of gold in 2000 to about 14 today, but if you look at a chart the Dow appears to be at new highs.  It’s like taking the Zimbabwe stock market and saying, “Look how well Zimbabwean stocks have done; the market was up 8,000%.”  But what if we adjust for the 100,000% inflation in that country? Not so good, is it?
 
BMG BullionFund is internally diversified.  We buy physical gold, platinum, and silver in equal amounts. While some people like to focus on gold, they would miss out on the fact that silver and platinum have both outperformed gold since the beginning of this cycle in 2002.
 
GLA: What do you do about inflation?
 
NB: First, it is important to look at real inflation. What is real inflation? The real number is around 9%, not 3%. The calculations the government uses for the Consumer Price Index (CPI) are really meaningless as a true inflation indicator. The real definition of inflation is an increase in the money supply that leads to an increase in prices. Prices do not increase on their own unless you have a shortage; when you increase the money supply, what you’re really doing is debasing the currency, and as the purchasing power of the currency declines prices appear to be rising. So with the US money supply (M3) growing at 20%, Canada’s growing at 9%, and most other countries’ growing at around 15%, that’s going to result in rising prices and real inflation.
 
If you take real inflation into account, Wainwright Economics suggests that the appropriate bullion allocation for a bond investor’s portfolio is 18%, and for the equity investor’s portfolio 40%, and that’s just to break even with inflation. Although this may sound incredible, think of the 1970s. How much bullion was required just to break even in an equity portfolio?  Bullion went up 2,300%, while equities were flat on a nominal basis. Inflation was 15%.
 
So without even getting wrapped up in a discussion about the complex subject of money, those two points are fairly straightforward. Ibbotson Associates confirmed that precious metals are the most negatively correlated asset class to the traditional financial assets, so it gives the biggest bang for the buck for the least amount of allocation. In the process you also achieve a more balanced, diversified portfolio. Advisors would do well to have an allocation to precious metals to protect their clients from under-diversification.
 
GLA: Do you think this pullback in gold is an opportunity to add to positions at this time?
 
NB: Yes as long as there hasn’t been a major change in the fundamentals that drive the price. When these pullbacks occur, you always get some technical interpretations, whether it’s conventional technical analysis or Elliot Wave, coming out with the idea that the bull market in precious metals is over and that it’s now going down forever and so on.
 
When these things happen, you have to ask if anything changed fundamentally to justify that decline.  If nothing changed fundamentally, the only conclusion you can draw is that something’s wrong in the technical interpretations.  In all likelihood the technical interpretation is wrong because there’s been an intervention by monetary authorities. Technical analysis only works when the markets are working freely.
 
GLA: Well, whatever it is they’re trying to do to knock the price down, once again, he who wins in the end is he who has the most ounces and the most shares. It’s got to have been a good year for you with gold prices up 10%, silver up close to 19% and platinum prices over 30%.
 
NB: Yes, it has. We have grown assets year-over-year by 80% this year alone, so it’s been a substantial increase, and performance-wise, we’re about 20% year-to-date.
 
GLA: Thank you very much for sharing your knowledge with us.
 
*All amounts expressed in US dollars, unless otherwise noted.
For a PDF version, click here: [PDF] Interview with Nick Barisheff, BMG Inc. 
  

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