Economic Resilience of Emerging Markets

Monday, September 12th, 2011

A boxer’s stamina is judged by how quickly he rebounds from a blow. Strength of a country, then, could be measured by how quickly the economy can bounce back from a crisis. The Economist provided one measure when it compared countries’ percentage change in real GDP per person from the fourth quarter of 2007 through the second quarter of 2011.

The chart shows a striking contrast: GDP per person has rebounded substantially faster in many emerging market countries compared to developed countries. The top 10 are all emerging markets in Asia, South America and Eastern Europe. China topped the world with nearly a 35 percent change in real GDP per person, followed by India, which had a change rate of more than 20 percent. Argentina and Brazil also grew significantly, as did Poland, Turkey and Russia.

Developed, debt-burdened markets detracted the most, with Ireland and Greece declining more than 10 percent. The United States had the seventh- worst change in real GDP per person, although it rebounded more than Portugal, France and the Netherlands.

This chart reaffirms our belief that emerging markets offer significant growth potential for investors. Since the recession began a few years ago, the growth weight appears to have begun to tilt toward the E-7 countries. Historically, the G-7 countries have contributed 50 percent of global GDP with only 11 percent of the total population. In contrast, E-7 countries (the seven most populous emerging market countries) produced only 21 percent of global GDP. We expect the GDP of the E-7 will continue to grow, and will one day outpace the growth of the G-7.

The key is in government policies, so our team will closely follow the countries’ leaders to see which nations support and encourage this growth over the next several years. It is in those countries where we believe the best opportunities lie.

Tags: Belief That, Boxer, Brazil, Eastern Europe, Economist, Emerging Market Countries, Emerging Markets, Fourth Quarter, GDP, Global Gdp, Government Policies, India, Percent Change, Percentage Change, Real Gdp, Recession, Resilience, Second Quarter, South America, Stamina, Striking Contrast, Total Population
Posted in Brazil, India, Markets | Comments Off

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

Sunday, December 28th, 2008

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

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

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

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

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

Source: Daryl Cagle

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, December 22, 2008.

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

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

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

Week’s economic reports

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

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Dec 23	8:30 AM	Chain Deflator-Final	Q3	3.9%	4.2%	4.2%	4.2%
Dec 23	8:30 AM	GDP-Final	Q3	-0.5%	-0.5%	-0.5%	-0.5%
Dec 23	10:00 AM	Existing Home Sales	Nov	4.49M	4.95M	4.93M	4.91M
Dec 23	10:00 AM	New Home Sales	Nov	407K	415K	415K	419K
Dec 23	10:00 AM	Michigan Sentiment-Revised	Dec	60.1	58.8	58.8	59.1
Dec 24	8:30 AM	Durable Orders	Nov	-1.0%	-3.5%	-3.1%	-8.4%
Dec 24	8:30 AM	Initial Claims	12/20	586K	545K	558K	556K
Dec 24	8:30 AM	Personal Income	Nov	-0.2%	0.1%	0.0%	0.1%
Dec 24	8:30 AM	Personal Spending	Nov	-0.6%	-0.8%	-0.8%	-1.0%
Dec 24	10:35 AM	Crude Inventories	12/20	-3.1m	NA	NA	NA

Source: Yahoo Finance, December 26, 2008.

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

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

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

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

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

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

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

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

Source: Daryl Cagle

 

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

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

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

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

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

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

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

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

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

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

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

Source: CNBC, December 22, 2008.

BNN: Conversation with BMO’s strategist Don Coxe

Source: BNN, December 23, 2008.

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

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

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

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

Source: CNBC, December 26, 2008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Fox News, December 16, 2008.

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

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

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

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

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

Click here for the full article.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Marketplace, December 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: CNNMoney.com, December 26, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, December 24, 2008.

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

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

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

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

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

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

Source: Bespoke, December 23, 2008.

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

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

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

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

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

Source: Bespoke, December 22, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: CNBC, December 23, 2008.

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

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

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

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

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

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

Source: Commodity Online, December 27, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Words from the (investment) wise for the week that was (Dec 15 – 21, 2008)

Sunday, December 21st, 2008

“Americans have always been able to handle austerity and even adversity. Prosperity [greed!] is what is doing us in,” said James Reston, former New York Times journalist and Pulitzer Prize winner.

Another chapter in dealing with the current credit and economic adversity was written on Tuesday when the US Federal Reserve announced a no-holds-barred set of measures in a determined attempt to fix the broken credit machine, revive economic activity and stem the deflationary tide.

The Federal Open Market Committee’s (FOMC) policy statement noted: “The Fed will employ all available tools to promote the resumption of sustainable economic growth … In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the Fed funds rate for some time.”

Although the FOMC slashed the Fed funds rate to a target range of 0 to 0.25% – the lowest the central bank’s key rate has been on record – the Fed was actually simply aligning its target rate with the effective rate, thereby pushing the US into an era of Zirp – a zero-interest-rate policy like that used by Japan for six years in its own fight against deflation.

The Fed’s communiqué also said: “The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level.” The statement discussed specific actions that would move the Fed further towards a quantitative easing approach to monetary policy.

Source: Daryl Cagle

President-elect Barack Obama told reporters the fact that the Fed had no more room to cut rates underscored the case for a big fiscal stimulus. “We are running out of the traditional ammunition that’s used in a recession, which is to lower interest rates,” he said according to the Financial Times. Word circulated that Obama may ask Congress next year to approve a stimulus plan of about $850-billion.

Investors’ concerns about the outlook for the global economy deepened on the back of the Fed’s announcement, as seen from government bond yields plunging to record lows and a sharp sell-off in oil prices (despite the announcement of the largest supply cut in Opec’s history). Furthermore, the dollar also tumbled on worries about the US’s public debt expansion and the potential inflationary implications of the “printing press”, although a relief rally did take place on Friday. (Also see my post “Greenback slumped on the canvas”.)

As far as stock markets are concerned, investors have again been shrugging off bad news – a pattern seen since the poor manufacturing and payrolls data of more than two weeks ago. “The newspapers may be giving us a parade of bad news, but the stock market is beginning to march to a different drummer,” said venerable newsletter writer Richard Russell (Dow Theory Letters). This is evidenced from the MSCI World Index (+2.4%), S&P 500 Index (+0.9%) and the MSCI Emerging Markets Index (+5.5%) all improving for a second week running.

The scamster Bernard Madoff’s Ponzi scheme also vied for a place in the history books, causing more billions to evaporate to money heaven – yet another example of how greed clouded the minds of people during the halcyon days. (Click here to track the fallout from the fraud.)

Bill King (The King Report), never one to mince his words, commented as follows: “Madoff allegedly engaged in a scheme that is similar to what the US government has been perpetrating for years – giving people benefits now and promising future benefits, even though the benefits are mathematically impossible to pay, by using new cash flows from taxpayers.”

On the bailout front, the White House gave Detroit their Christmas wish, announcing that General Motors (GM) and Chrysler will receive $13.4 billion in emergency government loans in exchange for substantially restructuring their businesses, according to Bloomberg. “Another $4 billion will be available to GM in February provided Congress releases the second half of the $700 billion TARP fund originally set up to bail out financial institutions.”

Some cheer has also been seen in the credit markets, with the TED spread (i.e. three-month dollar LIBOR less three-month Treasury Bills) declining by 43 basis points to 1.48% – the lowest level since the Lehman bankruptcy in September. Although this measure is moving in the right direction, credit spreads need to narrow further to indicate that confidence is returning and liquidity is starting to move freely again.

The cost of buying credit insurance for US and European companies also eased as shown by the narrower spreads for both the CDX (North America, investment grade) Index (down from 263 to 213) and the Markit iTraxx Europe Index (down from 214 to 191). High-yield credit indices also improved.

There is also some encouragement from the weekly average rates for US 30-year fixed mortgages having declined to 4.94% from 6.30% at the beginning of November, according to Zillow.com.

Next, a tag cloud from the dozens of articles I have read during the past week. This is a way of visualizing word frequencies at a glance. The key words include the usual suspects such as “bank”, “economy”, “Fed”, “market”, “prices” and “rate”.

Regarding the outlook for the stock market, the Wall Street Journal’s MarketBeat blog reported legendary money manager Jeremy Grantham as predicting that beaten-down equities will rally until spring, at which time the bear market will resume.

“While he said that equities in the last couple of months had reached a level of cheapness than had not been seen in years, he still expects more pain to come. Those who can invest with a seven-year time horizon should do well, saying that ‘we’ve popped all of the bigger bubbles’, but he expects ‘we’ll overrun on the downside’.

“He says that the market will likely continue to rally into the spring, and it ‘will be big enough to convince about three-quarters of the players that [the bear market] is all over’. However, he doesn’t believe it is over – expecting a ‘good rally and a different kind of decline, on the sheer grinding of bad news’. He expects something similar to 1974, where the market takes a step forward and a couple steps back, and is fed ‘a diet of ugly earnings’.”

From across the pond, David Fuller (Fullermoney) added: “… markets had fallen sufficiently so that one could nibble on weakness, taking a long-term view. My guess is that China has not only bottomed but is also leading the way back up. However the case is not proven, and will not be until we see base formations for China and most other markets, plus breaks above the 200-day moving averages, which have also turned up. At that point, the next bull market should be well under way.”

The S&P 500 could fall to as low as 600 in 2009 and “alternative assets” like commodities and currencies will provide no shelter for investors, said Gary Shilling in an interview on Tech Ticker (hat tip: Clusterstock). “Having been appropriately bearish heading into this year, Shilling sees ‘few good places to hide’ in 2009. His ‘S&P 600’ prediction, a 33% drop from current levels, is based on a view that S&P earnings will be $40 per share next year (versus the consensus of $83) and the index will trade at a P/E multiple of 15. (Here’s the math: $40 EPS x 15 P/E = 600.)”

Jeffrey Hirsch (Stock Trader’s Almanac) draws our attention to the so-called Santa Claus Rally. This is the trading period from the day after Christmas to the close of the second trading day of the New Year. During this period stocks historically tended to advance, but when recording a loss, it was frequently a sign of trouble ahead.

In my opinion, stock markets are still caught between the actions of central banks pulling out all stops to stabilize the financial and economic situation on the one hand, and a worsening economic and corporate picture on the other. The major US indices seem locked in a short-term trading range, having fallen back below their 50-day moving averages.

The CBOE Volatility Index (VIX) has declined from more than 80 in October and November to 44.9 on Friday. It is not uncommon for short-term volatility to be at extreme levels at bottom turning points, and for stocks to improve as the “storm” grows quieter. It nevertheless remains too early to tell whether a secular stock market low has been recorded on November 20 and, failing further technical and fundamental evidence, I remain distrustful of rallies. In short, we are in a wait-and-see mode. (Also see my post “Stock markets: is this it?”.)

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

Economic reports released in the US during the past week confirmed a world of “depression economics” (to coin Nobel Prize winner Paul Krugman’s phrase). According to Briefing.com, industrial production declined by 0.6% in November, housing starts plummeted by 18.9% (marking the largest decline since March 1984), building permits hit a record low, and weekly initial jobless claims held near a 26-year high. Furthermore, the seasonally unadjusted CPI fell 1.9% in November, the largest drop since the 1930s.

Elsewhere in the world, data releases compounded anxiety about a severe global recession, as seen from the following:

- Germany’s Ifo Business Climate Index fell to a record low in December. The outcome reflects the ongoing stresses in the financial markets and weaker global and domestic economic activity, which have weighed on business sentiment. The downward trend in the Ifo suggests that economic activity in Germany will be very weak in the fourth quarter and prospects going forward remain bleak.

- BBC News reports that France will enter recession in the first quarter of 2009, according to Insee, the country’s national statistics agency. France is the Eurozone’s second biggest economy, and would be the latest major world economy to enter recession.

- The Bank of England’s Monetary Policy Committee voted unanimously in favour of the decision to cut the main repo rate by 100 basis points to 2% at the December monetary policy meeting. However, the minutes revealed that the central bank had considered an even more aggressive interest rate cut, heightening expectations that the UK could follow the US in adopting a quantitative easing policy.

- Confidence among Japanese businesses capitulated during the fourth quarter, with the Tankan Survey Index for large manufacturers recording its biggest decline in more than three decades. Business sentiment in Japan is now at its lowest level in more than six years.

- The Bank of Japan followed the lead of the Fed and moved to a near-zero interest rate environment at its December monetary policy meeting. The central bank cut its overnight call rate target by 20 basis points to 0.10%.

- China’s industrial production growth rose only 5.5% year-on-year in November, the slowest gain since 1999 and steeply slower than the 17% growth reported in March, said RGE. Electricity production fell 9.6% – more than in October, which had marked the first fall in a decade.

Source: Financial Times, December 16, 2008.

Summarizing the economic situation, Nouriel Roubini, professor at New York University and chairman of RGE, said in an article in Forbes: “The outlook for the US and the global economy is now very bleak and getting worse as the global economy experiences its worst recession in decades. In the US, recession started last December and will last at least 24 months until next December – the longest and deepest US recession since World War II, with the cumulative fall in gross domestic product possibly exceeding 5%.”

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

Source: Yahoo Finance, December 19, 2008.

Next week’s US economic highlights, courtesy of Northern Trust, include the following:

1. Real GDP (December 23): The final estimate of third-quarter Real GDP is expected to be left at -0.5%. Consensus: -0.5%.

2. Existing Sales (December 23): Consensus: 4.90 million versus 4.89 million in October.

3. New Home Sales (December 23): Consensus: 420,000 versus 433,000 in October.

4. Durable Goods Orders (December 24): Consensus: -3.0% versus -6.2% in October.

5. Personal Income and Spending (December 24): Consensus: Personal income +0.0% versus +0.3% in October; Consumer spending: -0.7% versus -1.0% in October.

Click here for a summary of Wachovia’s weekly economic and financial commentary.

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

Source: Wall Street Journal Online, December 19, 2008.

This week I am giving the customary review of the various asset class movements a skip as family time calls, especially as we have just moved into a new house (located in the scenic Stellenbosch winelands region – about 35 minutes from Cape Town).

On a different note, Madoff’s jeer at the investing public, keeps reminding me of the old adage: “If something sounds too good to be true, that must be because it is too good to be true.” Let’s hope that the news items and words from the investment wise below will assist in bringing cheer to our portfolios during 2009.

