Dow Jones – Hi or Lo?

Wednesday, February 29th, 2012

This Week: SPDR DJIA TRUST Ticker: DIA / NYSE

The Dow Jones Industrial Average just touched the 13,000 level this week after nearly four years. Where to from here? Well, the mountain is high. The valley is low. We think it will climb, but not without woe.

The biggest woe is Greece. The indebted nation agreed a $170 billion rescue plan, but will only get the money if its government fires workers, slashes pensions and wages, and raises taxes, all by month’s end. Greeks are rioting and opposition leaders are threatening reversal.

Private holders of Greek bonds are being squeezed too: for every 2 bonds they hold, they’ll be offered a new one that is longer-dated and lower-yielding. If enough holders refuse the offer, Greece could default. There will be more on this by March. Until then, global equity markets will remain nervous.

A European recession would be woe #2. For all their sanctimonious lecturing, France and especially Germany profited from exports to their spendthrift, Euro-neighbors. But two years of fiscal clampdown have hurt economic growth. Now further austerity threatens to push it into recession.

The austerity hurt Chinese exports. And growth within China was dampened by central bank efforts to tame inflation and speculation, especially in housing (nothing we’d know about in Toronto). Slower growth in China will have a knock-on effect, especially on us hewers and diggers, but more broadly too.

Short-term technicals are also bearish. After climbing for five straight months, the Dow is showing signs of fatigue. Our proprietary indicator suggests a pull-back of about 5% in the next few weeks.  Also, since the start of February, the DJ Industrials has been climbing alone. The DJ Transportation Index, more closely tied to economic fundamentals, has lagged by 5.6%. Not a good sign.

This list of woes suggests a short-term correction for markets. Let’s get to the positives. What will take us higher on the Dow after the correction? Three things: stocks are cheap, bond yields are thin and the economy is improving.

Quality stocks are cheap by several measures. The Dow is trading at 13.3 times its earnings, near the bottom of its long-term range, as prices have lagged earnings growth. The Dow’s earnings-per-share is up 134% from the March 2009 lows, while the Dow’s price is up 70%. True, earnings growth has plateaued in the last two quarters, but that still leaves a large gap.

In the same period, corporations have drastically cut debt levels, bringing it to par with equity and the lowest level in over a decade. Little debt, lots of profit…it’s no wonder dividend yields have risen to 2.5% and are expected to rise further. Compare that to a yield of 3.2% on a similar quality 10-year bond.

From the technicals, looking past the next few weeks and out to the next few quarters, the view is positive too. Though not quite there yet, our proprietary indicator is near a Buy levels not seen since March 2009. A correction in the short term would put it firmly in the Buy camp. And while the recent new year rally has been on relatively light volumes, we expect low valuations and good dividend yields will lure investors back in.

Finally, the economy: It’s improving. Manufacturing and services have continued to gain. Unemployment is down, with initial jobless claims falling to the lowest level in four years. Consumption is rising again. Housing prices have bottomed.  The yield spread – the difference between long and short term interest rates – remains healthy at about +1.9 percentage points. Over many decades, this spread has proved an excellent recession forecaster, besting all economists. When it turns negative – that is, when the rate on a 3 month loan is higher than on a 10 year – watch out.

There are a couple of Exchange-Traded Funds to consider for the Dow Jones Industrial Average. The first is the SPDR DJIA ETF (DIA/NYSE), traded in U.S. dollars in New York. The second is the BMO DJIA Hedged to C$ ETF (ZDJ/TSX). Both are plain vanilla and hold all the 30 shares of the Index. For Canadian investors, with ZDJ you avoid a currency trade and you’re returns will mimic those received by a U.S. investor, regardless of how the U.S. dollar does against the Loonie.

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Tags: Austerity, Bond Yields, Canadian, Canadian Market, Chinese Exports, Clampdown, Dj Industrials, DJIA, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Fundamentals, Global Equity Markets, Greek Bonds, Nyse, Opposition Leaders, Private Holders, Signs Of Fatigue, Slashes, Spendthrift, Tame Inflation, Technicals, Transportation Index
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Staring Down China’s Inflation Dragon

Monday, July 11th, 2011

China’s inflation jumped to its highest in three years with consumer price index (CPI) surging 6.4% year-over-year in June (See Chart Below). The spike has been fueled by escalating food prices despite that the central bank’s effort to tame inflation by pushing up the RRR (Reserve Requirement Ratio) for commercial banks six times this year, while raising interest rates five times since September, most recently on July 6.

Inflation Hinges on Hogs

Food prices, which weight about 30% of the CPI basket, climbed 14.4% from a year earlier, and the price of pork, in particular, increased 57.1% year-on-year, and 11.4% month-on-month, is the engine behind the runaway consumer inflation train (See Chart), according to the figures released by the National Bureau of Statistics (NBS) and reported by China Daily.

The price of pork is a staple of the Chinese diet, hit a new high in June due to rising costs and short supply. One analyst based in China warned that price increases in pork, which accounted for 65% of China’s meat consumption, risked sending the costs of grains and vegetables up as consumers seek alternatives to meat.

Bloomberg reported that many investment banks and economists believe that the future direction of China’s CPI will still be mainly influenced by pork prices.

In addition to monetary policy, Beijing is also using other tools, such as sales of grain reserves, to cool prices. But rising food prices is a world-wide phenomenon with FAO food Price Index rising 39% year-over-year in June, according to the Food and Agriculture Organization of the UN.

So Beijing’s effort fell short, and the CPI now stood high above the government’s target of 4% for the year.

Far From Reaching Peak

Meanwhile, China’s Producer Price Index (PPI), measuring inflation at the wholesale level, rose 7.1% year-on- year (See Chart Above) in June mostly due to production materials costs which was up almost 8% in June.

Many analysts, expecting Beijing’s “intervention” to take effect, have been predicting China inflation to peak each month for the last 9 months. The latest verdict is that the inflation probably peaked in June and will trend down in the second half of this year.

However, the wide differential between the two inflation measures–CPI and PPI (See Chart Above), would suggest increasing pressure to pass on the price increases to consumers most likely well into at least the first half of 2012.

Price Control Could Backfire

On the other hand, if due to price control by the central government, producers and business are unable to pass through the cost increases, that could mean reduced production and profits for corporations, which is partly why China had to face summer power shortage. Coal power plants in China cut run rate in protest as operators could not make ends meet amid soaring coal prices and the government-imposed price cap.

30% Property Price Drop?

China’s expansionary monetary and fiscal policies since the Recession coupled with huge investment inflow into the real estate and other markets has not only exacerbated the pricing pressure, but also has also created overcapacity in some sectors.

The country has introduced a series of measures to curb rising property prices, while construction of 10 million government-subsidized homes is expected to start before the end of October. Price drop in the real estate sector could be in the second quarter of next year when a large amount of government-subsidized houses will flood the market.

China Daily quoted a research report by the National Institute of Property Finance and Beijing Beta Consulting Center that China’s first-tier cities will probably see a 30% fall in property prices. Second-tier cities could see drops of 10-20 % in coming months.

Even More Fixed Asset Investment

Urban fixed asset investment rose to 9.03 trillion yuan ($1.39 trillion) in the first five months, up 25.8% year-over-year (See Chart), while investment in residential housing reached 1.33 trillion yuan, up 37.8% from the same period last year. This has partly contributed to the current escalating inflation in China.

However, there’s no slowing down for construction any time soon even with current rampant inflation levels. Business China, in a June report, quoted an analyst from Northeast Securities that

“Affordable housing projects and high-speed trains ensure the “intensity” of China’s fixed asset investment… [this] will be around 20% per year in the 2011-2015 period, helping the nation’s construction machinery sector to realize its sales target of RMB 900 billion.”

The paper further noted,

“China’s construction machinery market is expected to grow by about 17% per year over the next 5 years…..citing the 12th five-year plan for the industry. According to the China Construction Machinery Association, the plan has been submitted to senior government departments and is expected to be issued before the end of this year.”

Expansionary Policy to Continue?

With the increasing bank tightening, many small businesses and companies are getting squeezed.  This news about fixed asset investment seems to suggest Beijing expects a mid-term weak domestic demand and possibly widening income gap that government “infrastructure stimulus” is the only reliable means to fuel growth, jobs and income.

Most likely Beijing is worried once it stops “intervention” and let the chips fall where they may, riots and revolution would ensue.

Nevertheless, China’s leaders pledged to give a greater priority to stabilizing prices in 2011 and better manage liquidity and also noted maintaining proper pricing levels is vital to the country’s stability and security.

So for now, depsite the recent revelation of a ticking bomb from high local government debt, there’s no reason to think China would not come through eventually.  However, in light of many other social economic issues, the battle of inflation most likely will need to go far beyond controlling food and energy prices.  That means it will be an vertical battle climb that could last well into 2013 and beyond, much longer than most market players have anticipated.

China & XXIII Winter Olympics Construction

Now, in the face of rising inflation, gold is the typical hedge.  But in the case of China, there are a few more options that could also stare down the inflation dragon.

For the ongoing construction boom and monetary tightening in China, listed domestic construction machinery companies like Sany Heavy Industry Co. Ltd (600031.SH) and Guangxi Liugong Machinery Co. Ltd. (000528.SZ) are cited as the most competent candidates for this big pot of government cash.

Metals such as copper, iron ore of which China is a big importer, producers like the World’s Big 3— BHP Billiton, Vale, Rio Tinto, and Cleveland-Cliffs, and Arcelor Mittal, etc. would also benefit from the steady high price supported by strong Chinese demand and the infrastructure build-out for the 2018 XXIII Olympic Winter Games at Pyeongchang, South Korea.

Status Symbols – Money’s No Object

Some “status symbol” consumer goods companies like McDonald’s, Starbucks and luxury car maker like Audi and BMW seem to have better luck (than the coal power plants at least) passing through some of their costs. So companies in this niche sector could weather the coming monetary tightening in China better than some other sectors.
Red Hot Hogs

Another long idea came from Phupinder Gill, president of CME Group who told China Daily that

“It makes sense to launch hog future contracts soon on Chinese commodity exchanges. Launching hog futures can help local farmers and relative food producers to better hedge price-surge risks, and “it is the smartest thing that the Chinese commodity exchanges can do now.”

