Another Country in Europe to Avoid (Koesterich)

Tuesday, March 13th, 2012

While Greece is now cleared to receive a second bailout and Spain and Italy are facing lower borrowing costs, Europe is not yet out of the woods. Greece, for instance, still has unsustainably high debt levels, and Portugal’s rising yields are becoming increasingly worrisome.

Given these lingering issues, I recently advocated that investors avoid Spain and Italy, markets that are cheap for a reason. Now, I’m adding another country to the list of European markets to consider underweighting: the United Kingdom, a market that has its own issues separate from those of the euro zone.

Currently, equities in the United Kingdom appear overvalued, especially when you consider the numerous signs that the country is teetering on the brink of another recession. As of this writing, UK stocks are trading at a relatively rich valuation of 1.7x book value, higher than the 1.5x book value average for developed countries.

At the same time, economic conditions in the United Kingdom are deteriorating. Expectations for UK growth have decreased over the last six months, and UK corporate sector profitability has dropped since the end of last year. In addition, UK mortgage rates have increased and unemployment remains at a 17-year high, headwinds for an economy where household spending accounts for roughly 2/3 of gross domestic product.

While UK inflation is declining, it’s still elevated at 3.6%, a level well above both the Bank of England’s target rate and UK wage growth. Thanks to the United Kingdom’s relatively high inflation, it appears unlikely that the Bank of England will provide further quantitative easing in the near term, meaning the UK economy will have less growth support. Finally, the United Kingdom may be trying to reign in its deficit too quickly by raising taxes and cutting spending, potentially raising the risk of another recession.

So where should investors consider investing in Europe? I continue to believe that much of Northern Europe represents a good value for long-term investors and I particularly like Germany, the Netherlands and Norway (potential iShares solutions: NYSEARCA: EWG, NYSEARCA: EWN, NYSEAMEX: ENOR).

Tags: 7x, Bailout, Bank Of England, Brink, Corporate Sector, Debt Levels, Developed Countries, Economic Conditions, Euro Zone, European Markets, Gross Domestic Product, Headwinds, Household Spending, Profitability, Recession, Target Rate, Uk Economy, Uk Inflation, Uk Mortgage Rates, Uk Stocks
Posted in Markets | Comments Off

Fixed Income in 2011: The Year of Opposites (Tucker)

Wednesday, December 21st, 2011

by Matt Tucker, Fixed Income,  iShares

Expectations of rising interest rates. Fears of massive municipal bond defaults. Heading in to 2011, those were the two strong trends that investors expected would shape the fixed income market. But as we know now, 2011 turned out to be almost the opposite of expectations.

At the end of 2010, investors were positioning their portfolios to respond to rising interest rates. To hedge rising interest rates in the first three quarters of the year, investors turned to fixed income ETFs, moving into short duration funds or investing in leveraged and inverse funds. Leveraged and inverse fixed income funds almost doubled in size by September¹.

But contrary to expectations, rising interest rates never materialized. The Federal Reserve kept its benchmark Funds rate near 0% and in August communicated for the first time that it intended to keep rates between 0% and 0.25% until 2013.

This was an unprecedented move on the part of the Fed. Previously they had communicated changes in the Fed Funds rate, as well as their view on the economic outlook and the likely path the Fed Funds rate would take in the future. Never before had they indicated to the market that they would maintain a target Rate for a specific period of time.

In September, the Fed once again took action to keep interest rates low, unveiling “Operation Twist.” The Fed said it would sell shorter-term Treasuries from its own portfolio and use proceeds from the sales to buy long-term Treasuries – a move designed to lower long-term interest rates.

The net result of these actions, illustrated in the chart below, was that US Treasury rates actually declined over the course of year. Short end Treasury rates remained low because they are primarily driven by the Federal Funds rate, which remained at 0%. Longer maturity Treasuries actually moved lower in yield, driven by the Fed actions as well as by increased investor concern over European sovereign default risk.