Thank you for your friendship and support in making Investment Postcards such a fulfilling experience. Here’s wishing you a great festive season full of fun, laughter and joy. May you have a wonderful 2009.

Source: Daryl Cagle

Krishna Guha (Financial Times): Fed slashes rates to near
“The Federal Reserve moved deeper into uncharted waters on Tuesday, heralding further unconventional measures to support the economy as it slashed interest rates from 1% to virtually zero.

“In a historic statement, the US central bank said it would target a record low interest rate, expressed as a range of between zero and 0.25%. It said it expected to keep rates at ultra-low levels ‘for some time’ and vowed to use ‘all available tools to promote the resumption of sustainable growth and to preserve price stability’.

“The Fed said it ‘stands ready’ to step up its planned purchases of securities issued by Fannie Mae and Freddie Mac, the mortgage giants now under government control. It also said it was ‘evaluating the potential benefits of purchasing longer-term Treasury securities’.

“The aggression of the statement caught the markets by surprise. Mohamed El-Erian, chief executive at Pimco, the bond fund manager, said it was ‘an incredibly strong public declaration that the Fed will throw everything it has in attempting to stabilize the financial and economic situation’.

“The US central bank laid out a strategy that aims to drive down actual borrowing costs for households and companies. It seeks to do so by supporting demand for such loans, reducing the risk spreads on them. At the same time, it wants to keep government bond yields low.

“This means expanded credit and outright asset purchase programs, likely to be funded, at least for now, by expanding reserves and therefore the money supply. Jan Hatzius, chief US economist at Goldman Sachs, called this ‘quantitative easing’. But a senior Fed official said its policy was different from the quantitative easing pursued in post-bubble Japan. The Fed policy is driven by its credit operations whereas Japan targeted bank reserves.

“The Fed said the outlook for economic activity had ‘weakened further’ and acknowledged that ‘inflationary pressures have diminished appreciably’.

“The decision to set a range for interest rates reflects an admission that the US central bank cannot tightly control the actual rate that prevails in the market in current conditions.

“Barack Obama, president-elect, told reporters that the fact that the Fed had no more room to cut rates underscored the case for a big fiscal stimulus. ‘We are running out of the traditional ammunition that’s used in a recession, which is to lower interest rates,’ he said.”

Source: Krishna Guha, Financial Times, December 17, 2008.

BCA Research: US monetary policy – unconventional easing underway
“The FOMC clearly crossed over the line into quantitative-easing territory by cutting the Fed funds target rate virtually to zero, promising to hold it low for a long period, and committing to large purchases of mortgage-related assets and possibly long-term Treasurys.

“In the statement that followed, the FOMC shifted emphasis away from the target rate as the Fed’s primary means of implementing monetary easing in favor of aggressively expanding its balance sheet to drive private sector borrowing rates lower.

“Early clues to its latest thinking were provided late last month upon the launch of its agency and MBS purchase programs and Term Asset-Backed Liquidity Facility (TALF). At that time, it promised to increase the size, the scope and the term of its liquidity facilities as necessary to get credit markets moving again. These comments were echoed in the FOMC statement, which confirms the Fed is prepared to do whatever it takes to restore order to the financial system and head off a potentially damaging bout of deflation.

“The Fed will drive agency and agency-backed MBS yields lower, and will keep Treasurys well bid. If investment-grade corporate bond yields do not fall in the coming months, the Fed could add new facilities to support this market as well.”

Source: BCA Research, December 17, 2008.

Nouriel Roubini (Forbes): Helicopter Ben goes ZIRP!
“The Fed decision to cut the Fed Funds range to 0% to 0.25% has formalized the fact that, over the last month, the Fed had already moved to a zero-interest-rate policy, or ZIRP, and started a policy of quantitative easing (QE) as its balance sheet has surged over the last few months from $800 billion to over $2 trillion.

“The Fed is now undertaking even more unorthodox policy actions. These actions are occurring while the US and the global economy are at risk of a protracted bout of ‘stag-deflation’ (stagnation and deflation).

“While it is now fashionable to talk about such deflationary risks (and the latest US Consumer Price Index figures confirm that we are entering into deflation), some of us were worrying about the coming deflation well before the mainstream – concerned with short-run and unsustainable increases in commodity prices – discovered the deflationary risks in the global economy.

“It was clear to those who saw, early on, the risks of a severe US and global recession, that deflationary rather than inflationary pressures would emerge alongside a slack in goods, labor and commodity markets. Welcome to the world of stag-deflation or, as Paul Krugman would put it, the world of ‘depression economics’.

So what is the outlook for 2009? And what is the likely policy response to the risks of a global stag-deflation?

“The outlook for the US and the global economy is now very bleak and getting worse as the global economy experiences its worst recession in decades. In the US, recession started last December and will last at least 24 months until next December – the longest and deepest US recession since World War II, with the cumulative fall in gross domestic product possibly exceeding 5%.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, December 18, 2008.

John Authers (Financial Times): The Fed’s morning after
“Markets expect the Bank of Japan to cut interest rats to zero; the Fed’s decision has drastically undercut the dollar, oil prices continue to fall despite low rates, a week dollar and a cut in output.”

Click here for the article.

Source: John Authers, Financial Times, December 17, 2008.

Paul Kedrosky (Infectious Greed): ZIRP-ishness around the world
“A quick-and-dirty chart of ZIRP-ishness – the degree to which countries’ nominal interest rates are approaching zero – around the world. Note: The whiter the country the more ZIRP-ish it is, while the more orange you are the further that country’s rate is from zero. Finally, gray means no rate data currently in the dataset.

“It is interesting how, for the most part, ZIRP neatly breaks down into the BRIC/emerging markets versus the rest of the world.”

Source: Paul Kedrosky, Infectious Greed, December 18, 2008.

Bloomberg: Obama may seek a stimulus plan exceeding $850 billion
“Barack Obama may ask Congress next year to approve a stimulus plan of around $850 billion, an amount that has grown as the US economy sinks deeper into recession, an adviser to the president-elect said.

“Obama’s transition team believes the amount, about 6% of the US’s $14 trillion economy, is needed to reverse rising unemployment, said the adviser, who spoke on condition of anonymity. The sum would exceed initial estimates by House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, as well as surpassing what some economists and the International Monetary Fund say is required.

“The latest proposal is circulating in Congress as Obama’s advisers work with lawmakers to craft a package aimed at improving roads, bridges and other parts of the US’s crumbling infrastructure. The plan probably will also include state aid for unemployment and health-care programs and incentives such as tax credits to promote renewable energy production, lawmakers have said.

“The president-elect wants to create as many as 2.5 million jobs over the next two years. As unemployment has increased, estimates of what is needed to pull the nation out of the slump have continued to grow, with some economists calling for a $1 trillion spending program.

“They include Kenneth Rogoff, a Harvard University professor who was an adviser to Republican presidential candidate John McCain, and Joseph Stiglitz, a Nobel Prize winner who served in President Bill Clinton’s White House.

“UBS AG economists calculate a global stimulus of 1.5% of gross domestic product has so far been lined up for next year. The IMF has called for packages of at least 2% of GDP to stem the economic crisis that’s sweeping the globe.”

Source: Lorraine Woellert, Bloomberg, December 18, 2008.

Bloomberg: $1 trillion stimulus
“Stimulus competition grows as companies vie for funds; Caterpillar wants a piece of the highway projects; GE is pushing to build an electric ‘smart grid’; Daimler AG hopes to build new buses for mass transit systems; Obama promises huge infrastructure investment.”

Source: Bloomberg (via YouTube), December 18, 2009.

Bloomberg: GM and Chrysler will get $13.4 billion in loans
“General Motors and Chrysler will get $13.4 billion in emergency government loans in exchange for substantially restructuring their businesses, President George W. Bush announced.

“Another $4 billion will be available to GM in February provided Congress releases the second half of the $700 billion Troubled Asset Relief Program fund originally set up to bail out financial institutions. The automakers have until March 31 to meet the conditions of the loans, including demonstrating they have a plan to become profitable, or be forced to repay.

“Winning the assistance is a reprieve for GM, the biggest US automaker, and No. 3 Chrysler after they said they would run out of operating funds as soon as this month. Bush is stepping in after Senate Republicans’ refusal last week to take up a House- approved rescue raised the prospect that the companies would fail, costing millions of jobs.

“‘These are not ordinary circumstances,’ Bush said at the White House today. ‘In the midst of a financial crisis and a recession, allowing the US auto industry to collapse is not a responsible course of action.’

“The cost of letting automakers fail would lead to a 1% reduction in the growth of the US economy and mean about 1.1 million workers would lose their jobs, including those in the auto supply business and among dealers, the White House said in a fact sheet.

“President-elect Barack Obama endorsed the plan, calling it a ‘necessary step’ to avoid a major blow to the economy.

“‘The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely required to save this critical industry,’ Obama said in a statement.

“The United Auto Workers are ‘disappointed’ that Bush added ‘unfair conditions singling out workers’, the union’s president, Ronald Gettelfinger, said in a statement. ‘We will work with the Obama administration and the new Congress to ensure that these unfair conditions are removed,’ Gettelfinger said.

“The package is intended for GM and Chrysler initially. Ford Motor Co., the second-biggest US automaker, has said it can continue operating without aid for now.”

Source: Roger Runningen and John Hughes, Bloomberg, December 19, 2008.

Bloomberg: Fed becoming lender of last resort – interview with Merrill Lynch chief economist David Rosenberg

Source: Bloomberg (via YouTube), December 17, 2008.

CNN Money: Economy rescue – adding up the dollars
“The government is engaged in an unprecedented – and expensive – effort to rescue the economy. Here are all the elements of the bailouts.”

Click on the thumbnail for a large table.

Source: CNN Money, December 15, 2008.

FT Alphaville: Welcome to debt central
“US total debt to GDP is beginning to worry a number of market commentators – even those previously convinced it wasn’t a problem. Most recently, Dennis Gartman of the Gartman Letter, has turned jittery on the issue:

“‘We have never been given to wailing and gnashing our teeth over the US’ growing debt, for during our nearly six decades of life and three and one half decades of trading in markets, we’ve seen the nation’s debt grow even as the quality of life and wealth of the country grew faster. But now, even we are becoming concerned; now even we see potential disaster looming; now even we are depressed … Now even we are considering that double hemlock!’

“As can be seen in the chart below, the figure has certainly ballooned somewhat substantially of late.

“But Americans shouldn’t feel too lonely. There’s at least one other G7 country that can rival the States in the debt to GDP rankings. Have you guess which one it is? Some clues: Land of the Great British Krona, home to Team GB … Yes – it’s the grand old United K. Just take a look at this chart from the Spectator.

“And that’s not even total debt, just external.”

Source: Izabella Kaminska, FT Alphaville, December 12, 2008.

CEP News: Leading nations’ GDP poised to decline in 2009
“US, Japan and euro zone GDPs are expected to decline in 2009, according to the Institute of International Finance (IIF) global economic forecast.

“The IIF forecast is calling for the US economy to decline by 1.3% after rising 1.2% this year, while the euro area economies are projected to decline by 0.9% in 2008 and 1.5% in 2009. Japan’s economy is expected to fall by 1.2% after a flat performance this year.

“IIF Managing Director Charles Dallara said, ‘we now face extraordinary challenges. The extent of the declines in the major economies in the current quarter and in the next quarter or two may be substantial, with the US and the euro area likely to see falls in real GDP in the fourth quarter of this year of respectively 5% and 3%.’

“The IIF is also predicting the downturn in the major economies to impact the leading emerging-market economies. They project the growth in emerging markets to average 5.9% in 2008 and 3.1% in 2009. Weak growth is anticipated to hit central, eastern and southern Europe with growth of just 0.3% for 2009, while the IIF is forecasting growth in South America to come in at 1% next year.

“Overall, global economies are poised to grow 2.0% in 2008 and fall 0.4% in 2009.”

Source: Steve Stecyk, CEP News, December 18, 2008.

The Times: IMF fears unrest without action on economy
“Violent unrest may be sparked around the world by a prolonged global slump unless governments act with greater urgency to jump-start stalled economies, the head of the International Monetary Fund said on Monday.

“Dominique Strauss-Kahn sounded a stark warning over the consequences of what he argued was weak and uncertain government reaction to the economic crisis. He used a hard-hitting speech in Madrid to single out eurozone nations over what he attacked as an inadequate response.

“The broadside from the IMF’s managing director came as fears over a protracted global recession, and political fallout, mounted after China said that its factories’ output registered the weakest growth in almost a decade last month.”

Source: Gary Duncan, The Times, December 16, 2008.

George Magnus (Financial Times): Five ways to start the world economic recovery
“After the Minsky Moment – where euphoria tips into crisis, named after Hyman Minsky – the capitulation of economic activity has been rapid and severe. The outlook is as dark as the doomsayers assert. The only thing that stands between today’s dire economic prospects and a lost decade similar to Japan’s in the 1990s is the competence and authority of macroeconomic policy. We have a long way to go, but for five reasons, even doomsayers can start to feel the force, so to speak.

“First, governments have already acted decisively to preserve the integrity of the formal banking system, while the so-called shadow banking system is collapsing. Over $8,000 billion of programmes to stem the collapse in credit and housing have been announced but it is too soon to declare victory. To strengthen banks in the recession and sustain lending, European banks will need a further $100 billion to $150 billion of capital, while US banks, including regional banks, should quickly be allocated most of the unspent Tarp money of $350 billion.

“Second, governments must continue to facilitate the enormous task of sustaining credit flows and restructuring debt. Bankruptcies are inevitable but additional direct lending programmes, asset purchases and government guarantees are needed to keep liquidity flowing to good corporate and residential borrowers, especially while bank balance sheets are constrained by the need to soak up bad assets that were previously held off-balance sheet. Equity-for-debt swaps will be required for companies with excessive debt.”

Click here for the full article.

Source: George Magnus, Financial Times, December 18, 2008.

CNBC: Feldstein – digging out of the recession
“An outlook on the economy, with Martin Feldstein, former Council of Economic Advisors chairman/National Bureau of Economic Research president emeritus.”

Source: CNBC, December 18, 2008.