And there’s an ETF for that - ETFS Lean Hogs (HOGS) tracks the DJ-AIG Lean Hogs Sub-Index.  Agriculture ETF or mutual funds such as Oppenheimer Commodity Strategy Total Return Fund (QRAAX) or Market Vectors Global Agribusiness ETFs (MOO) would also be good investing vehicles to diversify one’s portfolio.

Disclosure: No Positions

Tags: China Daily, Chinese Diet, Commercial Banks, Consumer Inflation, Consumer Price Index, Food And Agriculture Organization, Food Price Index, Grain Reserves, Index Cpi, Inflation Dragon, Infrastructure, Investment Banks, Meat Consumption, National Bureau Of Statistics, Pork Prices, Producer Price Index, Producer Price Index Ppi, Production Materials, Tame Inflation, Target, Wholesale Level
Posted in ETFs, Infrastructure, Markets | Comments Off

Canada Market Cheat Sheet (February 22, 2011)

Monday, February 21st, 2011

TSX and Subgroups Week Ending February 18, 2011

TSX and Subgroups YTD

TSX and Subgroups 1-year Ending February 18, 2011

Strengths

Carney Says `Possible’ Canada Fourth-Quarter Growth Faster Than Projected

Bank of Canada Governor Mark Carney said it’s “possible” the economy grew at a faster pace in the fourth quarter than the central bank projected last month. [Bloomberg]

Canada defies global trend with tame inflation

Canada’s annual inflation rate slipped to a relatively tame 2.3 percent in January as a strong currency helped it buck a global trend that has seen several major nations struggle to control rising prices.

Canada’s January inflation rate edged down to 2.3% [RBC]

In January, Canadian consumer prices increased by 0.3%, which was in line with market expectations. The annual inflation rate, however, eased to 2.3%, lower than December’s 2.4% pace. Core inflation, which excludes the eight most-volatile items and the effect of changes in indirect taxes, was unchanged in January and below expectations for a 0.1% rise. The annual rate edged down to 1.4% from 1.5%. [RBC Economics Research]

U.S. Fed members more confident about sustained economic recovery [RBC]

The minutes of the January meeting show a modestly upgraded forecast for the U.S. economy in 2011 although with the expectation of slow progress toward the Fed’s dual objectives of price stability and full employment. The minutes indicate that incoming data “would need to be solid for a while longer to justify a significant upward revision to their outlook.” As such, we see no need to change our view that the Fed will complete its current round of U.S. Treasury bond buying and maintain the Fed funds target in its current range. [RBC Economics Research]

Banking on a business-led recovery

As the country’s major banks get ready to report earnings this week, investors are taking a closer look at two areas of the balance sheet – commercial loans and consumer lending. Each will have something to say about what kind of a quarter it was in banking, but the real value of the data will be the statement it makes about the Canadian economy in the year ahead. {Globe and Mail]

Canadian new home prices rose to highest level on record in December [RBC]

Statistics Canada’s New Housing Price Index rose 0.1% on a month-over-month basis in December 2010 following the unrevised 0.3% advance in November. While the increase was slightly below expectations (market expectations were for a monthly increase of 0.2%), the rise in home prices moves the index to establish a new record high for the second consecutive month. On a year-over-year basis, the pace of growth in new home prices decelerated for sixth consecutive month, slipping to 2.1% from 2.3% in November. [RBC Economics Research]

Weaknesses

A merger that will only bring mediocrity

The executives of the London and Toronto exchanges are pumping their proposed merger so hard that you wonder how either bourse managed to survive on its own. Together, apparently, they would be a world-beating marvel. Left to their own inadequate devices, they would fade away like old soldiers, or simply get squashed by the new breed of monster exchanges like the baby deer in the classic Bambi Meets Godzilla cartoon. [Globe and Mail]

Canadian December manufacturing sales show disappointing increase [RBC]

Manufacturing sales in December 2010 managed to rise only 0.4% in the month. This increase failed to reverse the 0.6% drop recorded in November 2010, even with the decline lessened from the 0.8% decline previously reported. The volume of sales unexpectedly dropped 0.5% in the month. Expectations were for a much stronger increase in December of 3.0%, on a nominal basis, in the face of an earlier reported 9.7% surge in December merchandise exports and indications of the completion of auto sector retooling by the end of November. [RBC Economics Research]

Opportunities

U.S. retail shakeup will spread North: Desjardins

The U.S. retailing scene has been whipped into a frenzy, as activist investors and private equity players take a shining to the sector at a time when companies are reviewing their strategies.

And it’s only a matter of time before there’s a spillover effect in Canada, contends Desjardins Securities Inc. analyst Keith Howlett. [Globe and Mail]

Threats

RBC: U.S. January inflation rate rose more than expected

U.S. consumer prices increased by 0.4% in January 2011, thereby beating market expectations for a 0.3% increase, although in line with RBC’s forecast. The annual inflation rate rose to 1.6% as a result, slightly faster than December 2010′s 1.5% pace. Core inflation, which excludes food and energy prices, posted a 0.2% monthly gain, also beating expectations for a 0.1% rise, and the annual rate rose to 1.0%. The rise in the core inflation rate marked the third consecutive increase from October 2010′s 0.6% all-time low. [RBC Economics Research]

TSX sells, Canada sold down the river

Diane Francis states: The proposed takeover of the TSX Group is unacceptable and would injure Canada’s competitive advantages. [Financial Post]

Tar sands row threatens Canada-EU trade deal: sources 2:31pm EST

BRUSSELS (Reuters) – Canada has threatened to scrap a trade deal with the European Union if the EU persists with plans that would block imports of Canada’s highly polluting tar sands, according to EU documents and sources. [Reuters]

Canada PM Stephen Harper says no budget “horse trading” 4:44pm EST

VANCOUVER (Reuters) – Canadian Prime Minister Stephen Harper said on Monday he is not “horse trading” with opposition parties over the budget, but that does not mean he is trying to force an election this spring. [Reuters]

Stock trading patterns prior to mergers raise more red flags

A super-sized rally preceding the public announcement of a takeover raises difficult questions: Was the run-up in Norsemont shares simply a case of traders realizing the company was a likely takeover target and bidding up its price? Or did word of the pending deal leak out, allowing unscrupulous investors to take advantage? [Globe and Mail]

Tags: Annual Inflation Rate, Bank Of Canada, Bank Of Canada Governor, Canadian Market, Commercial Loans, Core Inflation, Currency, Dual Objectives, Economics Research, energy, Global Trend, Indirect Taxes, Inflation Canada, Mark Carney, Market Expectations, Quarter Growth, Rbc, Taking A Closer Look, Tame Inflation, Target, Treasury Bond, U S Treasury, Upward Revision, Week Ending February
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Inflation is a Function of How You Measure It

Wednesday, February 2nd, 2011

John Tamny is a senior economic advisor to Toreador Research & Trading, a senior economist with H.C. Wainwright Economics, and editor of RealClearMarkets and Forbes.

Copyright (c) Wall Street Cheat Sheet

Tags: Cheat Sheet, Chinese Consumer, Commodity Prices, Consumer Price Index, Cpi Index, Euroland, Frequent Question, Fxi, Gallon Of Gasoline, Inflation Deflation, Inflation Rates, Nyse, Price Measures, Riddle, Ronald Reagan, Rupee, Tame Inflation, Wall Street Journal, Weak Dollar, Yuan
Posted in Commodities, India, Markets | 1 Comment »

Doug Kass: Stocks Have Hit Bottom for the Year

Thursday, July 8th, 2010

This note is a guest contribution from TraderMark.

Hedge fund maven Doug Kass reports stocks have hit a bottom for the year [...]

New York City is in the midst of a serious heat wave, but on Wall Street the stock market is on a major cold streak. Stocks are down 9 of the past 11 sessions. Even Tuesday’s higher close was still well off the highs of the day.

Doug Kass of Seabreeze Partners, famous for calling the market bottom in March 2009, isn’t worried. In fact, he’s bullish. “I think we’ve seen the lows of the year,” he tells Tech Ticker guest host Jon Najarian of OptionMonster.com. “The market’s are traveling on a path of fear and share prices have significantly disconnected from fundamentals,” he says.

Kass predicts stocks will rise 10%-12% by year’s end on the back of strong earnings and a better-than-expected economic recovery. He says positive trends in the ISM manufacturing and non-manufacturing index and improved labor market conditions point to “moderate domestic economic expansion, not a double dip.”

Trading at around 11 times earnings, stocks are fairly inexpensive, says Kass. He notes stocks generally trade at around 15 times future earnings, and even higher in periods of tame inflation and low interest rates, as we’re currently experiencing.

It may not be a V-shaped rally like that of 2009, but Kass says we’ve just started building a base, which could lead to a fundamentally stronger and longer-lasting rally in the future.

Copyright (c) TraderMark

Tags: Double Dip, Doug Kass Stocks, Earnings, Economic Expansion, Economic Recovery, Guest Host, Heat Wave, Hedge Fund, Ism Manufacturing, Jon Najarian, Low Interest Rates, Lows, Market Bottom, Midst, Optionmonster, Phasers, Seabreeze Partners, Share Prices, Stock Market, Tame Inflation, Wall Street
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Gold Market Highlights

Sunday, January 24th, 2010

Gold Market
For the week, spot gold closed at $1,093.35 per ounce, down $37.58 or 3.32 percent. Gold equities, as measured by the Philadelphia Gold & Silver Index (XAU), fell 8.10 percent rise for the week. The U.S. Trade-Weighted Dollar Index (DXY) jumped 1.24 percent.
Strengths

• The Financial Times has reported the Russian central bank has already started buying Canadian dollars and securities in a bid to diversify its foreign exchange reserves. Analysts have said the move could be a sign of increased diversification of emerging market central bank assets away from the dollar and into investments in commodity-linked currencies.
• Russia’s central bank increased its gold reserves last month by 800,000 troy ounces, or 4.1 percent, from 612.73 tonnes to 637.62 tonnes. The increase in dollar terms was equivalent to $22.4 billion as of January 1.
• Liu Yuhui, an economist at the Chinese Academy of Social Sciences, has said China may scale back purchases of U.S. debt again on concerns the dollar will decline. A Treasury Department report shows China trimmed holdings by $9.3 billion in November to $789.6 billion.