At the start of 2011, there was also a great deal of fear about the health of the US municipal bond market. Numerous states were facing budget deficits and cities were grappling with everything from falling tax revenue to rising pension costs. Wall Street analysts meanwhile were predicting that municipal defaults would be large in both size and quantity, with some fringe analysts even predicting that defaults could total hundreds of billions of dollars.

Well, it’s nearly one year later. While a few high-profile defaults and bankruptcies were announced — like the Jefferson County bankruptcy — wide-scale defaults never materialized.

According to S&P, municipal defaults in 2011 are down 69% compared to the same period in 2010. Year-to-date monetary defaults in the S&P Municipal Index total roughly $750 million, representing less than 0.5% of the index. This compares with 2010 defaults of $2.4 billion.

Despite the dire predictions, most municipalities have a number of tools at their disposal – like raising taxes, cutting spending or laying off government workers — to help them make timely payments on their debt and to avoid defaults.

What’s the lesson learned from 2011? Diversification and liquidity are key, especially in volatile markets. All markets rise and fall, and the fixed income markets are no exception. Having a diversified portfolio can help to insulate your holdings, while being in liquid investment vehicles allow you to make timely, tactical investment decisions based on changing market environments.

Footnotes: 1 Source: Investment Company Institute: Estimated Long-Term Mutual Fund Flows report data as of 11/22/2011

Diversification may not protect against market risk. Liquidity of investments is not guaranteed.

Bonds and bond funds will decrease in value as interest rates rise.

Tags: Economic Outlook, Fed Funds Rate, Federal Funds Rate, Federal Reserve, Fixed Income Market, Investor Concern, Matt Tucker, Maturity, Municipal Bond, Opposites, Period Of Time, Portfolios, Rising Interest Rates, Target Rate, Term Interest, Three Quarters, Treasuries, Treasury Rates, Unprecedented Move, Unveiling
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Indian Economy Begins to Slow – Q2 GDP 7.7%

Wednesday, August 31st, 2011

by Trader Mark, Fund My Mutual Fund

It’s been a very rough year for Indian stocks, and indeed much of the emerging market space as central banks are fighting the easy money coming from the West (and Japan), by raising rates.  Inflationary pressures are still a concern in many of these countries, but it does appear the brakes are starting to work.  Of course the issue is not to break too hard.

India just reported a 7.7% GDP – while rip roaring in relation to Western developed economies, its significantly lower than we’ve seen the past few years.  (Last year I believe there was a print in the mid 9%s)  Looks like the construction sector has been hit the hardest from higher rates.

Via BBC:

• India’s economy grew 7.7% in the three months from April to June, compared with the same period of 2010.  It was India’sweakest growth for six quarters, but still better than had been expected.
• The slowdown is expected to continue as India’s central bank continues to raise interest rates to control inflation. “The latest growth number reinforces the view that although growth is slowing down, it is not collapsing as feared by some,” said Ashutosh Datar, economist at IIFL in Mumbai.
• Indian Finance Minister Pranab Mukherjee said he had been expecting a higher growth rate, but that given the muted recovery in the US and Europe, the figures were “not that much disappointing”.
• The Reserve Bank of India (RBI) has raised interest rates 11 times since March 2010. The next rate-setting meeting is on 16 September, when many economists expect rates will rise again, to 8.25%.
• Inflation in July was 9.22%, which was well above the RBI’s target rate of 4% to 4.5%. “India has raised rates much faster than any other major country, but inflation is also a bigger problem than in any other major economy,” said DK Joshi, chief economist at Indian ratings agency Crisil. Construction problems
• The sector breakdown showed that the construction sector had been one of the worst-performing parts of the economy.  Construction grew at an annual rate of 1.2% in the second quarter, down from 8.2% in the previous quarter, as rising interest rates and delays in planning approvals held up building projects.
• The manufacturing sector grew 7.2%, an improvement from the previous quarter, but well below the 10.6% in the second quarter of 2010.
• While 7% is extraordinarily high by the standards of European countries that are struggling to achieve 2%, there have been warnings from economists that it would be inadequate to fund the government’s attempts to deal with India’s endemic poverty.
• On Monday, a survey by the Indian Chambers of Commerce found that business confidence was at a two-year low.  It found that businesses had “growing apprehensions about the world economy entering into another recession“, while also worrying about how rising interest rates were hitting domestic demand.