Duke University: CFO Survey – historic recession to last another year
“Chief financial officers in the United States and around the world are more pessimistic than at any time in the history of the Duke University/CFO Magazine Global Business Outlook Survey. The majority of chief financial officers in the US and Europe say their firms will slash spending and employment in 2009, and their firms will post losses. The recession will last another year, according to nearly two-thirds of CFOs.

“These are some of the findings of the year-end 2008 quarterly survey, which asked 1,275 CFOs from a broad range of global public and private companies about their expectations for the economy.

CFO Optimism Index: Key Measures

“Weak consumer demand is the top corporate concern. CFOs also continue to worry about credit markets, which are devastating lower-rated firms. Companies rated B or lower face interest rates that are 225 basis points higher than their cost of borrowing before the crisis began.

“The CFO optimism index has proven accurate in predicting future GDP growth, employment and capital spending. This quarter’s extreme pessimism foretells a poor economy in 2009. Thirty-nine percent say the economy will not begin to recover until 2010.”

Source: Duke University, December 10, 2008.

Casey’s Charts: Foreign buyers help drive rates to zero
“Foreign purchases of US Treasury Bills hit a record $147 billion in October, helping drive yields to near zero percent on short-term government debt. Traditionally, foreigners have invested primarily in long-term bonds. This surprising shift into T-Bills reveals that nervous foreigners are transferring their mounds of dollars into more liquid assets. They must think there’s no alternative – why else would they accept a zero return?”

Source: Casey’s Charts, December 17, 2008

The New York Times: Chart of the day – deflation

Source: The New York Times, December 17, 2008 (hat tip: Barry Ritholtz).

Asha Bangalore (Northern Trust): CPI plunges
“The Consumer Price Index (CPI) fell 1.7% in November following a 1.0% drop in October. On a year-to-year basis, the CPI has fallen 1.1% versus a 4.1% increase in all of 2007 and a cycle high of 5.6% year-to-year increase in July 2008. In November 2008, the seasonally unadjusted CPI, which goes back to 1921, fell 1.9%, the largest drop since the 1930s.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 16, 2008.

Asha Bangalore (Northern Trust): Money supply growth trims decline of LEI
“The Index of Leading Economic Indicators (LEI) dropped 0.4% in November, after a revised 0.9% decline in the prior month. The index has fallen in ten out of the last fourteen months. The October-November average of the LEI as a proxy for the fourth quarter is down 3.6% from a year ago, a magnitude that is comparable with declines seen in the 1980’s recession.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 18, 2008.

Asha Bangalore (Northern Trust): Construction of new homes at new low
“Home builders remain reluctant to break new ground. Housing starts fell 18.9% in November to an annual rate of 625,000, the lowest on record since record keeping for this series began in 1959.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 16, 2008.

Washington Post: New poll shows 63% are already hurt by downturn
“The deepening recession has eroded the financial standing and optimism of a broad swath of Americans, nearly two-thirds of whom say that they have been hurt by the downturn and that the country has slipped into long-term economic decline.

“A new Washington Post-ABC News poll also found that a rapidly increasing share of Americans – 66%, up from just over half a year ago – are worried about maintaining their standard of living. Nearly two in 10 said they or someone living in their household had lost a job in the past few months, and more than a quarter said they had their pay or hours reduced. And 15% said that at some point in the past year they fell behind on their rent or mortgage.

“The poll captures the widening fallout from the faltering economy that policymakers are struggling to contain.

“The poll found that nearly two-thirds of Americans support new federal spending to stimulate the economy, and majorities of both Democrats and Republicans back the idea. Concern about deficit spending, however, mutes enthusiasm for the stimulus plan. When respondents were asked whether they would back the plan if it increased the deficit, support dropped to 47%. Overall, nearly nine in 10 said they are worried about the size of the federal budget deficit, including nearly half who are ‘very concerned’.”

Source: Michael Fletcher & Jon Cohen, Washington Post, December 17, 2008.

Bloomberg: Retailers may be weeded out during “Darwinian” competition
The US retail industry will undergo a weeding-out process next year as companies run out of cash as soon as January and competition forces store closings, according to private-equity buyers and restructuring experts.

“‘The United States is massively over-stored in all categories,’ Gregory Segall, a managing partner at buyout firm Versa Capital Management, said today during a panel discussion held at Bloomberg LP’s New York offices. ‘You could probably see 50,000 retail outlets close and it wouldn’t impact the availability and selection and choice of what you buy.’

“Only retailers with healthy balance sheets will survive the recession, said Matthew Katz, a managing director at consulting firm AlixPartners.‘This is a very Darwinian time,’ Katz said.

“Plunging home prices, rising unemployment and tightening credit have led consumers to rein in spending, resulting in what may be the worst holiday season in at least four decades. Macy’s, Kohl’s Corp. and other retailers have marked down items 50% to lure customers, eroding margins at a time when store owners hope to make a third or more of their annual profit.”

Source: Allison Schwartz, Bloomberg, December 17, 2008.

Clusterstock: Bernie Madoff’s victims: the slideshow
“The Bernie Madoff Ponzi scheme is a mess. Bernie himself says $50 billion has vanished. The tales of woe seem to fall into four categories: Superrich Individuals, Little Guys, Funds + Banks, and Charities + Universities + Hospitals. We’ve selected some of each, along with some scenes of the crime.

Click here to view the slideshow

Click here for a more comprehensive text list of Madoff’s victims.

Source: Clusterstock, December 14, 2008.

Bespoke: If you ever see a chart like this, run away fast
“We’ve all heard how Bernie Madoff’s returns sounded too smooth and consistent to be true. In picture form, however, the returns are even more eyebrow raising. The chart below shows the cumulative returns of $1 invested in the hedge fund Fairfield Sentry Limited, which was a fund run by Fairfield Greenwich Group that essentially directed all of its assets to the stewardship of Bernie Madoff. As shown, $1 invested in Madoff back in 1990 was supposed to be worth $6.75 today. NPB Bank, out of Zurich, even offered a version of this fund with three times the leverage. Talk about too good to be true.”

Source: Bespoke, December 16, 2008.

BCA Research: Still a bond-friendly world
“While most of the upside in government bonds has likely already been made, we maintain our long duration call.

“Aggressive monetary easing by each of the major central banks has helped fuel the rally at the long-end of the curve. While the recent drop in yields leaves most government bond markets well into overvalued territory, we are in no rush to take profits on our long duration call. Government bond prices may not have much more upside but value is not a timing tool and the growth and inflation backdrop is likely to keep yields suppressed for an extended period.

“However, we do advise clients to shift their long bond allocations to high quality nongovernment spread product, as we expect a significant narrowing in early 2009. We will await evidence that the global economy is beginning to stabilize, which will most likely take until the second half of 2009, before shifting further down in quality. The time-frame would move up if the Fed signaled that it would begin buying corporates in the interim. While legislation prevents the central bank from directly buying these issues, the Fed could purchase corporate bonds off balance sheet by setting up an SIV.”

Source: BCA Research, December 15, 2008.

Bespoke: 30-year fixed mortgage rates down to 5.28%
“Thirty-year fixed mortgage rates have declined significantly in recent weeks, down from 6% on November 20 to 5.28% as of yesterday [Wednesday]. The Fed is definitely happy to see rates fall, and they’ve still got further to go to get to the 10-year record low of 4.88% seen in 2003.”

Source: Bespoke, December 18, 2008.

CNN Money: Stock picks from the experts
“The crash has driven prices so low that even extreme value investors see some safe buys. The stakes are high whenever you invest, but they’re extra high when you’re managing your money amid a historic financial mess and record volatility.

“For advice equal to the task – in a setting chosen to inspire thoughts of security – we invited five champion fund managers to sit down inside a massive underground vault that’s now part of a restaurant a block from Wall Street: Bob Rodriguez of First Pacific Advisors, who manages the FPA Capital and New Income funds; Susan Byrne, who heads Westwood Holdings Group; Leslie Christian, president and chief investment officer of Portfolio 21 Investments; Tom Forester, manager of the Forester Value fund; and Jeremy Grantham, chairman of asset manager GMO.

“Fortune’s Geoff Colvin led the discussion. Edited excerpts follow; stock prices are as of December 1.

“Let’s get right down to business. Bob, you’ve held a lot of cash in recent years because stocks looked too expensive. Are stocks finally cheap?

“BOB RODRIGUEZ: My value screen went to a new record low in June of 2007, and only 33 companies out of 10,000 qualified. In January of this year we went north of 200 for the first time since the summer of 2002. We went to 250 in the Bear Stearns crisis. And the week of October 16, we hit 447 – the most qualifiers in more than 20 years.

“So stocks are cheap by historical standards. However, we’re being very cautious because what we’re experiencing now is a major shift, the culmination of failed policies in the regulatory system and the private sector that have been building up for 30 years.

“Susan, are stocks cheap?

“SUSAN BYRNE: The markets are providing real returns for the risk that you take all along the spectrum, from equities to debt. So, yes, I think that prices reflect the fact that people are quite rightly very afraid of the risk in the stock market.

“Jeremy, you’ve written that stocks will get cheaper.

“JEREMY GRANTHAM: If you look back at 1982 and 1974, the market was much cheaper than it is today. In ‘74 it was about 40% cheaper, and in ‘82 it was about 60% cheaper. Look at the bad times we had in ‘74 and ‘82, and I think several of us would conclude that this time is likely to be as bad – possibly worse. Bubbles like this always overcorrect.

“How bad will you feel if you put in your cash reserves and the market continues to go down? You’re going to feel awful. And how will you feel if you don’t buy in the cheapest market for 20 years and it runs away and leaves you? Horrible. You have to step your way through so that the regret, which is going to be huge anyway, is about neutral.”

Click here for the full article.

Source: Geoff Colvin, CNN Money, December 15, 2008.

David Stevenson (MoneyWeek): Stock markets might not bottom out until 2014
“Tobin’s Q ratio … This is a ratio developed by Nobel Prize-winning economist James Tobin to compare the market value of companies to the cost of their constituent parts, i.e. their real net asset value.

“When the gauge is more than 1.0, it indicates that the market is overvaluing company assets, while a reading of less than 1.0 suggests shares are undervalued because it’s cheaper to buy quoted companies than build them up.

“The Q ratio on US equities has now dropped to 0.7 from a 1999 peak of 2.9. That could indicate shares are now cheap.

“But think again. The ratio needs to fall to 0.3 to signal the final stage of a major bear market like this one, says Russell Napier at CLSA. How does he know? Because that’s what it did at the end of the four largest US stock price declines in 1921, 1932, 1949 and 1982. That translates into the US S&P 500 index plunging another 55% by 2014. Ouch.

“But between now and then, there’s certainly a good chance of a bear market rally – maybe up to two years long, so those strategists may be right about 2009 – as Obama and the US Fed manage to delay the start of deflation with New Deal II. But those efforts will eventually blow up as ballooning government debt devalues the dollar and prompts a massive share sell-off – on both sides of the Atlantic.

“‘Bear markets always end when they begin ‘pricing in’ deflation, as the value of assets falls and the value of debt stays up, so equity gets crushed’, say Napier. ‘The results are always horrific, and equities will become incredibly cheap.’

“Albert Edwards at SocGen has christened this period the Ice Age. Another bull market will start in time. But as Edward’s description suggests, it’s still a long way away.”

Source: David Stevenson, MoneyWeek, December 11, 2008.

Jeffrey Saut (Raymond James): A rally of some import is in the works
“The call for this week: The two questions du jour are: 1) when will the credit crunch end? and 2) how long will the economy remain weak as it attempts to correct the housing situation?

“Speaking to the first question, participants need to monitor the credit spreads, which so far have not improved.

“As for question two, delinquencies and bank repossessions appear to finally be stabilizing. If the stock market is a discounting mechanism, the 50% decline in the S&P 500 may have already discounted everything.

“Moreover, my sense is that just like participants were conditioned to believe that any decline would not gather much traction back in 1999 and 2000, they are now being conditioned to believe that any rally will not sustain. With stocks’ aggregate value currently below the year’s GDP, we continue to think a rally of some import is in the works”.

Source: Jeffrey Saut, Raymond James, December 15, 2008.

Bespoke: Strategists’ 2009 S&P 500 price targets
“Bloomberg recently surveyed market strategists for their 2009 S&P 500 price targets, and collectively, they’re looking for a gain of 21.8% from the index’s current price level.

“As shown below, UBS is the most bullish of the group with a year-end 2009 price target of 1,300 (a 47.2% gain). UBS was the most bullish last year as well with a 2008 price target of 1,700. Goldman and Strategas are the second most bullish this year with price targets of 1,100. Credit Suisse has a target of 1,050 (for mid-year ‘09), Citi and HSBC are at 1,000, and Merrill Lynch is at 975. Merrill is the least bullish strategist of those surveyed, but they’re still looking for a gain of 10.4% from current levels.

“For those looking for direction from these strategists, their 2008 projections should be noted. All were looking for gains this year, and their targets at the start of the year are far above where the S&P 500 is currently trading.”

Source: Bespoke, December 16, 2008.

King Report: US Dollar Index is collapsing
“What does this mean and what are the implications?

“Bernanke can continue to expand the Fed’s balance sheet until a critical mass of investors loose confidence in either Ben or the Fed’s balance sheet. And the confidence is reflected in the dollar.

“After Ben monetized an enormous amount and assortment of assets after the Bear Stearns, GSE, Lehman, AIG and Big Nine ‘problems’ the dollar rallied sharply. This showed confidence in Ben and the Fed.

“But now the dollar is in collapse. This is a clear sign of something other than confidence in Ben/the Fed. The dollar collapse implies that Ben and the Fed are now ‘on the clock’ and investors will react negatively to further Fed balance sheet hyper expansion.

“Here’s the really big problem with Ben’s gambit. It is the same thing that FDR attempted – devalue the dollar to avert deflation and depression. However, devaluation exports deflation and depression to other countries and they will retaliate, which they did to FDR. This is another reason for The Great Depression.

“So key questions are: How long will it take for China, Japan, Germany or others to retaliate against Ben’s scheme to export deflation and depression to them? And what will be the retribution?”

Source: Bill King, The King Report, December 18, 2008.

Bespoke: Biggest six-day decline for the dollar ever
“The US Dollar index fell another 2.2% today [Tuesday] for its biggest 6-day decline ever. As shown in the table below, the current 6-day decline of 8.07% tops the prior record decline of -7.48% set back in September of 1985. If it’s not one asset falling these days, there’s sure to be another.”