Weaknesses

• The week was dominated by risk-aversion as the U.S. dollar strengthened because of news that China’s economy expanded by 10.7 percent in the fourth quarter of 2009, modestly above consensus. As a result, China has been asking banks to curb lending, restricting overall credit growth to tame inflation because of an over-heated economy. Also, European sovereign credit risk fears continue to grow as Greek credit default swaps widened by 33 bps to 348 bps.
• Commodities across the board were hit on the news that China’s tightening would lead to less demand for raw materials. The head dealer at a prestigious brokerage firm in Chicago said that China was the driving force behind commodities and that there is now a wave of asset liquidation that triggered more profit-taking.
• The dollar was also buoyed after Republican Scott Brown won a U.S. Senate seat in Massachusetts and vowed to prevent healthcare reform in Congress, which eased concerns that the cost of the proposal would lead to higher debt levels.

Opportunities

• Inflation expectations have risen sharply in the U.S. and Europe in the past three months against a background of economic growth. Demand for inflation-indexed government bonds continues to rise amid expectations that interest rates will rise this year to subdue rising prices.
• The world continues to look to China as the main driver of growth. The World Bank has raised its forecast for the global expansion in 2010 to 2.7 percent from 2 percent last June and also predicted 9 percent growth in China.
• Dennis Gartman, Editor and Publisher of the Gartman Letter, has rescinded his remarks over a stronger dollar outlook made last December, and has said that President Obama’s remarks on financial overhaul, which limit bank proprietary trading and other activities, will cause capital to seek investment elsewhere. Gartman suggests a positive material shift in sentiment towards gold as the U.S. dollar may weaken further over uncertainty in the financial system.

Threats

• At the start of the year the consensus for most market strategists was for a strong first half in 2010 with some weakness expected in the second half of the year. The recent bout of profit taking may have to run its course and would impact all asset classes, but just as in 2009, gold based assets were some of the best investments to own.
• The Federal Housing Administration will raise the up-front Mortgage Insurance Premium, which is paid by borrowers, from 1.75 to 2.25 percent, marking the second time in two years it has raised its premium. New borrowers will also be required to have a minimum FICO score of 580 to qualify for the 3.5 percent down payment program, otherwise borrowers will have will be required to put down 10 percent.
• Australia’s Secretary to the Treasury Ken Henry has recommended that individual state levies on miners be replaced with a uniform tax expected to be 40 percent. This could narrow the profit margins for some of the miners.

Tags: Academy Of Social Sciences, Asset Liquidation, Bank Assets, Brokerage Firm, Canadian Market, China, Chinese Academy Of Social Sciences, Commodities, Credit Default Swaps, Dollar Index, Dxy, Emerging Markets, Foreign Exchange Reserves, Gold, Gold Equities, Gold Market, Gold Reserves, Philadelphia Gold, Risk Aversion, Russia, Russian Central Bank, Senate Seat, Silver Index Xau, Spot Gold, Tame Inflation, Yuhui
Posted in Canadian Market, China, Commodities, Markets, Outlook, Silver | Comments Off

Words from the (Investment) Wise (November 9, 2009)

Monday, November 9th, 2009

“Words from the Wise” this week comes to you in a shortened format as I am about to leave Cape Town for a visit to the colder environs of Switzerland and Slovenia. Although reduced commentary is provided, a full dose of excerpts from interesting news items and quotes from market commentators is included. Blog posting will be slow (and totally absent on some days) while I am on the road. The normal blogging service will be resumed on my return to Cape Town on November 16.

The Federal Open Market Committee (FOMC) maintained its extraordinarily accommodative monetary policy following its meeting on Wednesday. The communiqué had no surprises and said that the committee expected to keep the fed funds rate target in the 0-0.25% range “for an extended period”. As expected, the European Central Bank (ECB) and the Bank of England (BoE) also kept interest rates unchanged at 1% and 0.5% respectively.

“A hesitant economic recovery, tame inflation and severe credit headwinds suggest that monetary policy will need to stay very easy for at least another year. Liquidity trends will not be a constraint on higher prices for risk assets for a while,” said BCA Research.

The jump in the unemployment rate to a 26-year high of 10.2% in October – an increase of 0.4 of a percentage point – reminded pundits of the challenges in the labor market and broader economy. While investors’ hopes of an economic recovery might have got ahead of reality, the cartoonists continually reminded us of worrisome issues …

Source: Stuart Carlson, Uclick.com

The past week’s performance of the major asset classes is summarized by the chart below. Gold bullion was the star of the week, especially subsequent to the purchase by India’s central bank of 200 metric tons of gold from the International Monetary Fund. The price jumped by 4.7%, recording an all-time high of just over $1,100, with platinum (+1.7%) and silver (+6.6%) also handsomely higher. (See my recent post “Gold bullion surging in all currencies“.)

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

The MSCI World Index (+2.4%) and the MSCI Emerging Markets Index (+2.4%) both made headway last week to take the year-to-date gains to 23.0% and an impressive 65.1% respectively. Interestingly, Chile is now only 3.9% down from its July 2007 high and could be one of the first markets to wipe out all the financial crisis/recession losses.

The US indices reversed a two-week down-patch and all the major indices and economic sectors closed higher for the week. The S&P 500 scored a full house of gains and the Dow Jones Industrial Index reclaimed the 10,000 level, putting these indices within 2.7% and 0.7% respectively of their 2009 highs.

The year-to-date gains in the US remain firmly in positive territory and are as follows: Dow Jones Industrial Index 14.2%, S&P 500 Index 18.4%, Nasdaq Composite Index 34.0% and Russell 2000 Index 16.2%.

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

Top performers among stock markets this week were China (+5.6%), Argentina (+5.1%), Brazil (+4.7%), Ukraine (+4.7%) and Slovakia (+4.7%). At the bottom end of the performance rankings countries included Egypt (�‘6.6%), Vietnam (-5.5%), Iceland (-4.2%), United Arab Emirates (-3.4%) and Serbia (�‘3.3%).

Of the 99 stock markets I keep on my radar screen, 52% recorded gains (last week 15%), 43% (84%) showed losses and 1% (5%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included Telebras HOLDRS (TBH) (+13.1%), Market Vectors Gold Miners (GDX) (+12.4%), PowerShares Global Gold & Precious Metals (PSAU) (+10.7%), Market Vectors Brazil Small Cap (BRF) (+9.2%) and Market Vectors Coal (KOL) (+8.1%).

At the bottom end of the performance rankings, ETFs included United States Natural Gas (UNG) (-7.2%), ProShares Short Emerging Markets (EUM) (�‘5.5%), Vanguard Extended Duration Treasury (EDV) (-3.8%), ProShares Short QQQQ (PSQ) (-3.7%) and iShares Barclays 20+ Year Treasury Bond (TLT) (-2.2%).

Still on the topic of ETFs, Bespoke highlighted a list of the funds trading the furthest above (top table) and below (bottom table) their 50-day moving averages. The tables are posted with further comment.

Source: Bespoke, November 6, 2009.

Referring to the surge in the gold price, the quote du jour this week comes from long-timer Richard Russell, author of the Dow Theory Letters. He said: “An integral part of our prosperity since World War II has to do with the dollar as a reserve currency. As the world’s reserve currency, we could print our ‘wealth’ and the world would accept it. That ‘free lunch’ is now in the process of changing.

“The key to the whole picture is the acceptance of the dollar. The dollar is compared every minute with real Constitutional money – gold. As gold rises, the dollar’s future declines. At some point ahead, the world will refuse to accept dollars, which are really Federal Reserve notes. When that happens, the US’s great advantage will be over.

“The forces of real intrinsic money, gold, are now battering at the door of fiat money, which is money created at will out of nothing by the central banks. It’s a death-struggle between real intrinsic money against ‘counterfeit’ or play money created by bankers. Who will win? Reality will always triumph over fantasy.”

Other news is that the House, following the Senate, passed legislation that extended the $8,000 first-time homebuyers’ credit until April and unemployment insurance for an additional 20 weeks. Meanwhile, the Senate aims to publish a bill on regulatory overhaul next week.

Separately, regulators closed five more banks on Friday, bringing the tally of US bank failures in 2009 to 120. The latest round includes United Commercial Bank of South Francisco that reportedly received federal bailout funds in 2008.

Next, a tag cloud of all the articles I read during the week. This is a way of visualizing word frequencies at a glance. Although “bank” still features prominently, the key words have started taking on a more normal pattern compared with the crisis-related words that have dominated the tag cloud for many months. Unsurprisingly, “gold” is moving up the ranks as the metal increasingly gains favor.

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town) are given in the table below. With the exception of the Russell 2000 Index and the Bombay Sensex Index, most of the indices reclaimed their 50-day moving averages over the past few days, with all the indices still holding above their respective 200-day moving averages. The 50-day lines are also above the 200-day lines in all instances.

The October lows are also given in the table. A break below these levels would indicate a reversal of the uptrend since March, i.e. reversing the progression of higher reaction lows.

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

Eoin Treacy (Fullermoney) said: “Mean reversion [i.e. pulling back to the moving averages] within an overall bullish environment is the equivalent of taking a breather in a relatively long journey and is characterized by supply and demand coming back into balance for a time. As this is going on, bullish and bearish arguments increasingly compete for attention and sentiment is likely to begin to turn negative as the process unfolds. However, provided monetary conditions remain accommodative and markets find support in the region of their means [moving averages] we can continue to give the upside the benefit of the doubt over the medium to longer term.”

Moving on to government bonds for a moment, the ten-year US Treasury Notes yield has risen by 33 basis points since the October low as financial markets adopted a more upbeat outlook on the economy, while also grappling with concerns about massive issuance and inflationary pressures.