Copyright © Trader Mark, Fund My Mutual Fund

Tags: Bank Of India, Central Banks, Chief Economist, Construction Problems, Construction Sector, Easy Money, Emerging Market, India, Indian Economy, Indian Finance Minister, Indian Stocks, Inflationary Pressures, Joshi, Market Space, Perf, Pranab Mukherjee, Reserve Bank Of India, S Central, Sector Breakdown, Target Rate
Posted in India, Markets | Comments Off

Inflation: Mature vs. Emerging Economies

Tuesday, February 15th, 2011

This post is a guest contribution by Asha Bangalore, vice president and economist of The Northern Trust  Company.

The Bank of England (BOE) and The European Central Bank (ECB) have chosen to stand pat after their recent policy meetings.  However, inflation readings in the UK and the Euro area are problematic, particularly in the UK.  President Trichet of the ECB, last week, presented a less concerned stance about inflation compared with his comments in prior weeks.  Inflation in the Euro area (2.2%) is slightly higher than the target rate of 2.0%.  However, inflation is at a noticeably higher level in the UK (3.7%) compared with the target.  This morning, the Bank of England decided to leave policy rates unchanged as underlying economic conditions are troubling, given that real GDP fell in the fourth quarter.

In the US, the Federal Reserve is in a sweet spot and can continue to focus on economic growth in the inflation-growth debate.  At the present time, inflation expectations are contained and pass through of higher food and energy prices to core CPI has not occurred.

In the meanwhile, the situation in emerging markets is markedly different.  Inflation in China and India has led to tightening of monetary policy in both nations.  Overall inflation in India has decelerated in recent months but the November year-to-year change in CPI was at an elevated level of 8.4% (see Chart 3).  The CPI of China touched 5.1% in November and was slightly lower in December at 4.6% (see Chart 3).

In the other emerging markets, price pressures are evident (see Chart 4) and suggest a worrisome trend if the pace of economic growth continues to advance.  The dual speed global economy has led to different monetary policy stances of central bankers.  The key question is how much of the pass through of higher food and energy prices to core consumer prices will occur across the global economy.  This is new territory for central bankers to the extent that emerging markets are leading global economic growth.

Source: Asha Bangalore, Northern Trust, Daily Global Commentary, February 10, 2011.

Tags: Bank Of England, China, Core Consumer, Core Cpi, Dual Speed, ECB, Emerging Economies, Emerging Markets, energy, Energy Prices, Global Economy, Growth Debate, India, Inflation Expectations, Inflation In China, New Territory, Northern Trust Company, Policy Meetings, Price Pressures, Real Gdp, Target Rate, Trichet, Worrisome Trend
Posted in India, Markets, Outlook | Comments Off

China’s Currency Move a Success

Wednesday, July 21st, 2010

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

When the Chinese government changed its currency policy last month to allow appreciation of the renminbi (Rmb), skeptics like New York Times columnist Paul Krugman called the move a lame ploy to placate U.S. and European critics ahead of the G20 summit.

It appears this judgment may have been too quick and too harsh.

The renminbi gained 0.70 percent against the U.S. dollar in the first couple of weeks after it was unpegged from the dollar. That works out to an annualized rate of about 15 percent—a monumental move in the currency world.

In fact, CLSA’s Andy Rothman says that the policy change has been so effective that Beijing will actually have to curb renminbi appreciation to keep it at the annual target rate of 5-7 percent.

Rothman points out that the immediate appreciation is far higher than the average monthly rate seen in the 2005-2007 period (chart), when the renminbi’s exchange rate was last allowed to float.