Source: Bespoke, December 17, 2008.

James Turk (GoldMoney): Whatever it takes
“The Federal Reserve today made clear its intention to continue flooding the system with newly created dollars. It says in effect that it will do whatever it takes. Its Federal Open Market Committee (FOMC) lowered the federal funds interest rate target to a range of 0%-to-0.25%, which is an historic low, but it didn’t stop there. The FOMC also announced that it would “employ all available tools” in an attempt to jumpstart the moribund economy. That means it will monetize assets of all sorts. It will turn debt into more US dollar currency.

“The consequences of the Fed’s actions will debase the dollar, perhaps irreparably so. The dollar’s bear market rally that began in July ended last month.

“Since last month’s peak in the Dollar Index, gold has climbed 6.3%, while silver did even better. It has climbed 12.6%. These precious metals are clearly the place to be, given the path of monetary debasement being taken by the Fed.”

Source: James Turk, GoldMoney, December 16, 2008.

David Fuller (Fullermoney): Positioning for an upside move in gold
“I think all gold bulls are currently onto something. These are scary times. Gold feels comfortable in this environment. It is still appreciating against most currencies, including sterling, and also stock markets.

“Against this background, gold could spike higher once again – watch out if / when it maintains a break above that last high just over $900. I am not saying a huge move will occur, because I do not know. However I want to be positioned for an upside move in precious metals at this time. The price charts are increasingly showing us that gold and gold shares are performing once again.”

Source: David Fuller, Fullermoney, December 15, 2008.

I-Net Bridge: Platinum now cheaper than gold
“It is now cheaper to buy platinum than it is to buy gold. On Friday (November 12) the price of gold surpassed the price of platinum for the first time in 12 years.

“Both precious metals eased despite the dollar weakness, bringing a two-day rally to an end as sentiment in global markets after plans to bail out the US automotive industry collapsed.

“The $14 billion bailout for the US automotive industry, besides being a lifeline for faltering vehicle manufacturers, would have boosted platinum demand.

“Platinum, which is mainly used as a component in catalytic converters, is particularly vulnerable to a downturn in the automotive sector since the sector makes up 50% of total demand.

“Failure to provide US carmakers with the financial lifeline they so desperately need has triggered concern over additional job cuts and a possible industry collapse.

“The BullionDesk’s James Moore said gold’s movement over the past few days was ‘very encouraging’, But he said it ‘does raise a few questions about its sustainability short-term, which we suspect won’t be answered until early next year.’

“‘Overall though we would look for gold to continue trading sideways to higher as the Fed’s printing presses further erode the value of the greenback,’ Moore said.

“Turning to platinum, Moore said while the news from the US auto makers may generate some bearish sentiment, the ongoing downgrading of production forecasts should see the metal remain near equilibrium. He expected platinum to remain in the broad $780 to $880 range for the time being.”

Source: I-Net Bridge, December 12, 2008.

Bloomberg: Goldman expects crude to fall to $30 early next year
“Goldman Sachs cut its forecast for oil prices in the first quarter by half to $30 a barrel as the global economic slowdown curbs consumption.

“Crude demand will fall by 1.7 million barrels a day in 2009, analysts Jeffrey Currie and Allison Nathan said in a note. Goldman previously expected West Texas Intermediate, the US benchmark oil, to average $62 in the first quarter.

“The worldwide economic decline has reduced consumer spending and weakened demand for fuel. Demand growth in China and other non-member states of the Paris-based Organization for Economic Cooperation and Development is ‘on the cusp of a sharp deceleration’, the analysts said.

“Crude has fallen for five straight months since trading at a record $147.27 a barrel, as countries including the US, Japan and Germany have entered recessions. Goldman Sachs forecast in July that oil would recover to $149 by the end of this year because consumer demand was ‘restrained, but not destroyed’.”

Source: Rachel Graham, Bloomberg, December 12, 2008.

Bespoke: What a difference seven months makes
“We all remember back in May when Goldman Sachs issued a report predicting that oil’s ‘super spike’ would likely send the commodity to $200 ‘over the next 6-24 months’.

“Seven months later, Goldman is now advising clients that ‘oil prices will fall to $30 a barrel in the next three months’. If the call for $30 oil is as accurate as the call for $200 oil, investors may want to fill up their gas tanks and lock in their heating oil prices asap.”

Source: Bespoke, December 15, 2008.

Financial Times: Record oil cut fails to lift prices
“The depth of the world’s economic downturn was highlighted on Wednesday when the Opec oil cartel appeared powerless in its quest to drive up prices even after agreeing a record cut in its production.

“Opec, which controls about 40% of the world’s oil supplies, announced a further 2.2 million barrel a day cut on top of the 2 million b/d it has already pledged since September. It said it would cut 4.2 million b/d from its September output of 29.045 million b/d, bringing its production ceiling to 24.845 million b/d in January.

“Russia said its companies would be forced to cut another 320,000 b/d early next year only if low oil prices persisted.

“The oil market, however, took a dim view of Opec’s action. Nauman Barakat, of Macquarie in New York, said: ‘A cut of 2.2 million b/d is a pretty decent cut but it will take a while for the market to see the Opec cut actually filtering into the market.’

“Even Washington questioned whether Opec members would comply fully with the announced cuts. ‘It’s not clear that Opec’s actions will be effective, given the shift in global demand and the ability of Opec members to meet the cartel’s targets,’ said Tony Fratto, the White House spokesman.

“‘Regardless, Opec has an obligation to keep the market well supplied and to consider the health of the global economy, so efforts to limit the benefits of lower energy prices are short-sighted,’ he said.

“But Chakib Khelil, Opec president, said Opec had a long-established record in meeting the challenges it faced.”

Source: Carola Hoyos, Financial Times, December 17, 2008.

Bespoke: Baltic Dry Index rally?
“The Baltic Dry Index has been getting some attention recently after rallying more than 15% from its lows. One headline we came across even said that shipping companies were benefiting from the ‘revival’ of the Baltic Index. Revival? While the Baltic Index is indeed up from its lows, it is still down 93.5% from its highs in May, and as the chart below illustrates, the recent gain is barely even visible to the naked eye. Global shipping rates will bottom at some point, and may have already done so, but to call the action of the last two weeks a revival seems a bit premature.”

Source: Bespoke, December 15, 2008.

Financial Times: Shipping charter rates soar
“One of the world’s key shipping markets has begun to recover from a slump, with a revival in Chinese demand for iron ore and coal pushing some average charter prices up almost threefold in the past week.

“The revival in prices, after a disastrous six months for the industry in which charter rates fell nearly 99% for the largest vessels, could encourage ship owners to bring mothballed vessels back into service.

“One participant said yesterday that some owners were able to charge enough to cover the costs of operating Capesize ships, the largest dry bulk carriers. Average rates for these ships, which move coal and iron ore, have nearly tripled over the past week.

“The return of mothballed ships to the market could lead to a repeat of the over-supply which, combined with disappearing demand for coal, iron ore and wheat, depressed prices this year.”

Source: Robert Wright, Financial Times, December 14, 2008.

IFO Business Survey: Business climate in Germany continues to decline
“The Ifo Business Climate for industry and trade in Germany has clearly fallen in December, continuing its decline of more than one year. The dominant feature of the December decline is the worsening of the firms’ current business situation. With regard to the six-month business outlook, the scepticism of the survey participants remains nearly unchanged. A similarly low level of the business climate index was last reached during the second oil crisis at the end of 1982.

“The downturn is affecting above all the manufacturers of export and capital goods and less, up until now, retailing and construction.”

Source: IFO Business Survey, December 18, 2008.

BBC News: France set for 2009 recession
“France will enter recession in 2009, according to Insee, the country’s national statistics agency.

“The agency says the French economy has shrunk by 0.8% in the last three months of 2008 and will contract by another 0.4% in the first quarter of 2009.

“France is eurozone’s second biggest economy, and would be the latest major world economy to enter recession.

“Figures have already shown that Germany and Japan have endured two quarters of negative economic growth, while economists in the US have declared that its economy has been in recession since earlier in 2008.

“France only narrowly avoided negative economic growth between July and September, posting growth of 0.1%.”

Source: BBC News, December 18, 2008.

Victoria Marklew (Northern Trust): Increasingly grim outlook for UK
“The economic news out of the UK is ever more grim. Today was the turn of employment. Claimant count unemployment surged by 75,700 last month, taking the number of unemployed by this measure past the psychologically-important one million mark for the first time since 2001. The broader ILO-basis jobless rate rose from 5.8% in the three months to September, to 6.0% in August-October. As unemployment is usually a lagging indicator, the fact that jobs are being shed at this fast a pace this early in the economic downturn points to a harsh year ahead for employment.”

Source: Victoria Marklew, Northern Trust – Daily Global Commentary, December 17, 2008.

Bloomberg: Japan’s Tankan confidence plunges most in 34 Years
“Sentiment among Japan’s largest manufacturers fell the most in 34 years, signaling companies are likely to cancel spending plans and cut more jobs, pushing the economy further into recession.

“An index that measures confidence among large makers of cars and electronics dropped to minus 24 from minus 3, the Bank of Japan’s quarterly Tankan survey showed today. A negative number means pessimists outnumber optimists.

“The yen’s surge to a 13-year high last week has compounded woes for Japanese manufacturers who are already reeling from a collapse in export markets. Job cuts by companies including Sony and Toyota have brought the recession home to households and increased the risk of a prolonged slump.

“‘The overseas situation is worsening so quickly and so dramatically; it’s really getting dangerous,’ said Tomoko Fujii, head of economics and strategy at Bank of America in Tokyo. ‘The next few months are going to be a very severe period.’”

Source: Jason Clenfield, Bloomberg, December 14, 2008.

Asha Bangalore (Northern Trust): Japan – that sinking feeling

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 15, 2008.

Reuters: Ecuador defaults – fighting “monster” creditors
“President Rafael Correa declared a default on Ecuador’s foreign sovereign bonds on Friday, vowing to fight ‘monster’ debt-holders in court in one of the most aggressive moves against investors in the region for years.

“Ecuador’s dollar-denominated debt prices plunged on news of its second default in a decade and the first in Latin America since Argentina in 2002, although the decision was not expected to lead to similar moves around the region.

“Correa, a US-trained economist and ally of Venezuela’s anti-US President Hugo Chavez, refused to make a $31 million interest payment due on Monday on 2012 global bonds, saying the debt was contracted illegally by a previous administration.

“‘I gave the order not to pay the interest and to go into default,’ Correa said. ‘We know very well who we are up against – real monsters.’

“‘If we have to face international litigation due to this, we will,’ he added at a news conference in the OPEC nation’s largest city of Guayaquil.

“The default is unlikely to have a knock-on effect in other Latin American countries’ debt policies even if some, such as Venezuela, have pledged to investigate any irregularities in their own debt …

“Correa, who had often threatened to default, will offer bond-holders a tough restructuring deal. Last month, Ricardo Patino, a top debt adviser to Correa, said investors should expect a reduction of more than 60% in the nominal value of the global paper in any negotiations.

“Ecuador’s global bonds – the 2012s, 2015s and 2030s – total $3.8 billion of its roughly $10 billion debt.”

Source: Maria Eugenia Tello, Reuters, December 12, 2008.

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Words from the (investment) wise for the week that was (Dec 8 – 14, 2008)

Sunday, December 14th, 2008

Despite a litany of bleak economic and corporate news confronting investors during the past week, global stock markets digested the bearish fodder with a sense of aplomb. The MSCI World Index and the MSCI Emerging Markets Index gained 4.4% and 10.9% respectively on the week, with other reflation trades such as gold (+9.1%) and oil (+20.4%) also putting in a strong performance.

But investor angst was never completely allayed as seen from the yields on US one- and three-month Treasury Bills briefly trading in negative territory for the first time since 1940, indicating the willingness of risk-averse investors to pay the government for the “privilege” of holding their money. Three-month T-Bills ended the week in positive territory but barely so at a minuscule 0.036% yield, indicating that liquidity was still being hoarded. (Also see my “Credit Crisis Watch“.)

Source: Nick Anderson, Slate

The week kicked off on a positive note after US president-elect Barack Obama had spelled out his plans on Sunday for the biggest infrastructure investment in the US since the 1950s. According to CNN, Obama said: “We understand that we’ve got to provide a blood infusion to the patient right now to make sure that the patient is stabilized. And that means that we can’t worry short term about the deficit [which might surpass $1 trillion before his spending plans are included]. We’ve got to make sure that the economic stimulus plan is large enough to get the economy moving.”

“The resultant infrastructure and physical assets will be far better than endowing busted banks, insurance companies and other financial entities with US taxpayers’ cash, which effectively goes down a black hole,” remarked Bill King (The King Report).

Financial markets reacted negatively to the US Senate’s failure to agree on a $14 billion loan to the troubled automakers. The prospect of the biggest industrial failure in US history caused a sell-off on global stock markets, a widening of credit spreads and an onslaught on the US dollar.

However, the US Treasury was quick to signal its readiness to provide funds to prop up the “Big Three”, as quoted in the Financial Times: “Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry.” This indication resulted in an improved tone on financial markets by the close of the week.

Next, a tag cloud from the plethora of articles I have devoured over the past week. This is a way of visualizing word frequencies at a glance. Key words such as “credit”, “debt”, “economy”, “Fed”, “government”, “market”, “rates” and “stock” occur often, but “gold” is also becoming increasingly prominent.

Back to the issue of markets shrugging off bad news for the second week running. Richard Russell (Dow Theory Letters) commented as follows: “On top of everything else, Lowry’s Selling Pressure Index dropped substantially yesterday [Wednesday] and is now in a definite declining trend. At the same time, Lowry’s Buying Power Index is trending higher. Thus, the odds are saying that the trend of the stock market is turning up.

“This is all the more dramatic since this potential upturn has arrived in the face of black-bearish news. Markets bottoming and rising in the face of bearish news are often the most profitable ones. I have never seen a bear market hit its low amid happy news headlines.”

On a fundamental note, 39% of the constituents of the MSCI World Index sell at a discount to shareholders’ equity. “The cash-rich companies allow investors to pay nothing for future earnings streams,” said Jean-Marie Eveillard in an interview with Bloomberg.