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

Source: StockCharts.com

Nouriel Roubini (RGE Monitor) warned (via The Wall Street Journal) that markets, be they stocks, emerging markets or commodities, have rallied too far, too fast because the global economy will experience an anemic recovery rather than the hoped-for V-shaped recovery. He said that the current “party” can continue for another six months, but it will eventually end badly as much of the rise in asset prices since March is yet another bubble created by a huge pool of global liquidity.

As said last week, I will bide my time in the stock market while the fundamentals play catch-up. Meanwhile, caution remains the operative word.

For more discussion on the economy and financial markets, see my recent posts “Gold bullion surging in all currencies“, “Longer-term bond indicators flash ’sell’“, “Picture du Jour: Prepare for higher inflation“, “WealthTrack: Why Jim Grant is bullish“, “Unemployment rate troubling, but …” and “Credit woes continue“. (And do make a point of listening to Donald Coxe’s webcast of November 6, which can be accessed from the sidebar of the Investment Postcards site.)

Twitter and Facebook
I regularly post short comments (maximum 140 characters) on topical economic and market issues, web links and graphs on Twitter. For those not doing so already, you can follow my “tweets” by clicking here. You may also consider joining me as a friend on Facebook.

Economy
“Global business confidence has remained largely unchanged during the past two months through mid-October. Sentiment is consistent with a very tentative and fragile global economic recovery,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses … are more upbeat about the outlook into next year … South Americans are the most positive, and North Americans generally the most negative.”

Source: Moody’s Economy.com

“Signs of recovery after a torrid year reverberated around the world on Monday as manufacturers reported rising output and improved employment prospects in the US, Europe and Asia,” reported the Financial Times. The JP Morgan global composite purchasing managers’ index (PMI) rose to 54.4, up from 53 in September, the highest value since July 2004. The recovery in manufacturing was strongest in Asia, where economists said the PMI figures were consistent with pre-crisis growth rates, but also reached multi-year highs in France, the UK and the US.

Source: Chris Giles, Financial Times, November 2, 2009.

A snapshot of the week’s US economic reports is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

November 6
- October employment report – headline jobless rate is troubling, but it is a lagging indicator

November 5
- November 4 FOMC policy statement revisited
- Total continuing claims post second weekly decline
- Productivity gains are noteworthy, but temporary jump

November 4
- Fed retains stance of September FOMC meeting

November 3
- Auto sales rebound in October

November 2
- Factory sector maintains expansionary trend
- Housing sector – positive signs in construction data and Pending Home Sales Index

On the US unemployment rate hitting 10.2% in October, Clusterstock said: “Worse yet, the ‘real’ unemployment rate, which adds in things such as discouraged workers who have dropped out of the labor force, hit 17.5%. Ouch.

“Yet there’s some light at the end of the tunnel. While the unemployment rate and ‘real’ unemployment rate rose in October, the rate of deterioration (year-over-year change) for both measures kept falling, as shown below. Thus we’re still bleeding jobs and it hurts, but the blood loss is slowing rapidly and starting to come under control. Hopefully the patient still has a pulse by the time the blood stops,” said the report.

Source: Clusterstock – Business Insider, November 6, 2009.

Meanwhile, according to Financial Times, “the International Monetary Fund (IMF) projected that on current trends, even assuming some discretionary fiscal tightening next year, government debt in the advanced G20 economies would reach 118% of gross domestic product in 2014. Sweeping spending cuts and tax increases will be required across the industrialized world over the next decade to bring public finances under control following the economic crisis.” A decade of restraint looks like a likely scenario.

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

Source: Yahoo Finance, November 6, 2009.

Click here for a summary of Wells Fargo Securities’ weekly economic and financial commentary.

US economic data reports for the week include the following:

Thursday, November 12
- Initial jobless claims
- Treasury budget

Friday, November 13
- Trade balance
- Export and import prices
- Michigan sentiment

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

Source: Wall Street Journal Online, November 6, 2009.

“The conventional view serves to protect us from the painful job of thinking,” said John Kenneth Galbraith. Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist readers of Investment Postcards with formulating the correct view in order to invest profitably.

That’s the way it looks from Cape Town (where I will shortly be making my way to the airport for a long-haul flight to Europe).

Source: Steve Kelly, Comics.com

Financial Times: Stronger signs of global recovery
“Signs of recovery after a torrid year reverberated around the world on Monday as manufacturers reported rising output and improved employment prospects in the US, Europe and Asia.

“From Seoul to San Francisco, manufacturing sentiment has recovered quickly from the sudden shock of the global recession last year, when world trade stopped dead and unsold stock piled up in warehouses across the world.

“A year on, manufacturers reported that in October, output around the world was rising at the fastest rate for five years. The JPMorgan global composite purchasing managers’ index (PMI) rose to 54.4, up from 53 in September, the highest value since July 2004.

“The biggest surprise came in the US, where the Institute for Supply Management’s factory index rose to 55.7 from 52.6 in September. The figure, well above market expectations, sent stocks in the US and Europe surging as it was seen as evidence that the recovery was more durable and entrenched than previously thought.

“Speaking at a White House meeting of his Economic Recovery Advisory Board, Barack Obama, the US president, said the US economy had recovered a lot of ground since January, but cautioned that there was still more pain ahead for US employees. ‘We anticipate that we are going to continue to see some job losses in the weeks and months to come,’ he said.

“Around the world, manufacturers reported rising output, falling stocks of finished goods and encouraging new orders as the recovery gained momentum. They were strongest in Asia, where economists said the PMI figures were consistent with pre-crisis growth rates, but also reached multi-year highs in France, the UK and the US.”

Source: Chris Giles, Financial Times, November 2, 2009.

Financial Times: Commission raises EU growth forecasts
“The European Commission on Tuesday raised its forecast for European economic growth next year, but said the recovery from recession would come at the price of record-high budget deficits and public debt.

“In its six-monthly economic outlook, the Commission predicted that the 27-nation European Union would grow by 0.7% next year and 1.6% in 2011, after a slump of 4.1% in gross domestic product this year.

“The forecast for 2010 was significantly more positive than the Commission’s estimate in May of a 0.1% fall in GDP. It reflected the impact of multibillion-euro government deficit-spending programmes, emergency support measures for the financial sector and interest rates cut to almost zero.

“‘The EU economy is coming out of recession,’ Joaquín Almunia, the monetary affairs commissioner, said.

“‘This owes much to the ambitious measures taken by governments, central banks and the EU that have not only prevented a systemic meltdown but have kick-started the economy.’

“However, government borrowing to combat the financial crisis and recession has been on such a large scale that none of the eurozone’s 16 countries will have a budget deficit below 3% of GDP – the agreed ceiling in normal times – in either 2010 or 2011.

“The eurozone’s aggregate budget deficit was projected at 6.4% this year, 6.9% next year and 6.5% in 2011. By far the most seriously affected countries were Ireland, forecast to have a deficit of 14.7% in both 2010 and 2011, and Greece, whose deficit was estimated at 12.2% in 2010 and 12.8% in 2011.

“Aggregate public debt in the eurozone is forecast to rise to 84% of GDP next year and 88.2% in 2011 from 78.2% this year. The debt level stood at 66% in 2007.

“EU leaders agreed at a summit in Brussels last week that governments should concentrate on putting their public finances in order, but that the economic recovery was too fragile for the effort to start in earnest until 2011.”

Source: Tony Barber, Financial Times, November 3, 2009.

Financial Times: World Bank raises east Asia growth forecast
“The World Bank on Wednesday raised its forecast for economic growth in developing east Asia this year by 1.4 percentage points to 6.7%, but warned that the rebound from the global financial crisis had yet to turn into a recovery.

“The revised forecast compares with growth of 8% last year, and a fresh forecast of 7.8% for 2010 – a significant improvement on the development bank’s gloomier predictions in April that a world recovery might not materialise until late 2010.

“In an update to its East Asia and Pacific Outlook, published in April, the World Bank said the economies of developing east Asia had rebounded sharply from the steep drop in activity in early 2009 because of extraordinary fiscal and monetary measures, improved global financial conditions and an upturn in inventory cycles.

“The Bank said growth in the developed economies was projected to recover at a modest pace in 2010 as banks continued to reduce debt while high and rising unemployment subdued a recovery in private consumption.

“It warned that a premature withdrawal of the stimulus measures could damage the recovery, but also noted that the rebound in gross domestic product and emerging inflationary pressures could mean that monetary policy would have to be tightened ’sooner rather than later’.

“The Bank said that exchange-rate flexibility would be ‘critical’ in managing foreign-exchange inflows while keeping inflation and asset-price increases under control.

“It said many governments were worried that allowing exchange rates to appreciate would slow the recovery in exports and generate capital inflows that might cause financial instability.”

Source: Kevin Brown, Financial Times, November 4, 2009.

MoneyNews: Soros – China to be big winner from world crisis
“Billionaire investor and philanthropist George Soros said on Friday China will be the biggest winner of the global financial crisis while the United States stands to lose the most.

“‘There will be significant changes in the relative positions of other countries as well but from a global perspective, the one between the United States and China is the most significant,’ Soros told a lecture. ‘China is likely to emerge as the big winner.’

“Soros added the US banking system has to earn its way out of a hole while in commercial real estate and leverage buyouts, the ‘bloodletting is yet to come’.”

Source: MoneyNews, November 2, 2009.

McKinsey Quarterly: A global view of the housing bubble
“Although the current crisis started with the bursting of the US housing bubble, other economies around the world are feeling the effects of their own real-estate booms and busts. From 2000 through 2007, a remarkable run-up in global home prices occurred. But that trend has reversed abruptly. In 2008, the value of US residential real estate fell 10%; the global average fared only somewhat better, declining by almost 4%. We estimate that falling home prices erased more than $3.4 trillion of household wealth in 2008. And because home prices are slow to correct, the current slide may persist for some time, which could depress global consumption.”

Source: McKinsey Quarterly, October, 2009.

BCA Research: Fed policy – no exit in sight
“A hesitant economic recovery, tame inflation and severe credit headwinds suggest that monetary policy will need to stay very easy for at least another year.