The soft U.S. job market has been focusing blame on China for the decline of American industry, but Rothman reminds us that the U.S. manufacturing sector has been shriveling for more than half a century – from 23 percent of American workers in 1949 to 16 percent in 1989 (when Chinese imports were still “insignificant”) to 9 percent today.

The Chinese government has much higher aspirations than being the world’s factory of cheap goods. This year we’ve seen the government raise minimum wage requirements across the country and move to improve labor conditions.

This is all part of a longer-term plan to move up the manufacturing food chain and build a stronger base for domestic consumption. A stronger renminbi that enhances the purchasing power of both Chinese importers and the average citizen fits well into that vision.

Tags: Chief Investment Officer, Chinese Government, Chinese Importers, Chinese Imports, Currency Policy, Domestic Consumption, Frank Holmes, G20 Summit, Half A Century, Manufacturing Sector, New York Times, New York Times Columnist, Paul Krugman, Period Chart, Purchasing Power, Rothman, Skeptics, Target Rate, U S Global Investors, York Times Columnist
Posted in China, Markets | Comments Off

TD Economics: Bank of Canada Embarks on the Upward Climb

Tuesday, June 1st, 2010

This comment is a guest contribution by Grant Bishop, Economist, TD Economics.

June 1, 2010

Data Release: BANK OF CANADA EMBARKS ON THE UPWARD CLIMB [PDF Download]

• The Bank of Canada commenced tightening of monetary policy with a 25 basis point hike, increasing the overnight target rate to 0.50%. This move was widely expected given the strong Q1/2010 GDP performance and acceleration in core CPI. Having taken the overnight target rate off its lower bound, the Bank also normalized the operating band, reestablishing its deposit rate and lending (the “Bank Rate”) at 25 basis points below and above the target, respectively.
• The text of the announcement highlighted Canada’s strong performance, observing the robust first quarter growth and resumption of employment growth. It pointed to the strength of domestic demand through the housing and consumer spending.
• However, the Bank stressed that household expenditures will necessarily moderate to pace more in-line with income growth, reducing the contribution from consumption and residential construction in the coming quarters. Moreover, the Bank observed that business investment still has yet to take the baton, noting that “the anticipated pick-up in business investment will be important for a more balanced recovery”
• The statement was also keenly attentive to the international setting and its downside risks. Although the volatility from sovereign debt fears has somewhat subsided in the past weeks, the Bank notes that that the Eurozone tensions will likely prompt increased borrowing costs and more rapid fiscal consolidation for some countries. While the Bank observes that spillover to Canada has so far been modest and limited to commodity prices and some heightened financial stress, it observes that the “broad forces of household, bank and sovereign will add to the variability, and temper the pace, of global growth.”
• Looking ahead, anticipating a moderating clip for domestic demand and bearing the recent global volatility in mind, the Bank stressed the “considerable uncertainty surround the outlook” and stated that “any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”

Key Implications

• Remembering that monetary policy only impacts with a lag, the exceptional near-term performance of the Canadian economy and stickiness in core inflation point to a necessary tightening to begin to restrain price growth. The Bank of Canada has the sole mandate of achieving its 2% inflation target and conducts its policy through that exclusive prism.
• Although the near-term economic strength will ebb, the uptake of slack and rebound in price growth meant it was due time to take interest rates off their emergency level at the effective lower bound. Nonetheless, today’s 25 basis point increase represents a modest tightening and still leaves rates at very accommodative levels.
• The decision does mean that a rebalancing of monetary policy has commenced and interest rates will be lifted as economic slack is absorbed to restrain price growth. Nonetheless, the wording of the announcement indicates that in undertaking subsequent rate hikes the Bank will remain very attentive to the likely moderation in domestic demand and developments in the global financial system.
• While the Bank took the “elevator down” when cleaving rates, ongoing uncertainties and an easing pace of growth point to a very careful pace of tightening. The Bank may not hike at each meeting and might “pause” on increases if near-term financial conditions warrant. The emphasis on global conditions in today’s communiqué is no accident and, after the rocky last couple of years, policy-makers are keenly aware that Canada is not an island.
• Barring unforeseen shocks in global financial markets, based on our outlook for economic growth and inflation, we anticipate a sequence of 25 basis point increases at subsequent announcements, with the overnight rate at a still-stimulative 1.50% by year’s end.