A positive for the bulls is that the period post Thanksgiving through the end of the year has usually been a bullish time for stocks, based on studies by Jeffrey Hirsch (Stock Trader’s Almanac). Should the bullish seasonal tendencies provide a tailwind on this occasion, possible first targets are the 50-day moving averages of 8,784 for the Dow Jones Industrial Index (current level 8,630) and 910 for the S&P 500 Index (current level 880).

The last word on equities goes to Hong Kong-based Puru Saxena: “I cannot say with any certainty whether we are already in the early stages of the next cycle. Under my best case scenario, we are in the very early stages of a new multi-year bull market. And under my worst case scenario, we are going to get a very strong rebound (30% move higher in the S&P 500) over a short period of time, which will probably take the markets back to their 200-day moving averages.”

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.

Economy
“Global business confidence has been shattered. Sentiment is equally negative in North America, South America and Europe. Asian business confidence is not quite as dark, but it is falling rapidly,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Pricing power is quickly evaporating and approaching that which prevailed in 2003, the last time deflation was a concern.” According to the survey results, the global economy is suffering a severe recession.

Economic indicators released in the US during the past week mostly pointed to a deepening recession.

BCA Research said: “The year-end spending season will be the biggest bust in several decades, as consumers have been hit by a double whammy: a meltdown in financial and residential asset prices; and a sharp rise in layoffs. The government’s failure to deliver a fiscal stimulus plan and unfreeze the credit markets imply that the recession will deepen and any recovery will be pushed farther into the future.

“The contraction in payrolls and economic growth will persist until there are some signs that policy actions are finally becoming effective. The fiscal stimulus plan needed to stabilize the economy will be massive and policy rates will stay near zero for a long time.”

The precarious position of the US consumer is illustrated by a plunge of 21.9 points to 63.7 in the annual average of the University of Michigan Consumer Sentiment Index – the largest annual average decline in the history of the Index which began in 1952, according to Asha Bangalore (Northern Trust).

The Fed fund futures are pricing in a 76% chance of a 75 basis-point cut in rates from 1.0% to 0.25% when the FOMC meets on December 16.

However, Bill King questioned the Fed’s approach: “[Effective] Fed funds traded at zero late last night. We have screamed for months that the official or ‘target’ Fed funds rate was irrelevant because the effective funds rate was much lower, and near zero. Now Fed funds are trading at zero. Yet there will be pundits and experts that will assert that the Fed might cut its target funds rate this week to 0.50% or even 0.25% – even though the cut in the target rate is meaningless. Now that the Fed is paying interest to banks, why did the Fed allow the funds rate to trade at zero? Yep, they are terrified by something.”

Also, the Fed is considering issuing its own debt to further expand money supply without clogging up bank balance sheets and making it harder for the Fed to maintain interest rates at the desired level. RGE Monitor said: “… there are upper limits to Treasury issuance and lower limits to the amount of Treasuries the Fed can sell off from the asset side of its balance sheet. One hurdle to issuing Fed bills: The Federal Reserve Act doesn’t explicitly permit the Fed to issue notes beyond currency.”

Elsewhere in the world, economic reports compounded anxiety about a severe global recession. Specifically, Chinese exports in November declined by 2.2% from a year earlier as a result of a drastic slowdown in demand in many of its main markets. The figures were far below forecasts and the +19% figure for October. “This is the worst collapse in Chinese exports since 1999 and is probably just the beginning of a prolonged export contraction,” said Isaac Meng, economist at BNP Paribas, as reported by the Financial Times.

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

Source: Yahoo Finance, December 12, 2008.

In addition to interest rate announcements by the FOMC (Tuesday) and the Bank of Japan (Thursday), next week’s US economic highlights, courtesy of Northern Trust, include the following:

1. Industrial Production (December 15): The 1.4% drop in the manufacturing man-hours index in November suggests a 1.0% decline in industrial production. The operating rate is projected to have dropped to 75.7. Consensus: -0.8%; Capacity Utilization: 75.7 versus 76.4 in October.

2. Consumer Price Index (December 16): A 0.7% decline in the CPI is forecast for November versus a 1.0% drop in October, reflecting largely lower energy prices. The core CPI is expected to have moved up by 0.1% after a 0.1% decline in October. Consensus: 1.3%, core CPI +0.1%.

3. Housing Starts (December 16): Permit extensions for new homes fell by 9.2% in October, inclusive of a 12.6% drop in permits issued for single-family homes. These figures suggest a sharp drop in housing starts (730,000). Consensus: 740,000 versus 791,000 in October.

4. Leading Indicators (December 18): Interest-rate spread and money supply are the only two components likely to make a positive contribution in November. Stock prices, initial jobless claims, manufacturing workweek, consumer expectations, vendor deliveries, and building permits are expected to make negative contributions. Forecasts of money supply and orders of consumer durables and non-defense capital goods are used in the initial estimate. The net impact is a 0.5% drop in the leading index during November, assuming building permits fell. Consensus: -0.5 %

5. Other reports: NAHB Survey (December 15), Current Account (Q4) (December 17), Philadelphia Fed Survey (December 18).

Click here for a summary of Wachovia’s weekly economic and financial commentary.

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

Source: Wall Street Journal Online, December 12, 2008.

Equities
Global stock markets rallied strongly during the past week as bargain-hunters looked past the grim economic and corporate reports. Both mature and emerging markets participated in the rally, as shown by the gains of the MSCI World Index (+4.4%) and the MSCI Emerging Markets Index (+10.9%). Notwithstanding the improvement, these indices were still down by 47.4% and 58.8% respectively since the peaks of October 2007.

Particularly noteworthy, the MSCI Emerging Markets Index has been outperforming the Dow Jones World Index since late October (rising green line), after a period of solid underperformance from May to October (falling line).

The chart below shows the performance of the four BRIC countries since the November 20 lows. Brazil (orange line), India (green) and Russia (red) have all recovered sharply, but China (blue) has underperformed after initial outperformance following the climactic[MR2] November 10 sell-off.

Click here or on the thumbnail below for a (pleasantly green) market map, obtained from Finviz, providing a quick overview of last week’s performances of global stock markets (as reflected by the movements of ADR stocks).

The Dow Jones Industrial Index was one of the few major indices to record a negative return during the past week, with US markets in general lagging other bourses as shown by the major index movements: Dow -0.1% (YTD -34.95), S&P 500 Index +0.4% (YTD -40.1%), Nasdaq Composite Index +2.1% (YTD �‘41.9%) and Russell 2000 Index +1.6% (YTD -38.8%).

The bar chart below shows the US sector performances over the week, and specifically how strongly energy and materials have recovered. Nine of the ten best-performing groups were related to commodities (diversified metals & mining, coal & consumable fuel, aluminum, steel, gold, oil & gas drilling, oil & gas exploration & production, gas utilities[MR3] , and oil & gas equipment & services).

Jamie Dimon, JPMorgan Chase’s (JPM) chief executive, prompted a sharp fall in financial shares with a warning that his bank was having a tough fourth quarter after a “terrible” November and December. Goldman Sachs’ (GS) earnings report on Tuesday is keenly awaited.

Based on the outperformance of emerging-market stocks and the sharp recovery of commodity-related groups, it would appear that investors are becoming less risk averse. Another example is the outperformance of small caps since the November 20 lows. A study published by Bespoke on December 8 highlighted the decile performance of stocks in the S&P 500 Index based on market cap. As shown by the chart below, the two deciles of the largest-cap stocks in the S&P 500 increased by about 17%, while the decile of the smallest-cap stocks was 54% higher.

Fixed-income instruments
The yields on government bonds generally edged up during the past few trading days after a record-breaking plunge since the beginning of November.

The UK ten-year Gilt yield increased by 17 basis points to 3.60% and the German ten-year Bund rose by 26 basis points to 3.30%. Although the US ten-year Treasury Note yield declined by 7 basis points to 2.59% on the week, the yield edged up from an earlier five-decade low of 2.48%.

John Hussman (Hussman Funds) expressed his concern about the level of Treasuries: “The problem with Treasury yields here is that while there are good economic reasons for the downward yield pressures, the levels are low enough to invite explosive spikes that can easily wipe out a year or more of yield-to-maturity in a few days.”

Emerging-market bonds moved in an opposite direction to mature bonds, with the JPMorgan EMBI Global Index gaining 2.4% during the week.

US mortgage rates were almost unchanged on the week, with the 30-year fixed rate rising by 2 basis points to 5.71% and the 5-year ARM declining by 1 basis point to 5.95%

The CDX and iTraxx credit indices, US Treasury Bills and high-yield spreads are still at distressed levels. Some improvement has been seen as a result of the central banks’ actions, notably the tightening of the TED and LIBOR-OIS spreads, and lower mortgage rates. However, credit spreads need to narrow further to indicate that liquidity is moving freely again and credit markets are starting to thaw. (Also see my “Credit Crisis Watch“.)

Currencies
The US dollar fell sharply as the recent relationship between risk aversion and dollar strength weakened as a result of US-specific factors like the deterioration in the US trade balance and the automaker woes. The greenback plummeted to a 13-year low against the Japanese yen and touched its lowest level against the euro for seven weeks.

As shown by the chart below, the dollar has broken below its 50-day moving average and seems to be topping out. Are foreign investors coming to the conclusion that the US currency, which briefly last week yielded a negative yield, is no longer an attractive option?

Over the week the US dollar lost ground against the euro (-5.0%), the British pound (-1.8%), the Swiss franc (-3.6%), the Japanese yen (-1.8%), the Canadian dollar (-2.0%), the Australian dollar (-3.0%) and the New Zealand dollar (-2.2%). The US currency also fell against emerging-market currencies[MR4] , like the South African rand (-2.0%).

The British pound came under renewed pressure as the worsening economic situation triggered concerns of a currency crisis. Sterling’s trade-weighted index fell to its lowest level since record-keeping began in 1981.

Commodities
The Reuters/Jeffries CRB Index (+8.8%) closed higher by the end of the week – only its sixth positive week since commodities peaked early in July. The Baltic Dry Index – a benchmark for shipping major raw materials including coal, iron ore and grain – bounced by 15.2% from very oversold levels.

The graph below shows the movements of various commodities over the past week, indicating an improvement across the whole complex (with the exception of natural gas) as a weak US dollar pushed prices higher.

The International Energy Agency urged a “substantial” cut in Opec output when the oil cartel meets next week, as global oil demand this year is expected to contract for the first time in 25 years. The price of West Texas Intermediate crude surged by 20.4% in expectation of a cut of at least 1 million to 1.5 million barrels a day.

Gold bullion (+9.1%) remained in favor with investors as a result of a solid supply/demand situation, store-of-value considerations and a weaker US currency. The chart below illustrates the strong inverse relationship between gold (green line) and the dollar (red line). In addition, gold has broken above its 50-day moving average (blue line) and trades at about the same level it started off in January 2008 – quite a feat in these difficult markets. Platinum (+4.9%) and silver (+8.5%) improved in tandem with the yellow metal.

After the storm comes the calm. With only 12 more trading days remaining before we wish the tumultuous 2008 goodbye, let’s hope the calm lies just ahead. And as Richard Russell reminds us: “Calm after a bearish trend is usually bullish.” Meanwhile, the news items and words from the investment wise below will hopefully assist in steering our portfolios on a profitable course.

That’s the way it looks from Cape Town.

Source: Dave Granlund

YouTube: The twelve days of bailouts
A bailout song for the holidays.

Source: YouTube, December 6, 2008.

New York Magazine: Oracles of doom
They always knew the economy would collapse. What do they think will happen next?

FORTUNE TELLER: Gerald Celente
Trends Research Institute founder; owner of collapseof09.com

TRACK RECORD
Predicted 1987 crash, 1997 Asian currency crisis; said in 2007 that US was headed for “economic 9/11″ in 2008.

CURRENT PREDICTION
“Products are going to be cheaper to buy, but guess what? You’re going to need more dollars to buy them because your dollar’s going to be worth less. There is no fiscal or monetary policy that can save this. You cannot save it by printing more money.”

FORTUNE TELLER: Nouriel Roubini
NYU business professor; chairman of RGE Monitor

TRACK RECORD
Predicted this year’s crisis in 2006, pointing to a housing bust, oil shocks, and interest-rate increases.

CURRENT PREDICTION
“It’s becoming a global recession. I expect it to be the worst US recession of the last 50 years. I expect a cumulative fall in output from the peak of 4% and the unemployment rate going all the way to 9%.”

FORTUNE TELLER: Peter Schiff
President of Euro Pacific Capital

TRACK RECORD
Published “Crash Proof: How to Profit From the Coming Economic Collapse in February 2007″; star of YouTube video “Peter Schiff Was Right 2006-2007.”

CURRENT PREDICTION
“I predicted that the economy would collapse. The bigger risk I saw was the government’s attempt to solve the problem by doing exactly what they’re now doing. They’re going to create another Great Depression, but worse, because the cost of living will go through the roof.”

FORTUNE TELLER: Richard Russell
Founder of the Dow Theory Letters

TRACK RECORD
Predicted bottom of 1974 bear market; exited market before crashes in 1987 and 2000.

CURRENT PREDICTION
“As long as we can hold the Dow above 7,470, I think the situation is hopeful. That’s the halfway level from when the bull market started in 1982 and when it ended in 2007. My guess is that it will break that level. Most bear markets have wiped out more than 50% of a bull market.”

FORTUNE TELLER: Barry Ritholtz
CEO and equity research director of Fusion IQ; blogger at The Big Picture

TRACK RECORD
Predicted downturn last year.

CURRENT PREDICTION
“In March, the first-quarter numbers start coming out, and that’s potentially a problem. It’s just going to be an issue of dealing with the market. If earnings continue to drop and you end up with multiple contractions, that basically takes you to a really bad, ugly place, which is an S&P at 400 or 500. I don’t think that’s likely, but it’s certainly possible.”

FORTUNE TELLER: Jeremy Grantham
Co-founder and chairman, GMO LLC

TRACK RECORD
His 1998 ten-year forecast showed severe market declines in 2007 and 2008; warned of global bubble in April 2007.

CURRENT PREDICTION
“I would think, just to guess, that the period of heroic volatility will end pretty soon and will be replaced by a rather 1974-ish environment, where you quietly get bitterly resigned to your steady diet of bad news.”