“There were no surprises from the latest FOMC meeting, with the statement’s language on the economy and policy virtually unchanged from the September release. Fed policymakers no doubt had an in-depth discussion about exit strategies and how to communicate these to the public at large. However, in terms of near-term actions, there is no change in the picture: a highly accommodative stance is still needed.

“The Fed’s balance sheet is bloated, but liquidity injections into the banking system have still failed to trigger a self-feeding expansion in money and credit. The monetary base has expanded by $788 billion in the past year, while outstanding bank loans have contracted by $638 billion. Meanwhile, actual inflation and inflation expectations remain tame.

“Bottom line: Policy needs to stay very easy, and the first rate hike may not come till late-2010/early-2011. Liquidity trends will not be a constraint on higher prices for risk assets for a while.”

Source: BCA Research, November 6, 2009.

Asha Bangalore (Northern Trust): Fed retains stance of September FOMC meeting
“The FOMC policy statement following the meeting of November 3-4 retains roughly the stance that was conveyed in the September policy statement. In the November 4 policy statement, the Fed also left unchanged the much quoted phrase – “warrant exceptionally low levels of the federal funds rate for an extended period”. Essentially, the Fed is no rush to change its monetary policy stance. The financial media appears to have reacted prematurely after the 3.5% increase in third quarter real GDP. The effective federal funds rate continues to trade below the upper limit of the target federal funds rate.

“The modifications of today’s [Wednesday] policy statement are consistent with the nature of incoming economic reports and financial market conditions. The outlook for inflation was not modified. The reduction in the quantity of agency bonds the Fed plans to purchase (to $175 billion from $200 billion) is due to a limited availability of these bonds.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 4, 2009.

MoneyNews: Geithner – recovery is going to take awhile
“Treasury Secretary Timothy Geithner acknowledges the federal budget deficit is too high, but that the priorities now are economic growth and job creation.

“Asked repeatedly on NBC’s Meet the Press whether this means taxes will rise, Geithner avoided giving specifics. He did say President Obama is committed to dealing with deficit in a way that will not add to the tax burden of people making less than $250,000 a year.

“The White House has not decided how to reduce the red ink, Geithner said in an interview broadcast Sunday.

“‘Right now we’re focused on getting growth back on track,’ he said. ‘And we’re not at the point yet where we have to decide exactly what it’s going to take.’

“He acknowledged that the economic recovery, while showing positive movement, has been shaky and uneven.

“‘A lot of damage was caused by this crisis. It’s going to take some time for us to grow out of this. It could be a little choppy,’ he said. ‘It could be uneven. And it’s going to take awhile.’

“A bright spot in the recovery identified by Geithner is the banking system, which he said is ‘dramatically more stable’ because of the government bailout.

“But Geithner said more needs to be done to assist small businesses, adding that the administration is working to help open up credit to them. These businesses, he said, ‘face a really tough environment on the financing side’.

“After financial institutions were widely blamed for assuming too much risk and bringing the economy to the brink of collapse, Geithner said a concern now is that they might end up being too timid.

“‘The big risk we face now is that banks are going to overcorrect and not take enough risk,’ he said. ‘We need them to take a chance again on the American economy. That’s going to be important to recovery.’

“Geithner said it’s too early to decide if a second government stimulus package should be offered, though he acknowledged unemployment probably will rise even more before it starts to turn around. Economists expect to see job growth after the first of the year, probably in the first quarter, he said.

“Geithner also said the administration supports steps being considered by Congress like extending unemployment insurance and the homebuyer tax credit.”

Source: MoneyNews, November 2, 2009.

The Wall Street Journal: More relief for unemployed, home buyers
“The Senate has passed a bill extending unemployment benefits and the popular tax credit for homebuyers. It also includes proposed tax increases to offset the costs that may be hard for some businesses to swallow.”

Source: The Wall Street Journal, November 4, 2009.

MoneyNews: Krugman – Huge new stimulus now
“The Obama administration’s stimulus plan is working, but the deficit spending was way too small to have a significant, long-term impact on the US economy, writes Nobel Prize winning economist Paul Krugman.

“‘The good news is that the American Recovery and Reinvestment Act, a.k.a the Obama stimulus plan, is working just about the way textbook macroeconomics said it would,’ writes Krugman in The New York Times.

“‘But that’s also the bad news – because the same textbook analysis says that the stimulus was far too small given the scale of our economic problems. Unless something changes drastically, we’re looking at many years of high unemployment.’

“Though the likelihood of long-term, high unemployment is acknowledged by policymakers in Washington D.C., it is not probable that they will spend another $1 trillion or so on a second stimulus any time soon. The political environment won’t allow it, as the urgency of the early days of the Obama administration has passed.

“‘The really bad news is that centrists in Congress aren’t able or willing to draw the obvious conclusion, which is that we need a lot more federal spending on job creation,’ writes Krugman.

“Though the US faces a bout of bad employment news, the ‘free fall’ of the economy has stopped, Krugman adds.

“‘The stimulus didn’t completely eliminate these effects, but it was enough to break the vicious circle of economic decline,” Krugman writes.”

Source: Gene Koprowski, MoneyNews, November 3, 2009.

Clusterstock: Bernanke rips a page from Japan’s suicidal playbook
“Let’s hope that Bernanke doesn’t keep playing by Japan’s suicidal 1991 interest rate playbook for too much longer.

“The chart below shows Japan’s 1991-2006 interest rates on top of our current US interest rate cycle.

“While Mr. Bernanke is trying to temporarily fight deflationary forces in the economy after the massive housing bust, don’t forget that Japan’s low interest rate policy lasted far longer than they had initially expected. And they lost a decade of economic growth by not allowing prices to fall when they should have. If we follow Japan, our rates would stay low until 2022.

“Sure, the US dynamics are different. Yet if Bernanke follows the Japan model for just a quarter as long as Japan did, while we might not lose a decade of growth, we might set off a decade of dollar-destroying inflation.”

Source: Vincent Fernando and Kamelia Angelova, Clusterstock – Business Insider, November 4, 2009.

MoneyNews: Volcker – no more reliance on consumer spending
“White House economic adviser Paul Volcker said his meeting on Monday with President Barack Obama focused in part on reducing US economic reliance on consumer spending.

“The alternatives to help bolster future economic growth include boosting exports, applying innovative technology to green issues and improving the nation’s infrastructure, Volcker said.

“The former Federal Reserve chairman, who now heads the White House Economic Recovery Advisory Board, said Obama understands that ‘we cannot have so much consumption’.

“Consumer spending accounted for 70% of the US economy before last year’s economic meltdown, a level that Volcker said was sustained only by ‘the magic of financial engineering’.

“‘We cannot rebuild the economy to the tune of 70% consumption or housing booms. It will just break down again,’ Volcker said.

“Obama has been accused recently of ignoring Volcker’s advice to do more to separate commercial banking from risky securities trading.”

Source: MoneyNews, November 3, 2009.

Asha Bangalore (Northern Trust): Productivity gains are noteworthy, but temporary jump
“Productivity of the US economy increased 9.5% in the third quarter of 2009 vs. 6.9% gain in the second quarter. Unit labor costs fell 5.2%, after a 6.1% drop in the prior quarter. Hourly compensation moved up 3.8% in the third quarter vs. a 0.3% increase in the second quarter. Productivity gains are impressive at the early stages of a recovery as output is raised without expanding payrolls. Putting things in perspective, the underlying productivity trend of the US economy is little over 2.0%.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 5, 2009.

Asha Bangalore (Northern Trust): October employment report – headline jobless rate is troubling, but it is a lagging indicator
“The significant increase in the unemployment rate to 10.2% in October from 9.8% in September is a shocking headline. At the first blush, the 3.5% increase in third quarter real GDP and the weak employment report are puzzling but closer scrutiny indicates that the unemployment rate is a lagging indicator (always peaks at the end of a recession or after a recovery has commenced). There is an important difference to note in the timing of the peak of the jobless rate in the post-war period. The unemployment rate took longer to peak after a recovery was underway in the 1990-91 and 2001 recessions. In other words, real GDP was advancing for several quarters before the unemployment rate peaked. A similar case is projected for the current recovery. Our current forecast is for the unemployment rate to peak in mid-2010. At the same time, real GDP should continue to advance during the final months of 2009 and all of 2010.

“Nonfarm payrolls fell 190,000 in October, following upward revisions of August and September estimates which led to net addition of 91,000 jobs over the two-month period. The trough of the year-to-year change in payroll employment appears to be August 2009. About 7.3 million people have lost jobs since the recession began in December 2007.

“In sum, the grim October employment report supports expectations of a Fed on hold for several months. As The Economist magazine puts it, there are aspects of both ‘gloom and glimmer’ in the October employment report.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 6, 2009.

Asha Bangalore (NorthernTrust): Housing sector – positive news
“The positive news from the housing sector is noteworthy. Total construction spending rose 0.8% in September, with the gain in residential sector spending (+3.9%) and 1.3% increase of publicsector outlays accounting for the overall gain. Residential construction spending has posted strong growth in the August-September months. Non-residential construction spending fell 1.8% in September.

“The Pending Home Sales Index (PHSI) of the National Association Realtors increased to 110.1 in September from 103.8 in August. This gain bodes positively for sales of existing homes in the October/November period. The PHSI has risen each month since February. The existing home sales data for October are scheduled for publication on November 23.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 2, 2009.

Asha Bangalore (Northern Trust): Factory sector maintains expansionary trend
“The ISM manufacturing composite index rose to 55.7 in October, marking the third consecutive monthly reading that exceeds 50.0. Readings in excess of 50 denote an expanding factory sector. The new orders index (58.5 vs. 60.8 in September) edged down slightly in October implying that orders are growing but at a slower pace compared with the prior month. The sharp increase of the production index (+7.6 to 63.3) puts it at the highest in nearly five years. The main message is that the factory sector continued to grow and registered a more rapid pace in October compared with September.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 2, 2009.

Bespoke: Was yesterday’s ISM an early warning for more inflation down the road?
“In addition to the Indian Central Bank’s purchase of 200 tons of gold from the IMF, one reason for gold’s strong rally today can be found in yesterday’s ISM. In each month’s Report on Business, ISM publishes the results of its monthly commodities survey where it asks respondents which commodities are rising in price and which are declining. In this month’s survey, respondents saw price increases in eleven commodities and decreases in only one. This month’s net reading of +10 brought the three month moving average to eleven and is the highest level since September 2008.

“The chart below compares the three month average net reading in the ISM Commodities Survey (CS) with the year over year change in CPI. Over the last ten years, trends in the CS have often preceded moves in the CPI. So when the net reading in the CS rises, increases in the CPI are typically not far off. Therefore, given that the net number of commodities rising in price is currently at +10 from a low of -15 in February, don’t be surprised if upcoming inflation reports come in on the high side of expectations.”

Source: Bespoke, November 3, 2009.

Asha Bangalore (Northern Trust): Auto sales rebound in October
“Sales of autos rose to an annual rate of 10.2 million units in October from 9.2 million in September. Attractive incentives helped to push sales in October. Consumer spending is most likely to make a positive contribution to real GDP in the fourth quarter, but a relatively smaller gain compared with the 3.4% annualized increase during the third quarter. Auto sales ranged between 16.2 million – 17.4 million units during 1999-2007. In the first three quarters of 2009, sales of autos have averaged 10.2 million units. Effectively, auto sales have dropped a little over a third of the pace seen in the eight years ended 2007.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 3, 2009.

The Wall Street Journal: Business bankruptcy filings increased 7% in October
“Business bankruptcy filings jumped in October, reversing two consecutive months of declining commercial filings and indicating that bankruptcies could continue to rise as the economy struggles to stabilize.

“Last month, 7,771 businesses filed for bankruptcy protection, compared to 7,271 that sought shelter from creditors in September, according to new data from Automated Access to Court Electronic Records, or AACER, a private firm that tracks bankruptcy filings.

“After two months of decline, the 7% rise in commercial filings shows that businesses are still struggling to access financing and are facing weak demand for their products.

“‘The margin for success is so thin that any financial hiccup’ could cause a business to file for bankruptcy, said Jack Williams, a bankruptcy professor at the Georgia State University College of Law.

“The tight credit markets since 2008 ‘will only be exacerbated’ with small-business lender CIT Group Inc.’s (CIT) Chapter 11 filing Sunday, he said.

“The hardest-hit industries continue to be real estate and retail, but weakness in those sectors trickles down to a number of other areas, including home building and manufacturing, Mr. Williams said.

“On a year-to-year basis, business bankruptcies shot up 24% in October compared with the same month in 2008. Mr. Williams called that increase ’substantial’ and said it is a bad omen for the final months of 2009 and the first quarter of 2010.”

Source: Eric Morath, The Wall Street Journal, November 3, 2009.

CNBC: Wilbur Ross on commercial real estate
“Wilbur Ross, chairman and CEO of WL Ross & Co., discusses the state of commercial real estate.”

Source: CNBC, November 3, 2009.

Financial Times: Obama signals rethink on bank oversight reform
“The Obama administration could support a bolder consolidation of bank regulators, an official said on Tuesday, as the US Senate prepared legislation to streamline financial supervision.

“Chris Dodd, chairman of the Senate banking committee, could unveil a draft bill next week that reduces the country’s bank regulators from four to one, retaining a separate division for smaller banks.

“An administration official said there could be a way to support a more drastic consolidation than that outlined by the Treasury in June, which proposed merging the Office of Thrift Supervision into the Office of the Comptroller of the Currency.

“Barney Frank, chairman of the House financial services committee, has said that further consolidation is a non-starter, with regulators protecting their turf. The Federal Reserve and Federal Deposit Insurance Corporation are the other two national bank regulators.

“Others in Congress have questioned whether a streamlined system, such as the UK, has proven any better during the financial crisis.

“‘The only argument Dodd seems to hear against a single bank regulator is that it is a politically difficult move, not that it is a bad idea,’ said Kirstin Brost, spokeswoman for the Senate banking committee.

“As the Senate aims to publish its bill soon, Mr Frank was on Tuesday proposing changes to his version of the regulatory overhaul as he and the administration try to put the legislation back on track.”

Source: Tom Braithwaite, Financial Times, November 4, 2009.

The Wall Street Journal: Geithner testifies on regulation
“The Federal Reserve should lose its authority to bail out big, failing financial firms like AIG and Bear Stearns under proposed reforms aimed at limiting the collateral damage from such failures, US Treasury Secretary Timothy Geithner said.”

Source: The Wall Street Journal, October 29, 2009.

Financial Times: Buffett bets $27 billion on US
“Warren Buffett on Tuesday struck the biggest deal of his life with the $26.6 billion purchase of Burlington Northern Santa Fe, one of the largest US railroad operators, in what the billionaire investor called an ‘all-in wager’ on America’s economic future.

“The cash-and-shares deal by Mr Buffett’s Berkshire Hathaway, which already has a 22.6% stake in BNSF, caps a long search by the legendary investor for an ‘elephant’ deal to deploy his vast cash pile.

“The takeover deepens Mr Buffett’s exposure to the US-focused old-economy sectors that have long been the backbone of his empire alongside financial services, and underlines his confidence in a rebound in domestic growth. ‘It is a very solid business … that will do well if the economy does well and I believe the economy will do well,’ Mr Buffett told the Financial Times.

“After a few overseas purchases prior to the crisis, Mr Buffett refocused on the US during the turmoil, buying into then-ailing corporate icons like General Electric and Goldman Sachs and urging Americans to purchase shares.

“Doug Kass, general partner at the hedge fund Seabreeze Partners Management and a former Berkshire shareholder, said the BNSF takeover could be a defining moment for the 79-year-old investor. ‘Considering the size, this could be Mr Buffett’s coup de grâce on the deal world. And it’s going to take a while to absorb it. I think it’s his last meaningful deal,’ he said.”

Source: Francesco Guerrera, Justin Baer and Robert Wright, Financial Times, November 3, 2009.

Financial Times: JGB yields reach a three-month high
“Japanese government bond yields closed at their highest level in three months on Thursday as poor demand at a 10-year bond auction underscored concerns over rising issuance in the world’s largest bond market.

“The benchmark 10-year JGB yield rose 3 basis points to 1.44 per cent. At the Y2,100 billion auction, 37.6% was accepted at the lowest price, and that price was the lowest since February.

“Rising bond issuance is also alarming investors in other countries as governments issue record amounts of debt to finance stimulus programmes and, in some cases, bail out their banks.

“In Japan, investors are concerned because a tax shortfall is going to have to be covered by additional bond issuance, and poor demand from retail investors is going to force institutions to pick up the slack.

“That could result in an additional Y6,000 billion of Japanese sovereign bond issuance in the current financial year.

“Japan’s ministry of finance said earlier this year that it planned a record Y44,100 billion in new bond issuance in the fiscal year to March to pay for economic stimulus and offset falling tax revenue.

“Since then, concerns have grown over how the new government, led by the Democratic Party of Japan, will finance the promises made in its manifesto.

“Christian Carrillo, a senior strategist at Société Générale in Tokyo, said that although the Y44,000 billion was ‘quite do-able’, a figure of Y50,000 billion was a ‘bit more doubtful’.

“‘[This] is the reason why you see the market so tense right now,’ Mr Carrillo said. ‘The basic issue is: how is the market going to be able to digest the increase in supply.’

“But Mr Carrillo said it was important to remember that the vast majority of Japan’s debt was held internally, so it was less vulnerable than countries where significant amounts of debt were held in foreign currency and by overseas investors.

“Japan’s huge issuance this fiscal year is likely to take the country’s debt to gross domestic product ratio close to 200%, making it one of the most indebted governments.”

Source: Lindsay Whipp, Financial Times, November 5, 2009.

Charles Kirk (The Kirk Report): November trends
“Historical trends have not been particularly useful this year, but I know many of you like for me to pass this kind of information on so I’m more than happy to do so.

“A few things that you may want to know include:

“The Dow has been down only three Novembers in the last 14 post-election years

“Today [Monday] starts of the ‘Best Six Months’ of the year. Investing in the Dow Jones Industrial Average between November 1 and April 30 and then switching into fixed income for the other six months has produced a +7.6% gain versus the +0.6% gain since 1950.

“Historically, November is the number one best performance month for the S&P 500. It is also the number two best performance month historically for the Nasdaq since 1971.

“As you can see from CXO Advisory’s trading calendar, November tends to start off strong, pull back, and then close with a nice gain.”

Source: Charles Kirk, The Kirk Report, November 2, 2009.

Bespoke: Another dip in the earnings beat rate
“More than 1,800 US companies have now reported third quarter numbers, and as shown below, the percentage of them that beat earnings estimates has dropped below 70% to 69%. Based on the first half of earnings season, it looked like this quarter might register the highest ‘beat’ rate in at least a decade, but if the trend continues, this quarter might not even beat the 68% reading seen in Q2 ‘09. Earnings season ends next Thursday when Wal-Mart reports.”

Source: Bespoke, November 6, 2009.

Patrick Moonen (ING Investment Management): Dividend growth in 2010
“Global earnings per share growth should see a strong rebound next year – paving the way for a recovery in dividends, says Patrick Moonen, senior equity strategist at ING Investment Management.

“‘During the current recession, corporates have seen the biggest earnings decline in at least three decades,’ he says. ‘One of the big differences compared to previous recessions was that this time round, dividends were also dramatically cut.’

“Mr Moonen says a lack of easy finance and the subsequent rise in corporate bond yields made companies reluctant to distribute their cash flow.

“As a consequence, the payout ratio, which historically jumps during profits recessions as companies prove reluctant to cut dividends, remained near the long-term average.

“But he argues that a swift turnaround in profits means dividends now have room to grow above their long-term average.

“‘Corporate earnings have passed the low point of the cycle. This happened very quickly due to aggressive cost-cutting, lower capital expenditures and a steep downturn in inventories.

“‘A direct consequence was that operating margins troughed well above previous recessions and above analysts’ forecasts.

“‘We currently prefer European to US equities due to their more favourable valuations. We also like emerging markets, as they offer superior fundamentals and earnings growth at similar valuations.’”

Source: Patrick Moonen, ING Investment Management (via Financial Times), November 2, 2009.