Source: Jeff VanDam, New York Magazine, December 7, 2008.

CNBC: Merrill Lynch – outlook for 2009
“An economic and investment outlook for 2009, with Merrill Lynch’s Richard Bernstein and Davis Rosenberg.

Source: CNBC, December 11, 2008.

Financial Times: Obama to focus on stimulus not deficit
“Barack Obama on Sunday spelled out his plans for the biggest infrastructure investment in the US for half a century. The president-elect argued that with the economy reeling, his incoming administration could not afford to worry about a spiralling budget deficit.

“Mr Obama’s proposals for government works on roads, bridges, internet broadband and school buildings, together with energy efficiency measures and health spending, are far more detailed than the normal announcements during a time of transition.

“At a time of deepening economic gloom – with half a million jobs lost last month alone – president George W. Bush has been largely absent from the recent economic debate. Mr Obama is highlighting his concern at the depth of the recession he will inherit, while fast-tracking his plans to counter it.

“‘Things are going to get worse before they get better,’ Mr Obama said on Sunday on NBC’s Meet The Press. He emphasised that his plans represented the largest US infrastructure programme since the federal highway system in the 1950s.

“‘The key is making sure we jump-start the economy in a way that doesn’t just deal with the short term, doesn’t just create jobs immediately, but also puts us on a glide path for long-term sustainable economic growth.’

“Noting the US budget deficit might surpass $1,000 billion before his spending plans are factored in, Mr Obama added: ‘We understand that we’ve got to provide a blood infusion to the patient right now to make sure that the patient is stabilised. And that means that we can’t worry short term about the deficit. We’ve got to make sure that the economic stimulus plan is large enough to get the economy moving.’

“He wanted a strong set of financial regulations to make banks, credit ratings agencies, mortgage brokers and others ‘much more accountable and behave much more responsibly’.

“‘I am absolutely confident that if we take the right steps over the coming months that not only can we get the economy back on track but we can emerge leaner, meaner and ultimately more competitive and more prosperous,’ Mr Obama said at a subsequent press conference.”

Source: Daniel Dombey, Financial Times, December 7, 2008.

Bill King (The King Report): Obama Plan one of the better plans
“The Obama Plan to spend massive amounts of money on infrastructure in the US is one of the better plans being proffered to keep the US out of a depression. But it has its drawbacks.

“Other stimulus plans put money or entitlements in US consumers’ pockets. Most of the money ends up in China, Japan or OPEC. Most infrastructure spending will remain in the US. And instead of just passing out checks or larger entitlements, jobs, mostly temps, will be created and permanent assets will result.

“The resultant infrastructure and physical assets will be far better than endowing busted banks, insurance companies and other financial entities with US taxpayers’ cash, which effectively goes down a black hole.

“Obama’s Plan will boost blue collar employment, provided a limited number of illegals are hired. This will produce an income shift to blue collar and lower middle class households. But fired employees of financial, high tech and other high-end jobs are unlikely to participate. So the multiplier effect of increased income will be less on the economy in general.

“The negatives of the plan, besides the massive debt and likely corruption, is that it does not remedy structural problems in the US economy and financial system. There will be few new industries spawned and therefore few permanent well-paying jobs. Nothing addresses the savings and investment problems.

“There is too much capacity in the world. There are hundreds of empty or abandoned factories in China alone. Until excess capacity is scuttled and new industries appear, stable employment is a fantasy.

“The real problem, the one that solons will not address, is the US welfare state is busted. The Keynesian and monetary stimuli that were abused over many decades to paper over welfare state spending are now being escalated to an unsustainable degree in a last grand attempt to salvage the welfare state system.

“Like all state attempts to stave off a debt deflation by running the printing press and nationalization, it will likely result in a massive inflation that destroys the nation’s fabric and the financial assets of the upper middle class and elites. The middle and lesser classes have few financial assets.”

Source: Bill King, The King Report, December 9, 2008.

Financial Times: Treasury signals rescue for carmakers
“The US administration was on Friday scrambling to save Detroit’s troubled car industry, as General Motors said it was closing most of its North American manufacturing plants for the month of January in the wake of the Senate’s failure to agree a $14 billion loan for GM and Chrysler.

“The US Treasury signaled it was ready to step in with funds intended to prop up the financial system to prevent the biggest industrial failure in US history.

“‘Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry,’ the Treasury said.

“GM’s bonds fell to a new low of 9-10 cents on the dollar on fears of a bankruptcy by America’s largest domestic carmaker, before recovering to 15 cents on the news that the Bush administration was looking for alternative financing.

“For weeks George W Bush, the US president, has resisted using the $700 billion troubled asset relief program to provide aid to the carmakers, arguing that such an interventionist step would be a misuse of funds.

“However, facing the prospect of the collapse of one or more of the Detroit companies, the White House indicated it had few other options. ‘A precipitous collapse of this industry would have a severe impact on our economy and it would be irresponsible to further weaken and destabilize our economy at this time,’ said Dana Perino, White House spokeswoman, specifically noting the possibility of using Tarp funds.

“A Chapter 11 bankruptcy filing by GM, the world’s biggest carmaker, would mark the biggest industrial failure in US history.”

Source: Daniel Dombey, John Reed and Bernard Simon, Financial Times, December 12, 2008.

Reuters: Fed mulls issuing own debt
“The US Federal Reserve is considering issuing its own debt for the first time, the Wall Street Journal said, citing people familiar with the matter.

“Fed officials have approached Congress about the move, which could include issuing bills or some other form of debt and would provide the central bank with more flexibility to tackle the financial crisis, the Journal said.

“The Fed can already print as much money as it wants, but issuing debt is largely the province of the Treasury Department.

“The Fed stepped in with emergency credit for investment bank Bear Stearns in March and insurer AIG in September, and threw open its direct loan window to Wall Street firms this year in a bid to stabilize financial markets amid a credit freeze.

“But with the credit crisis showing no signs of abating, and the narrow scope for further interest rate cuts from the present levels of 1%, economists expect the Fed to look at new ways to boost the supply and circulation of money to avoid a deflationary slump.”

Source: Reuters, December 10, 2008.

Paul Kasriel (Northern Trust): The credit rating on a benevolent counterfeiter’s debt – infinity A?
“Why would the Fed be contemplating issuing its own debt? To soak up in the future some of the massive credit the Fed has created in the past year or so. Why would the Fed not just sell US Treasury securities from its portfolio in order to soak up this excess Fed credit? Because, as shown in the chart below, the Fed’s outright holdings of US Treasury securities has dropped from a shade under $800 billion to about $475 billion as Fed credit outstanding has risen from a little over $800 billion to about $2.1 trillion. In percentage terms, the Fed’s outright holdings of US Treasury securities has gone from a bit over 90% of reserve bank credit outstanding to about 22-1/2%. The Fed is afraid it might run out of US Treasury securities to sell!

“I can see nothing sinister about all this. It is not a conspiracy to print money. Just the opposite. It is a way to destroy some of the paper the Fed already has ‘printed’.”

Source: Paul Kasriel, Northern Trust – Daily Global Commentary, December 10, 2008.

Bloomberg: Fed refuses to disclose recipients of $2 trillion
“The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from US taxpayers and the assets the central bank is accepting as collateral.

“Bloomberg filed suit November 7 under the US Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

“The Fed responded December 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital, which oversees $22 billion in assets.

“The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP.

“Congress is demanding more transparency from the Fed and Treasury on bailout, most recently during December 10 hearings by the House Financial Services committee when Representative David Scott, a Georgia Democrat, said Americans had ‘been bamboozled’.

Source: Mark Pittman, Bloomberg, December 12, 2008.

The Wall Street Journal: Mayors get in line for US funds
“Big-city mayors will arrive on Capitol Hill Monday to lobby for more federal spending to be funneled to urban areas that they say drive the country’s economic engine.

“The push comes after a strong Democratic turnout in metropolitan areas helped President-elect Barack Obama – who is set to become America’s first urban president in almost half a century – win by such a decisive margin in November.

“A delegation of mayors, including Michael Bloomberg of New York and Antonio Villaraigosa of Los Angeles, plans to ask the federal government to distribute funds directly to cities instead of going through state governments. The group is set to present a list of more than 4,600 infrastructure projects that they say are ‘ready to go’.

“Tom Cochran, executive director of the US Conference of Mayors, which is organizing Monday’s event, said the next administration has signaled that it will coordinate financing for projects for an entire metropolitan area instead of dealing with cities and suburbs separately.

“‘I am of the opinion, based on our conversations with President-elect Obama, that he gets it,’ said Mr. Cochran. ‘You can’t just have a transportation system that stops at the city line.’

“Mr. Obama’s transition office is drawing up plans to create a White House office on urban policy, which would report directly to the president, to coordinate funding for cities from different federal agencies. Mr. Obama has pledged to provide new funding for job training, education and grants for local governments and organizations.”

Source: T.W. Farnam, The Wall Street Journal, December 8, 2008.

Bloomberg: Interview with Martin Feldstein
“Harvard University professor Feldstein discusses auto bailout, how to fix the housing market as well as Fannie and Freddie, and 3-month T-Bill rates below zero.”

Source: Bloomberg (via YouTube), December 9, 2008.

Ambrose Evans-Pritchard (Telegraph): Deflation virus is moving the policy test beyond the 1930s
“Debt deflation is tightening its grip over the entire global system. Interest rates are creeping towards zero in Japan, America, and now across most of Europe.

“We are beyond the extremes of the 1930s. The frontiers of monetary policy are being pushed to limits that may now test viability of paper currencies and modern central banking.

“You cannot drop below zero. So what next if the credit markets refuse to thaw? Yes, Japan visited and survived this policy hell during its lost decade, but that was a local affair in an otherwise booming global economy. It tells us nothing.

“This time we are all going down together. There is no deus ex machina to lift us out. Certainly not China, which is the most vulnerable of all.

“As the risk grows, officials at the highest level of the British Government have begun to circulate a six-year-old speech by Ben Bernanke – at the time of its writing, a garrulous kid governor at the US Federal Reserve. Entitled ‘Deflation: Making Sure It Doesn’t Happen Here’, it is the manual of guerrilla tactics for defeating slumps by monetary means.

“‘The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost,’ he said.

“His point was that central banks never run out of ammunition. They have an inexhaustible arsenal. The world’s fate now hangs on whether he was right (which is probable), or wrong (which is possible).

“As a scholar of the Great Depression, Bernanke does not think that sliding prices can safely be allowed to run their course. ‘Sustained deflation can be highly destructive to a modern economy,’ he said.

“Bernanke’s central claim is that the big guns of monetary policy were never properly deployed during the Depression, or during the early years of Japan’s bust, so no wonder the slumps dragged on.

“The Fed can create money out of thin air and mop up assets on the open market, like a sovereign sugar daddy. ‘Sufficient injections of money will ultimately always reverse a deflation.’

“Bernanke said the Fed can ‘expand the menu of assets that it buys’. US Treasury bonds top the list, but it can equally purchase mortgage securities from US agencies such as Fannie, Freddie and Ginnie, or company bonds, or commercial paper. Any asset will do.

“The Fed can acquire houses, stocks, or a herd of Texas Longhorn cattle if it wants. It can even scatter $100 bills from helicopters. (Actually, Japan is about to do this with shopping coupons).”

Source: Ambrose Evans-Pritchard, Telegraph, December 9, 2008.

Asha Bangalore (Northern Trust): Household net worth is shrinking rapidly
“Household net worth in the third quarter of 2008 was $56.5 trillion, down 4.7% from the second quarter. This is the largest quarterly decline since the second quarter of 1962 when net worth of households dropped 5.0%.

“Household spending will suffer as setback a household net worth shrinks, which is already visible in consumer spending data, and the proclivity of households to borrow will show a reduction. The chart below indicates that growth of both mortgage and consumer debt have fallen in the third quarter. The sharp drop in mortgage debt (-2.4%) reflects the impact of mortgage foreclosures and a drop in home purchases, while consumer debt grew at a 1.2% pace in the third quarter versus a 7.2% jump a year ago.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 11, 2008.

Asha Bangalore (Northern Trust): Weak trajectory for retail sales
“Retail sales fell 1.8% in November, after a 2.9% decline in the prior month. Retail sales have dropped for five straight months, the longest string of declines since record keeping for retail sales began in 1967. The wide swings of gasoline prices influence the headline of retail sales. Excluding gasoline, retail sales dropped 0.2% in November after a 1.6% plunge in the prior month. Retail sales excluding gasoline have recorded six consecutive monthly declines. Unit auto sales have fallen in ten out of eleven months of the year.

“The upshot is that with or without gasoline and autos, retail sales show an extraordinary weakness that is seen the overall consumer spending data and this weak trajectory for retail sales and overall consumer spending is predicted to prevail in the near term.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 12, 2008.

Asha Bangalore (Northern Trust): Consumer spending in post-war recessions
“The chart below illustrates the history of consumer spending during recessions. Consumer spending typically declines in recessionary periods with the exception of the 1948 and 2001 recessions.

“Our forecast includes five consecutive quarterly declines in consumer spending, possibly another record for the books if our forecast is accurate. The highly leveraged household balance sheet of households underlies this prediction.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 8, 2008.

Bloomberg: Inside look – housing crisis
“From Housing Forum in Washington D.C.: Interview with PIMCO Managing Director Scott Simon.”

Source: Bloomberg (via YouTube), December 8, 2008.

BusinessWeek: Unretired – retirees are back, looking for work
“They saved. They planned. Then housing tanked and the markets melted. Now they need jobs, and there aren’t any.

“Six years ago, Paul Nelson gave up his long career in the defense industry for what he thought would be a peaceful retirement in Tucson. The weather was mild, the neighbors friendly. He had plenty of time to volunteer and garden.

“But retirement hasn’t worked out the way he planned. In 2006 his wife of 46 years died unexpectedly. He tried to swap their house for a smaller one and lost a chunk of his retirement savings in the process. Then this year the stock market cratered, wiping out almost everything he had left. Now the 71-year-old is looking for work at local hardware stores and Home Depot and contemplating filing for personal bankruptcy. ‘I have nothing left,’ says Nelson, a former Raytheon engineer. ‘I am not alone, I think.’