Bespoke: Percentage of stocks above 50-day moving averages
“With the S&P 500 moving back above its 50-day moving average, the percentage of stocks in the index above their 50-days is unsurprisingly back above 50% – 51% to be exact.

“But there are still a few sectors that have failed to get this 50-day indicator back above 50%. The Financial sector ranks the worst with just 29% of stocks above their 50-days. Technology, Materials, Utilities, and Telecom are the other four sectors that still have less than 50% of stocks above their 50-days.

“On the positive side, Energy and Consumer Staples rank the best with a reading of 73%, followed by Industrials and Health Care at 63%. For this market to break to new highs once again, we’ll need to see the Financial and Technology sectors rally back more than they have over the past couple of days.”

Source: Bespoke, November 5, 2009.

Bespoke: Sector relative strength – technology and financials
“The charts below show the relative strength of the Financial and Technology sectors versus the S&P 500. In each chart, a rising line indicates that the sector is outperforming the S&P 500 while a declining line indicates underperformance. We have also included dots showing each time the Fed has recently cut rates (red) or left them unchanged (blue dots). Given the fact that the two sectors are the most widely followed sectors in the market, any meaningful rally in equities will need to see both sectors participating.

“With the overall market correcting, it is not surprising to see that Financials have been weak. In the days and weeks ahead, it will be important for this sector to stabilize or pick up now that it has moved back down to the range it was in for much of the Summer.

“While the Financial sector is lagging, the Technology sector is improving. After peaking back in July on a relative basis, the Technology sector has stabilized and has been improving over the last two to three weeks. If the sector can break above its prior peak, it should set the stage for an end of year rally. Otherwise, the market will be in for more of the recent lackluster action.”

Source: Bespoke, November 5, 2009.

Richard Russell (Dow Theory Letters): Stocks could decline rapidly
“I don’t believe most investors understand the significance of the possibility that the March to October rally was an upward correction in a bear market. The majority of analysts believe that the advance that started from the March lows represented the beginning of a new bull market. I disagree, and do not believe March marked the start of a new bull market.

“For the sake of argument, let’s just assume that I’m right and that what we’ve seen since March was a bear market rally. If that’s true, we’re in a very dangerous situation. It appears to me that the rally is in the process of topping out. Again, let’s assume that we’ve been in a bear market rally. If the rally is indeed topping out, then the stock market will soon be again in the grip of the bear.

“The rally ran from March to October, a period of seven months. In other words, the bear market has been ‘held back’ for a period of over half a year. My thinking is that the bear is ‘angry’ at being held back, and it will probably want to make up for lost time in the period ahead. From everything I see, hear or read, I gather that almost everybody believes the March lows are safe, that they will not be violated, no matter what.

“However, if the bear market rally is now in the process of breaking up, my thought is that stocks could decline very rapidly, much faster than most people are prepared for. If late-coming traders suspect that the rally is over, we could see a frenzy to get out of this market. This along with a panic from pros who want to get out with what profits are left.”

Source: Richard Russell, Dow Theory Letters, November 3, 2009.

David Fuller (Fullermoney): Modest US recovery best recipe for stocks
“For equity investors, and not just in the West, a distinctly modest US economic recovery could be the best recipe for further stock market gains. While this may sound counter intuitive, equities often do well in a slow growth environment because monetary policy remains accommodative, enabling efficient companies to prosper. Conversely, strong growth forewarns of tighter monetary conditions which eventually choke-off bull markets.

“Surprisingly, this point is often lost on economists and fundamental analysts who constantly fret over the lack of strong growth to validate stock price appreciation. Investor sentiment will remain net favourable provided that equity indices are trending higher, with the help of accommodative monetary policy, and the economy appears to be heading in the right direction, however gradually.

“Meanwhile, there is little doubt, in my view, that stock markets and commodity markets continue to lead asset price inflation, reactions and the occasional correction aside, fuelled in no small part by expansionary monetary policies. The higher these markets go, the more likely it is that the Fed will become less accommodative. However not all markets are equal and I believe it is an eventual spike in crude oil prices that central banks and therefore investors will fear most.

“Recently, a corrective phase has been evident for stock markets and many commodities. This is removing some of the froth from asset price appreciation and a further pause would reduce calls for central banks to ‘do something’.”

Source: David Fuller, Fullermoney, November 2, 2009.

The Wall Street Journal: Equity investors should be careful what they wish
“Equities seem to be pricing in a normal recovery. But normal recoveries tend to be accompanied by much stronger GDP growth than economists are expecting for the coming year. A normal recovery growth rate could see a sharp unwind of central bank policy, which would do some serious damage to both stocks and bonds.”

Source: The Wall Street Journal, November 4, 2009.

Simona Paravani (HSBC Global Asset Management): Get the Latin feeling
“Investors looking at emerging markets should favour Latin America over Asia in the near-term – in spite of Brazil’s imposition of a tax on foreign stock purchases, says Simona Paravani, global investment strategist at HSBC Global Asset Management.

“She points out that LatAm equities are trading at a more than a 40% discount to emerging Asian equities, versus a five-year average discount of just 5%, based on 12-month trailing price to earnings ratio.

“Ms Paravani argues that the valuation case is further supported by a buoyant macroeconomic picture. HSBC’s central scenario is for Brazilian growth to be 5.3% in 2010 – which will in part be driven by strong Asian demand for commodities.

“She does note some hesitation among investors about LatAm equities after Brazil’s recent move to levy a 2% tax on foreign purchases of real-denominated shares and fixed-income securities.

“‘This has raised worries there will be ramifications for the whole region, not only because Brazil accounts for 70% of the MSCI Latin America index, but also because similar policies are being adopted or considered by other LatAm countries.

“‘This measure is clearly not market-friendly and should create volatility in the short-term. But it is unlikely to have a major impact as the fundamentals of the Brazilian economy and corporates are very sound and should continue to attract inflows.’”

Source: Simona Paravani, HSBC Global Asset Management (via Financial Times), November 3, 2009.

Reuters: PIMCO’s El-Erian says Fed fuels dollar carry trade
“The Federal Reserve will continue to foster a US dollar-funded carry trade with its near-zero interest rate policy, Mohamed El-Erian, chief executive of Pacific Investment Management Inc., said on Wednesday.

“The so-called carry trade refers to borrowing at low short-term rates – in this case, in the US dollar – to buy high-yielding, long-dated securities in other markets. The intention is to profit from the rate differential, although rising short-term rates make this strategy riskier and less profitable.

“Investors worldwide will keep borrowing dollars to buy assets including equities and commodities, fueling the risk of huge bubbles, given the Fed’s stance, El-Erian told Reuters.

“As expected, the US central bank reemphasized its pledge to keep interest rates ‘exceptionally low’ for an ‘extended period’ as long as inflation expectations are stable and unemployment remains elevated.

“Policymakers kept their benchmark overnight lending rate in a range between zero and 0.25% and conditioned its commitment on rates based on ‘low rates of resource utilization, subdued inflation trends, and stable inflation expectations’.

“‘The simple message from today’s announcement is that the Fed does not wish to rock the boat. I suspect many in the markets will interpret the Fed statement as a green light to pile onto the momentum trade in risk markets, further increasing the dollar-funded carry trade,’ El-Erian said.

“El-Erian said the Fed ‘welcomes the pick-up in economic activity and provides reassurance on inflation, but it does not address some of the more controversial issues that are increasingly on the mind of many.’ That includes the value of the dollar and ‘the risk of another asset bubble’, El-Erian added.

“‘The Fed statement will, in the short term, add fuel for the dollar-funded carry trade.’”

Source: Jennifer Ablan, Reuters, November 4, 2009.

MoneyNews: Marc Faber – I am long the dollar
“The US dollar may appreciate well over 10% against the euro during the next quarter, says Marc Faber, the economist known as ‘Doctor Doom’ to investors.

“Faber has long predicted the dollar’s complete collapse, so the dollar rally for him is an interesting turn of events.

“‘Maybe the dollar has made a turn; it can easily rebound by 10%,” Faber told Bloomberg News.

“‘It may have started already since the asset markets started to go down 10 days ago.’

“‘I don’t think that the dollar will be a strong currency, but you can have periods like in 2008 that the liquidity tightens. If you have the private sector withdrawing credit and the government throwing credit at the system you can get a lot of volatility.’

“Faber said he would be careful buying equities now as ‘we are in a correction period’.”

Source: Gene Koprowski, MoneyNews, November 4, 2009.

Bespoke: Gold soars to new highs
“The price of gold has broken out to another new high this morning [Tuesday] following news that India’s Central Bank purchased 200 tons of the metal from the IMF. Previously, the IMF had announced that it would sell around 400 tons, raising speculation that the planned sale would cause a glut of gold in the market. Based on India’s $6.7 billion 200-ton purchase, the market may have an easier time digesting the increased supply than previously thought. The average price per ounce for the Indian Central Bank’s purchase works out to around $1,045. With gold now trading at $1,079, they have already made $218 million (3.25%). Not bad for a few days work!”

Source: Bespoke, November 3, 2009.

Eoin Treacy (Fullermoney): Gold’s advance “rivetingly consistent”
“Taking a longer-term view, gold in US dollars completed a third 18-month consolidation in September and continues to extend the upward break. In stronger currencies it is now also firming.

“On a somewhat shorter-term view, gold’s advance since July has been rivetingly consistent. It consolidated for six weeks and broke emphatically upwards, traded laterally for a month in a $40-$50 range and broke upwards again in October. Another $40-$50 congestion area formed and was completed this week with another powerful upward break. Gold has now posted three relatively similar ranges, one above another. It has sustained three relatively similar advances since September. This isn’t chart theory; these are all chart facts.

“This type of action suggests that the metal is under accumulation. The consistency characteristics are quite evident for anyone to see and would need to deteriorate to indicate that the dominance of demand is being undermined. As we have seen in gold’s other major advances this decade, the pace of the uptrend tends to increase in the latter stages. Gold is not accelerating now, but it could and the chart pattern has nothing to contradict the bullish view at this stage.

“Gold related instruments such gold shares have often lagged in the early stages of gold’s advances, but tend to play catch-up as the trend becomes more widely accepted. What about this time?