“Far from it. An increasing number of people who retired in recent years, confident they had set aside enough to live on comfortably, are finding themselves strapped. The stock market plunge and the housing downturn have affected many Americans, of course. But retirees have been particularly pinched because their homes and investments are the primary assets they depend on for income. As a result, many of the country’s elderly are finding themselves in Nelson’s situation, low on money and looking for work. ‘Suddenly the rug has been pulled out from under them,’ says Alicia H. Munnell, director of the Center for Retirement Research at Boston College.”

Click here for the full article.

Source: Heather Green, Business Week, December 4, 2008.

Asha Bangalore (Northern Trust): Oil imports lead to wider trade gap in October
“The trade deficit widened to $57.2 billion in October from $56.6 billion in September. During October, exports (-2.2%) and imports (-1.3%) of goods and services fell.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 11, 2008.

Reuters: Jim Rogers calls most big US banks “totally bankrupt”
“Jim Rogers, one of the world’s most prominent international investors, on Thursday called most of the largest US banks ‘totally bankrupt’, and said government efforts to fix the sector are wrongheaded.

“Speaking by teleconference at the Reuters Investment Outlook 2009 Summit, the co-founder with George Soros of the Quantum Fund, said the government’s $700 billion rescue package for the sector doesn’t address how banks manage their balance sheets, and instead rewards weaker lenders with new capital.

“Dozens of banks have won infusions from the Troubled Asset Relief Program created in early October, just after the September 15 bankruptcy filing by Lehman Brothers. Some of the funds are being used for acquisitions.

“‘Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt,’ said Rogers, who is now a private investor.

“‘What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent,’ he said. ‘What’s happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics.’

“Rogers said he shorted shares of Fannie Mae and Freddie Mac before the government nationalized the mortgage financiers in September, a week before Lehman failed.

“Now a specialist in commodities, Rogers said he has used the recent rally in the US dollar as an opportunity to exit dollar-denominated assets.

“While not saying how long the US economic recession will last, he said conditions could ultimately mirror those of Japan in the 1990s. ‘The way things are going, we’re going to have a lost decade too, just like the 1970s,’ he said.

” … Rogers said sound US lenders remain. He said these could include banks that don’t make or hold subprime mortgages, or which have high ratios of deposits to equity, ‘all the classic old ratios that most banks in America forgot or started ignoring because they were too old-fashioned’.

“‘Governments are making mistakes,’ he said. ‘They’re saying to all the banks, you don’t have to tell us your situation. You can continue to use your balance sheet that is phony … All these guys are bankrupt, they’re still worrying about their bonuses, they’re still trying to pay their dividends, and the whole system is weakened.’

“Rogers said he is investing in growth areas in China and Taiwan, in such areas as water treatment and agriculture, and recently bought positions in energy and agriculture indexes.”

Source: Jonathan Stempel, Reuters, December 11, 2008.

CNBC: Meredith Whitney – outlook grim for banks

Source: CNBC, December 7, 2008.

Financial Times: Post-Lehman company defaults to soar
“Default rates for speculative grade companies are forecast to jump threefold next year following the fall of Lehman Brothers, the world’s biggest bankruptcy, according to Moody’s, the US ratings agency.

“The implosion of Lehman on September 15 is widely regarded as a significant milestone, turning the credit crunch into a fully blown economic crisis.

“Jim Reid, credit strategist at Deutsche Bank, said: ‘We are at a turning point for default rates, with much bigger monthly rises from now on.

“‘Two or three months after Lehman’s collapse, we are starting to see the impact on the real economy, particularly for those companies on short-term funding.’

“European companies defaulting on their bonds are also set to outpace those in the US, although analysts suggest this is because the European junk-grade market is smaller, meaning any rise in defaults has a greater impact in percentage terms, rather than pointing to a deeper recession.

“Global default rates are forecast to rise to 10.4% by November 2009 – from 3.1% last month – to levels last seen in 2001 following the dotcom crash. Rates are forecast to jump to 4.2% by the end of this year.

“A year ago, the global rate was 0.9 per cent.

“The ratings agency’s distressed index, which measures the number of companies with bonds trading at more than 1,000 basis points over government paper, rose to 51.8% at the end of last month, up from 48.5% at the end of October, and the highest level since Moody’s launched the index in 1996. This reflects the deepening problems for company funding. Even some investment grade companies are now trading at distressed levels.”

Source: David Oakley and Paul J Davies, Financial Times, December 8, 2008.

Bespoke: 10-Year Treasuries overbought
“It’s an understatement to say that Treasuries are overbought at current levels. We’ve been monitoring the spread between its price and its 50-day moving average, and the 10-year Note has finally gotten to a level that is usually met with selling pressure in the near term. Since 1977, the 10-year has only gotten more than 12% above its 50-day moving average on three different occasions. As shown in the table below, the returns over the next week, month, and 3 months lean to the negative side. The average change of the 10-year over the next three months when getting this overbought has been -3.23%.”

 

Source: Bespoke, December 9, 2008.

Bespoke: Want to lend money to uncle Sam? It’s going to cost you
“What would your reaction be if you had a friend who had reached the limit on 20 different credit cards and then came to you to borrow $100? Then imagine that you actually said yes, and when you went to give your friend the $100, he or she actually asked for $101 just for the privilege of loaning the money. Well, that is exactly what is happening (to a lesser degree) in the US T-bill market. As just another example of the crazy times we are living in, the yield on 3-month Treasuries went negative today. There was a time when an event such as this was unimaginable. Today it barely gets noticed.”

Source: Bespoke, December 9, 2008.

John Hussman (Hussman Funds): Unusually unfavourabale yield levels for Treasuries
“In bonds, the market climate last week was characterized by unusually unfavorable yield levels and generally favorable yield pressures. As I have frequently noted, yield levels are much more important than market action in driving subsequent total returns in bonds. This is because bonds are less susceptible to ‘bubbles’ as a result of their payment stream being known, so favorable market action can’t be taken as evidence of favorable surprises in those payments.

“The problem with Treasury yields here is that while there are good economic reasons for the downward yield pressures, the levels are low enough to invite explosive spikes that can easily wipe out a year or more of yield-to-maturity in a few days.

“Corporate yields have increased significantly, but default rates tend to pick up in the later stages of recessions, and there isn’t much historical evidence to suggest that corporate bonds reach their lows any earlier than stocks do. For that reason, corporate bonds are essentially equity-equivalents here, and the same considerations about quality apply as well here as they do for stocks. Generally speaking, corporate bonds are currently priced to deliver both lower long-term returns than stocks, but as a group, will probably have lower volatility than stocks as well.”

Source: John Hussman, Hussman Funds, December 8, 2008.

Bloomberg: US Treasury risk surpasses Campbell Soup as debt increases
“The cost to hedge against losses on US Treasuries surpassed the price of default protection on bonds from Campbell Soup and drug-maker Baxter International as government spending on stimulus packages grows.

“Credit-default swaps protecting US government debt in euros for five years are trading at 65 basis points, according to CMA Datavision, meaning costs 65,000 euros ($84,200) to protect 10 million euros of debt. Contracts on Campbell were at 52.5 basis points and Baxter contracts were 57.5 basis points at the close of trading [on Wednesday] in New York.

“The Federal Reserve’s assets have more than doubled from a year ago to $2.14 trillion as the central bank seeks to revive credit markets. Economists including Harvard University professor Kenneth Rogoff and Nobel Prize winner Joseph Stiglitz say President-elect Barack Obama should push for a stimulus package of at least $1 trillion to lift the economy out of a yearlong recession. The US government’s total cost to bail out the economy may exceed $4 trillion, according to strategists including Ira Jersey at Credit Suisse Group AG in New York.

“Contracts protecting U.K. government debt for five years were quoted at a mid-price of 114.75 basis points today [Wednesday], according to CMA. Swaps on Italy are at 190, and the Netherlands at 99.5. France was quoted at 58.75 and Germany at 51.5, CMA data show.

“Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to meet its debt obligations. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.”

Source: Shannon D. Harrington, Bloomberg, December 10, 2008.

Jean-Paul Calamaro (Deutsche Bank): Credit markets offer stunning opportunities
“The crisis gripping financial markets has produced some stunning investment opportunities in credit markets. Among the best is the returns available on ‘basis trades’ between corporate bonds and credit default swaps, says Jean-Paul Calamaro, global head of quantitative credit strategy at Deutsche Bank.

“‘Investors buy a corporate bond and also buy default protection on the issuer via a CDS. When the basis is negative [CDS protection costs less than the bond’s spread to swaps] this produces protected cash flows and further profits if the difference between the bond and CDS narrows, or if the issuer defaults. The basis between bonds and CDS has been at historic wides recently, giving significant returns without using leverage,’ he says.

“‘The trade works for many investment grade and high yield issuers in Europe and the US, but high yield trades look most attractive.

“‘This is because investors can earn high returns more quickly when an issuer defaults and at this point in the credit cycle we think defaults are more likely. The trades also work in investment grade, not because we expect defaults but because we expect the basis between bonds and CDS to narrow.

“‘The major cheapening of bonds versus CDS across corporate credit has been due to the heightened funding crisis since the Lehman bankruptcy in mid-September. We believe conditions will start to ease after year end, which makes these types of trades unusually attractive now.’”

Source: Jean-Paul Calamaro, Deutsche Bank (via Financial Times), December , 2008.

Bloomberg: Cheapest stocks since 1995 show cash exceeds market
“Stocks have fallen so far that 2,267 companies around the globe are offering profits to investors for free. That’s eight times as many as at the end of the last bear market, when the shares rose 115% over the next year.

“Bank of New York Mellon in New York, Danieli in Italy and Seoul-based Namyang Dairy Products hold more cash than the value of their stock and debt as the slowing world economy wiped out $32 trillion in capitalization this year. Companies in the MSCI World Index trade for an average $1.17 per dollar of net assets, the lowest since at least 1995, and 39% sell at a discount to shareholder equity, data compiled by Bloomberg show.

“The cash-rich companies allow investors to pay nothing for future earnings streams, providing opportunities to buyers concerned about deflation, according to Jean-Marie Eveillard, whose $16 billion First Eagle Global Fund has beaten 98% of competitors this year. Microsoft and Novo Nordisk, which generate the most money compared with debt, can expand even if lower consumer demand erodes profits.

“‘Cash is king, not necessarily for the investor but for corporations,’ Eveillard said in an interview from New York last week. ‘It’s useful to sit on a ton of cash, No. 1 to survive, as opposed to going bankrupt, and No. 2 to seize opportunities either to make acquisitions cheaply or to squeeze competitors.’”

Source: Michael Tsang and Alexis Xydias, Bloomberg, December 8, 2008.

Richard Russell (Dow Theory Letters): “I’m beginning to like what I see”
“If they create enough of it, will they come and spend it? That’s what Mr. Bernanke is going to find out. The government has created over a trillion dollars of currency. There’s now over $8 trillion on the sidelines in money markets and T-bills – all frozen with fear and waiting for something better and safer to come along. There’s too much money now in relation to the quantity of goods and merchandise available. This is the formula for inflation or even hyper-inflation. What’s holding it all back? Lack of confidence, fear.

“What would change that? The stock market rising steadily would bring back confidence. Which is why I monitor the stock market so closely. Yes, it’s quite a game, and it’s the most important and fascinating game in the world. No wonder I’m in this business. I read the markets, and I’m beginning to like what I see!

“My guess is that the market is establishing a tradeable bottom with a rally that will last into the first quarter of next year. What we’re seeing now might not be the final bottom but it will serve until the real one comes along.”

Source: Richard Russell, Dow Theory Letters, December 8, 2008.

Richard Russell (Dow Theory Letters): Adding some selected stocks
“Up to now, our favored position has been cash and gold (preferably physical gold). Our new position is cash, gold and, for the bolder crowd, a few selected stocks (DIA if you’re a fearless, speculative type).

“Backing off: Subscribers may think Russell’s lost his mind. He’s turning just a bit bullish. The answer is that I’m reporting exactly what I’m seeing. And if what I see doesn’t jibe with what I’m reading in the newspaper and it doesn’t jibe with prevailing sentiment, then I think it’s that much more important. I keep hearing the most horrendous stories about unemployment and companies in trouble, and my thought is always, ‘Has this been discounted by one of the worst bear markets since the ’30s?’ Which is why I report every item that I see, every item that might suggest that the market has already discounted the bad news. The question always is ‘cut through the BS, what is the market saying?’”

Source: Richard Russell, Dow Theory Letters, December 11, 2008.

Puru Saxena: Sowing the seeds
“This nasty bear-market is in its latter stages and I suspect that the bulk of the declines are now behind us. Although it is premature to claim that the bear-market definitely ended on October 10, it does look increasingly likely that the lows recorded on November 21, were in fact a successful ‘test’ of the prior month’s lows.

“History shows that following a major bear-market, it is common for the major indices to retest the lows. In a recent study undertaken to review recovery patterns, JP Morgan examined all the bear-markets going back to 1900 and it came up with a few interesting observations. The study revealed that market bottoms were almost always retested and that such ‘tests’ resulted in a new marginal low about 40% of the time.

“The study also found that 75% of the retesting events occurred within 44 days of a major bottom; so if October 10 marked the bottom of this bear-market, the retest on November 21 was bang on target from a timing perspective.

“At this stage, I am only guessing that October 10 was the pivotal turnaround of this bear-market. It may well be that this market breaks below those lows in the days ahead, however given the favourable technical and sentiment data, at the very least, there is a strong possibility that we will get a multi-month rally from these oversold conditions.

“It is worth noting that new bull-markets are always born amidst abject pessimism; at a time when the majority are convinced that economic activity will never pick up again. Furthermore, it is interesting to note that frightening economic news continues to surface, long after a new bull-market has begun. So, the time to buy is during such scary times. This was also highlighted by Warren Buffet who recently wrote – ‘If you wait for robins, spring will be over’.

“Now, I cannot say with any certainty whether we are already in the early stages of the next cycle. However, the recent rout in the markets has set the stage for above-average long-term returns. Under my best case scenario, we are in the very early stages of a new multi-year bull-market. And under my worst case scenario, we are going to get a very strong rebound (30% move higher in the S&P500) over a short period of time, which will probably take the markets back to their 200-day moving averages.”

Source: Puru Saxena (via Fullermoney), December 10, 2008.

David Fuller (Fullermoney): S&P 500 at extreme divergence from its 200-day moving average
“We first posted this indicator on October 10 when the relevant spreadsheet was created for us by a subscriber. The indicator remains at a historically low level but has risen considerably from its early October nadir. This has been achieved by the relevant indices having gone mostly sideways for the last two months. The moving average is now starting to come down towards the price and while it still has a long way to go, mean reversion is taking place.

“This is not a guarantee that the market will not go lower later but, historically, when the market has diverged from its mean by such a margin, important stock market lows have occurred relatively soon afterwards.”

Source: David Fuller, Fullermoney, December 8, 2008.

Bespoke: Percentage of stocks above 50-day moving averages
“Even though the S&P 500 is in a new bull market, the percentage of stocks in the index trading above their 50-day moving averages is still at oversold levels. As shown in the chart below, at 26%, this indicator has a long way to go before becoming overbought.

“On a sector basis, Telecom, Utilities, and Consumer Discretionary have the highest percentage of stocks above their 50-days, while Energy and Financials have the lowest.”

Source: Bespoke, December 10, 2008.

Bespoke: Third worst bear market on record
“The S&P 500 finally had its first 20%+ rally in 408 days yesterday [Monday], which means we’re currently in a bull market by the standard definition (20% rally preceded by a 20% decline).

“… below we highlight historical bear markets for the S&P 500 since 1927. As shown, the bear market that ran from 10/9/07 to 11/20/08 is the third worst ever with a decline of 51.93%. The bears that ended in June of 1932 (-61.81%) and March of 1938 (-54.47%) are the only two that had bigger declines without a rally of 20%.”

Source: Bespoke, December 9, 2008.

Bespoke: US sector and stock buy ratings
“Below we highlight the average percentage of buy ratings for stocks in each of the ten S&P 500 sectors. As shown, Financial stocks have the lowest percentage of buy ratings of any sector at 35%, while Energy has the highest at 63%. Consumer Discretionary, Materials, and Consumer Staples are the three other sectors (along with Financials) that have below average buy ratings compared to all stocks in the S&P 500.

Source: Bespoke, December 8, 2008.

David Fuller (Fullermoney): Commodities – are they the most promising asset class today?
“I do think commodities have significant recovery potential, despite the global economic slump, deflation threat and depression fears. Moreover, I believe that the fundamentals for commodities have now improved more than for all other asset classes.

“Consider the following bull points:

1. Interest rates have fallen, which is currently better for commodity speculators than commodity producers, because contangos have shrunk considerably, lowering rollover costs.

2. However, the credit crunch means that it is now more difficult for commodity producers to obtain necessary financing. Consequently, miners and oil producers are deferring development projects and laying off workers, while farmers find it more difficult to finance the purchase of fertilizers and equipment. These problems are not fully offset by the lower cost of energy.

3. Prices for all commodities are much lower today than during the first half of 2008, not least because speculators have been shaken out and traders are actually short. This is good news for those who wish to buy oversold commodities. However it is a big disincentive for commodity producers, many of whom are now reducing production.

4. While the global economic slump has reduced demand for commodities somewhat, these are essential resources which the world cannot do without, unlike luxury goods, the latest fashions, lavish holidays or expensive restaurants.

5. The US dollar has peaked and commenced what is likely to be a significant retracement of gains seen since July. This is bullish for commodities because most are priced in US dollars.

“What could significantly delay or even prevent a big rally for commodities? The reflationary efforts could fail, or more likely take many more months before they turn a global economy that is still contracting. If so, there could be some additional downside risk and base formation development would most likely be lengthy. The US Dollar Index could fail to maintain its downward break. Improved weather patterns could lead to increased supplies of agricultural commodities.

“For these reasons, Fullermoney maintains that commodities are best purchased following setbacks. Positions are most safely built incrementally.”

Source: David Fuller, Fullermoney, December 11, 2008.

Financial Times: So long, super-cycle
“The severity of the crisis has surprised natural resources companies’ executives, commodity traders and Wall Street bankers alike. After all, the commodities boom of 2003-08 has been the most notable for a century in its magnitude, duration and the number of commodities whose prices it has lifted. The sudden plunge poses a fundamental question: is this just a temporary blip within an upward trend, with prices likely to rebound in the medium term, or is it the conclusion of another commodities cycle of boom and bust, with a period of relatively stable prices coming ahead?

“The common belief in the industry itself, and among most Wall Street analysts, is that the market is undergoing a correction but that the boom years have not ended. As many point out, the main drivers of what many have come to see as a commodities super-cycle – such as strong pent-up demand in emerging countries and supply constraints caused by a lack of investment over the past 20 years, along with the rise in resource nationalism – are intact. The current drop is, in the words of one senior mining executive, a ‘reset’ of the boom, not the end of it. Prices will rebound, in this view, and continue rising.”

Click here for the full article.

Source: Javier Blas and Krishna Guha, Financial Times, December 9, 2008.

Bespoke: Consensus gold estimates
“Below we provide the consensus price target for gold through 2012. These target prices are based on the median of 21 gold analysts surveyed by Bloomberg. As shown, analysts currently aren’t expecting a big rally or a big decline in gold over the next few years. By mid-year 2009, analysts are expecting gold to be at $825/ounce, which is less than $10 from its current price of $816. At the end of 2011, analysts expect gold to be down to $790, and then down to $762 by the end of 2012.”

Source: Bespoke, December 12, 2008.

Casey’s Charts: Gold stocks – time to bottom feed
“The previous low point for the ratio of the XAU gold stock index to the price of gold was 0.16, when gold was trading around $270 an ounce in October of 2000. Today, the XAU is trading a mere 57% higher than it was in October of 2000, compared to a gold price that has increased by 184%. As a general rule of thumb, anytime the ratio is above the 25-year average is the time to sell, and below its average says gold stocks are cheap. With the ratio bouncing off the lowest level since the inception of the XAU index, it signals a SCREAMING buy for gold stocks!

“Picking the bottom of any market is near impossible, but knowing when something is grossly undervalued can be easy. Gold has long been considered a hedge against inflation, and with trillions of new government bailout dollars ready to circulate into the system, buying precious metal stocks at these distressed prices is the chance of a lifetime.”

Source: Casey’s Charts, December 5, 2008.

Profit NDTV: Asia beats US in gold futures trading
“Asia, which accounts for 60% of the world gold imports, has overtaken the US in gold futures trading, with Mumbai and Shanghai exchanges growing rapidly, leading trade magazine Futures Industry has reported.

“According to the latest edition of the US-based magazine, data from the first eight months of this year show that the combined volumes in gold futures trading at exchanges in Shanghai, Tokyo, Taiwan and Mumbai reached 49.8 million contracts, far ahead of the 34.3 million contracts traded in the US.

“‘From January through August this year, seven of the top 10 gold contracts in the world were Asian,’ it said, adding that much of that growth was in Mumbai and Shanghai.

“‘Some of the boom is undoubtedly driven by the search for a safe haven as the value of stock investments continues to evaporate,’ the magazine said noting that Asian investors may also have a greater cultural predisposition toward gold than Westerners.

“Asia imports 60% of the world’s gold and its exports 40%. India is the largest consumer of physical gold in the world, followed by the US, and then China. And this year, China became the world’s largest gold producer – a title south Africa had held for more than 100 years.”

Source: Profit NDTV, December 9, 2008.

BBC News: UK economic slowdown “worsening”
“The UK economy contracted 1% between September and November, the National Institute of Economic and Social Research (NIESR) has estimated.

“This fall followed after a 0.8% drop in the three months to the end of October, said the think tank. Indicating that the rate of output decline is ‘accelerating’, the NIESR now expects a fall of more than 1% in the last three months of the year.

“Official data showed that the economy shrank 0.5% from July to September. But it will not be until January that the Office for National Statistics reports on the final quarter’s GDP.

“If it reports a decline for the three months to December, then the UK will be in officially in recession under the generally accepted definition of two consecutive quarters of decline.

“The NIESR says it has a good track record in forecasting GDP growth in advance of the official figures. The latest data from NIESR is just the latest indication that the UK economy is most probably falling into a recession.”

Source: BBC News, December 10, 2008.

Victoria Marklew (Northern Trust): Swiss rates head toward zero
“The Swiss National Bank (SNB) effectively lopped another 50bps off its main policy rate today, lowering its target band for three-month Swiss franc LIBOR to 0.0-1.0% (down from 0.5-1.5%) and aiming for the mid-point of 0.5%. This brings the easing total to 225bps since October 8.

“The SNB warned that the sharply worsening global climate will push Switzerland into recession next year. Chairman Roth stated that growth is likely to be negative, not just in the first two quarters of 2009 but for the year as a whole. The bank is now forecasting a contraction in real GDP of between 0.5% and 1.0% next year. The inflation forecast was also revised down, with the bank now seeing the annual rate averaging 0.9% next year and 0.5% in 2010.”

Source: Victoria Marklew, Northern Trust – Daily Global Commentary, December 11, 2008.

Financial Times: Japan contracts faster than expected
“Japan’s gross domestic product contracted much more rapidly in the third quarter than previously thought, official data showed on Tuesday, amid new indications of distress in the world’s second-biggest economy.

“The revised GDP data showed a quarter-on-quarter fall of 0.5% for the three months to September, compared with last month’s preliminary estimate of a 0.1% decline.

“The economy contracted at an annualised rate of 1.8% between July and September – a much more precipitous pace than the annualised 0.5% decline suffered in the same quarter by the US, centre of the global financial crisis.

“Analysts said the revision, though bigger than expected, reflected relatively technical factors involving inventories and government spending rather than worrying new information and so would not dramatically change assessments of the economy’s prospects.

“‘The downgrade in headline growth does not look as bad as the headline suggests,’ UBS said in a research note.

“However, the news the recession was deeper than thought came as the Cabinet Office said its latest composite index of business conditions showed the economy ‘worsening’.”

Source: Mure Dickie, Financial Times, December 9, 2008.

Financial Times: China’s export fall worse than predicted
“The impact of the global financial crisis on China became clear on Wednesday when the government revealed that exports fell in November for the first time in almost seven years.

“With demand in many of its main markets slowing sharply, Chinese exports declined 2.2% from a year earlier. Imports also fell 17.9% from a year earlier, according to Chinese customs figures, prompting the government to announce plans to further boost the economy.

“The Chinese data shocked economists. The figures were far below forecasts, even in the light of sharp slumps in exports in November from both Taiwan and South Korea.

“‘This is the worst collapse in Chinese exports since 1999 and is probably just the beginning of a prolonged export contraction,’ said Isaac Meng, economist at BNP Paribas.

“The drop in imports, the biggest since the early 1990s, helped push the monthly trade surplus to a record $40 billion, the fourth month in a row that the surplus has broken records.

“The government pledged on Wednesday to do everything it could to maintain ‘stable, healthy’ growth next year. At the conclusion of the three-day Central Economic Work Conference, an annual meeting of top policy-makers, officials said they would boost public spending in order to promote domestic demand.

“A report on state radio about the meeting said the government had reaffirmed its policy of keeping the exchange rate ‘basically steady’, but would take other measures to deal with falling domestic demand.

“Until last month, China’s exports had held up much better than most observers had expected, increasing by 19% in October compared to the same month last year.”

Source: Geoff Dyer and Jamil Anderlini, Financial Times, December 10, 2008.

Financial Times: China inflation falls as growth slows
“China’s consumer price inflation fell to a 22-month low of 2.4% in November, giving the central bank free rein to cut interest rates further to offset an abrupt slump in the world’s fourth-largest economy.

“Economists had expected inflation to moderate to 3.0% from 4.0
% in the year to October. In the event, the reading was the lowest since January 2007.

“Nie Wen, an analyst with Huabao Trust in Shanghai, said the plunge meant real, inflation-adjusted interest rates in China were now back in positive territory even though the economy had run into fierce headwinds.

“‘The government will become more decisive in cutting rates,’ Nie said.

“Jing Ulrich, head of China equities at J.P. Morgan agreed. ‘We believe there is further scope for the central bank to ease monetary policy in an effort to avoid an excessive slowdown and stave off deflation,’ she said in a note to clients.

“‘Definitely we are going to move into a deflationary environment in China, probably through the first six months of the year,’ said Glenn Maguire, chief Asia-Pacific economist for Societe Generale in Hong Kong.”

Source: Financial Times, December 11, 2008.

Bespoke: Deflation coming in China?
“It wasn’t too long ago that one of the biggest worries facing the global economy was that improved standards of living in China would lead to higher wages for its workers. This, it was feared, would cause the country to begin exporting inflation around the world. As recently as August, PPI data from China showed that inflation was running at a rate of 10.1% year over year (y/y). Since then, however, pricing power in China has collapsed as evidenced by last night’s [Tuesday] release of the November PPI, which showed that prices are now up by just 2.0% y/y. At this rate, it won’t be long before we start seeing minus signs.”

Source: Bespoke, December 10, 2008.

Financial Times: Rouble exodus hits Russia’s credit rating
“Russia on Monday became the first G8 country since the start of the financial crisis to have its credit rating downgraded after Standard and Poor’s took fright at the recent exodus from the rouble and sharp drop in oil prices.

“S&P said it had lowered Russia’s foreign currency credit rating by one notch from BBB+ to BBB because of the ‘rapid depletion’ of the country’s foreign exchange reserves and the ‘difficulty of meeting the country’s external financing needs’. It said the outlook for the rating was negative.

“Russia’s reserves have fallen by $128 billion since August to $455 billion, as the country battles the capital flight that began following the war with Georgia and escalated as the oil price fell and the global crisis worsened.

“S&P said Russia could be forced to spend all $200 billion now parked in its two sovereign wealth funds on recapitalising the banking system and covering fiscal deficits in 2009 and 2010.

“The agency expects Russia to run a current account deficit next year of 2.6% of gross domestic product due to the oil price fall, putting further pressure on the balance of payments.

“‘There are a lot of layers of concern,’ said Frank Gill, primary credit analyst at Standard and Poor’s. ‘There are macroeconomic and political risks … and Russia has not operated a current account deficit since 1997 and that was less than 1% of GDP.’

“The thought of devaluation raises the spectre of the 1998 rouble crash that wiped out Russians’ savings, although economists say any devaluation this time would be far less severe.”

Source: Catherine Belton, Financial Times, December 8, 2008.

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