“Gold shares were among the first to bottom in October 2008 and were a leading sector when compared to the wider stock market until February 2009. Large cap markets began to rally from March and competed for attention with gold shares. The Amex Goldbugs Index has been performing in line with the S&P 500 since. In absolute terms the AMEX Goldbugs Index is one of the few to have retraced almost the entire bear market decline.

“Gold mining shares are inherently more volatile than physical gold because they are by definition a diminishing asset subject to labour, political, energy, equipment and other pressures. However, in an environment where gold has reasserted its secular bull trend, gold shares could return to outperformance relative to the wider stock market.

“Relative to gold, the Amex Goldbugs Index has been outperforming since October 2008 and has retraced most of last year’s relative decline against the metal. This would suggest that gold shares as a sector probably have greater potential to outperform the wider stock market than the actual gold price.”

Source: Eoin Treacy, Fullermoney, November 5, 2009.

Bloomberg: Roubini says Rogers’s $2,000 gold “utter nonsense”
“Nouriel Roubini, the economist who predicted the global economic crisis, said a forecast by investor Jim Rogers that gold will double to at least $2,000 an ounce is ‘utter nonsense’.

“There is no inflation or ‘near-depression’ to drive gold prices that high, Roubini said today [Wednesday] at the Inside Commodities Conference in New York. If a severe depression came to pass, with investors buying canned goods and hiding out in log cabins, ‘maybe you want some gold in that scenario’, Roubini said.

“‘Maybe it will reach $1,100 or so but $1,500 or $2,000 is nonsense,’ Roubini said. Gold rose to a record $1,098.50 today in New York on speculation that central banks and investors will purchase the metal to hedge against a declining dollar.

“Rogers, who predicted the start of the commodities rally in 1999, said in an interview on Bloomberg Television today that Roubini is wrong about the threat of bubbles in gold and emerging-markets stocks. The price of gold will double in the next decade, he said.

“In his New York speech, Roubini repeated his assertion that asset prices have risen ‘too much, too soon, too fast’.”

Source: Asjylyn Loder, Bloomberg, November 4, 2009.

TheStreet.com: Gold will hit $2,300
“Frank Holmes, CEO of US Global Investors, argues that gold should rise to its adjusted inflation price of $2,300. He reveals his trading strategy.”

Source: TheStreet.com, November 2, 2009.

Financial Times: Gold adds lustre to metal prices
“Gold’s strong run has inspired greater investor interest in other precious metals, with silver, platinum and palladium enjoying strong gains this year.

“Gold has risen 24.7% this year but the rest of the precious metals sector has performed even better: silver is up 55.7%; platinum has risen 48.5%, and palladium is up 79.7%.

“‘The implosion in financial markets last year and subsequent deleveraging has led to loss of confidence in paper assets and a shift into tangible assets,’ says Gijsbert Groenewegen at Silver Arrow Capital, the precious metal hedge fund.

“Like cyclists in a team pursuit race, silver, platinum and palladium have served as pacemakers for each other. Silver set the tempo until February, to be overtaken by platinum in April before regaining the top spot in June. Platinum roared to the front in early July and has maintained its lead ever since.

“Industry insiders expect continued price strength on the back of strong investor appetite for precious metals, according to delegates polled at the London Bullion Market Association meeting, the largest gathering of the industry, this week in Edinburgh.

“LBMA delegates – a mix of analysts, traders and mining executives who, as a group, have a good track record as forecasters – said silver prices would reach $18.10 a troy ounce by next September, up 2.9% from current levels. The delegates also predicted that platinum would hit $1,629.10, up 18.6%, and palladium would reach $475.80 an ounce, a 43.5% rise.

“The strength of the gold market – on Wednesday the metal hit a fresh record high of $1,095.4 an ounce – is also likely to attract further interest from retail investors, particularly for silver, which some consider gold’s ‘poorer sister’.

“Underpinning price gains for all of these metals have been huge inflows into exchange-traded funds (ETFs) as investors sought sanctuary from the credit crisis in physical assets. ETF assets now rival some official reserves.

“Aram Shishmanian, chief executive of the industry backed World Gold Council says: ‘Exchange-traded funds have become ‘the people’s central bank’.’”

Source: Chris Flood, Financial Times, November 4, 2009.

Bespoke: S&P 500 priced in gold
“With equities correcting over the last few weeks and gold rallying to record highs, the price of gold has once again exceeded the price of the S&P 500. It now takes 0.96 ounces of gold to buy the S&P 500. This is considerably less than the long-term average of 1.74 since 1980, and a far cry from July 1999 when it took over 5.5 ounces of gold to buy the S&P 500. The question now is, if gold eclipses 1,100, will its time above that level be as brief as it recently was for the S&P 500?”

Source: Bespoke, November 4, 2009.

Bloomberg: Trichet, King signal moves toward exit on recovery
“Europe’s biggest central banks signaled they will start to wind up emergency policies introduced to fight the financial crisis as the global economy recovers.

“European Central Bank President Jean-Claude Trichet said today the ECB plans to phase out its unlimited liquidity operations next year, and Governor Mervyn King’s Bank of England said UK officials will slow the pace of bond purchases.

“Central banks around the world are starting to rein back some of the measures introduced to stave off a second Great Depression. Australia and Norway have already raised interest rates and the Federal Reserve yesterday outlined the circumstances in which it would be prepared to tighten policy.

“‘There is a common theme,’ said Luigi Speranza, an economist at BNP Paribas SA in London. ‘No one expected this to last forever, but the ECB and the Bank of England will proceed very gradually. They want to avoid jeopardizing the economic recovery.’

“‘Not all our liquidity measures will be needed to the same extent as in the past,’ Trichet said in Frankfurt. The Bank of England said in London that a ‘pickup in economic activity may soon be evident’ after the economy unexpectedly contracted in the third quarter.

“The ECB kept its benchmark rate at 1% and the Bank of England held its main rate at 0.5%.

“Policy makers have spent much of the year pumping money into the global economy and are now shifting their focus to exit strategies as the global recovery stokes concerns about asset bubbles. Bank of England Chief Economist Spencer Dale has said he’s concerned about asset prices and Brazilian central bank President Henrique Meirelles said they will be a topic at the Group of 20 talks in Scotland this weekend.”

Source: Brian Swint, Bloomberg, November 5, 2009.

The Wall Street Journal: Bank of England, ECB chart different courses on rescue

Source: Neil Shah and Brian Blackstone, The Wall Street Journal, November 6, 2009.

Financial Times: Bank tries “last heave” with £25 billion boost
“The Bank of England will pump another £25 billion into the economy, which remained mired in recession in the third quarter, in what was described as ‘one last heave’ to propel growth.

“The pace of cash injections as part of the so-called quantitative easing programme over the next three months will be slowed, however, in line with what the Bank regards as a slightly brighter economic outlook. The extension of the programme will bring its total cost to £200 billion.

“The Bank’s move puts it in line with the Federal Reserve and the European Central Bank, which have taken decisions this week cautiously signalling an end to the extraordinarily loose monetary policy used to combat the financial crisis.

“Economists predicted that this would be the last time the Bank acts to boost the stimulus in this recession and by the middle of next year it will be thinking about raising interest rates.

“Michael Saunders, economist at Citigroup, called the expansion of asset purchases ‘one last heave’, while Simon Ward at Henderson Global Investors said ‘the message seems to be that this will be the final slug barring an economic shock’.”

Source: Daniel Pimlott and Chris Giles, Financial Times, November 5, 2009.

Nationwide: UK house prices rise at slower rate in October
“Commenting on the figures Martin Gahbauer, Nationwide’s Chief Economist, said:

“‘House prices rose for a sixth consecutive month in October, but the strong upward momentum in property values seen over the summer is showing some signs of moderating as we head into the autumn months. The price of a typical property was 0.4% higher on the month in October, compared to an increase of 0.9% in September and 1.4% in both July and August.

“‘The 3 month on 3 month rate of change – generally a smoother indicator of the near term trend – dropped back slightly from 3.8% to 3.4%. At £162,038, the average price of a typical UK property was 2.0% higher than a year earlier, representing the first time since March 2008 that the annual rate of change has been in positive territory.

“‘A moderation in the rate of house price inflation was to be expected, as the very strong monthly increases seen over the summer months were unlikely to be sustainable over the long run. Slower house price inflation is also consistent with developments in housing market activity, as industry figures have shown that the pick-up in mortgage approvals for house purchases has lost some momentum in recent months. Although too early to tell for sure, it may also reflect a more natural level of stock available for sale coming to the market, alleviating some of the extreme shortages of property on the market seen during most of this year.’”

Source: Nationwide, October 30, 2009.

Caijing.com.cn: Goldman Sachs predicts 9.4% growth for China’s economy in 2009
“China’s gross domestic product is forecast to grow 9.4% in 2009 and 11.9% in 2010, Goldman Sachs macroeconomist Qiao Hong said on Monday.

“The consumer price index could rise 2.6% in 2010, Qiao told a media briefing.

“Goldman Sachs has estimated China’s CPI will fall 0.9% year-on-year this year.

“China’s performance will be better than other countries because China realized the importance of expanding domestic demand, Jim O’Neill, head of global economic research at Goldman Sachs, said at the media briefing.

“The global downturn meant an opportunity because it forced China to shake off its export-oriented strategy to boost growth and turn its attention to domestic demand, O’Neill said.

“Goldman Sachs expected China’s domestic demand to grow 13.3% year-on-year in 2009 and 13.6% in 2010.

“China is less dependent on Western countries than it used to be, O’Neill said, adding that compared with major Western economies, China was less affected by the global financial crisis.

“China will perform much better in the future, O’Neill said, adding he is very upbeat about China’s development prospects.

“O’Neill said China would become the world’s biggest economy in 2027, with GDP reaching about US$21 trillion. Domestic consumption will contribute about US$9 to US$10 trillion, he added.

“Domestic consumption, which now accounts for about 37% of China’s GDP, has huge growth potential, O’Neill said.”

Source: Liu Zhijie, Caijing.com.cn, November 3, 2009.

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