Grant Bishop, Economist
416-982-8063

DISCLAIMER

This report is provided by TD Economics for customers of TD Bank Financial Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Financial Group and the members of TD Economics are not spokespersons for TD Bank Financial Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and fi nancial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affi liates and related entities that comprise TD Bank Financial Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

Tags: Bank Of Canada, Basis Point, Basis Points, Canadian Market, Commodity Prices, Consumer Spending, Core Cpi, Downside Risks, Employment Growth, Financial Stress, Fiscal Consolidation, Global Growth, Household Bank, Household Expenditures, Lower Bound, Quarter Growth, Residential Construction, Sovereign Debt, Spillover, Target Rate, Td Economics
Posted in Canadian Market, Markets, Outlook | Comments Off

Bank of Canada Raises Rates As Expected (Update)

Tuesday, June 1st, 2010

The following are two comments from TD Economics’ Grant Bishop, and Miller Tabak’s Peter Boockvar (following the TD comment), regarding today’s BoC decision to raise policy rates.

This comment is a guest contribution by Grant Bishop, Economist, TD Economics.

June 1, 2010

Data Release: BANK OF CANADA EMBARKS ON THE UPWARD CLIMB [PDF Download]

• The Bank of Canada commenced tightening of monetary policy with a 25 basis point hike, increasing the overnight target rate to 0.50%. This move was widely expected given the strong Q1/2010 GDP performance and acceleration in core CPI. Having taken the overnight target rate off its lower bound, the Bank also normalized the operating band, reestablishing its deposit rate and lending (the “Bank Rate”) at 25 basis points below and above the target, respectively.
• The text of the announcement highlighted Canada’s strong performance, observing the robust first quarter growth and resumption of employment growth. It pointed to the strength of domestic demand through the housing and consumer spending.
• However, the Bank stressed that household expenditures will necessarily moderate to pace more in-line with income growth, reducing the contribution from consumption and residential construction in the coming quarters. Moreover, the Bank observed that business investment still has yet to take the baton, noting that “the anticipated pick-up in business investment will be important for a more balanced recovery”
• The statement was also keenly attentive to the international setting and its downside risks. Although the volatility from sovereign debt fears has somewhat subsided in the past weeks, the Bank notes that that the Eurozone tensions will likely prompt increased borrowing costs and more rapid fiscal consolidation for some countries. While the Bank observes that spillover to Canada has so far been modest and limited to commodity prices and some heightened financial stress, it observes that the “broad forces of household, bank and sovereign will add to the variability, and temper the pace, of global growth.”
• Looking ahead, anticipating a moderating clip for domestic demand and bearing the recent global volatility in mind, the Bank stressed the “considerable uncertainty surround the outlook” and stated that “any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”

Key Implications

• Remembering that monetary policy only impacts with a lag, the exceptional near-term performance of the Canadian economy and stickiness in core inflation point to a necessary tightening to begin to restrain price growth. The Bank of Canada has the sole mandate of achieving its 2% inflation target and conducts its policy through that exclusive prism.
• Although the near-term economic strength will ebb, the uptake of slack and rebound in price growth meant it was due time to take interest rates off their emergency level at the effective lower bound. Nonetheless, today’s 25 basis point increase represents a modest tightening and still leaves rates at very accommodative levels.
• The decision does mean that a rebalancing of monetary policy has commenced and interest rates will be lifted as economic slack is absorbed to restrain price growth. Nonetheless, the wording of the announcement indicates that in undertaking subsequent rate hikes the Bank will remain very attentive to the likely moderation in domestic demand and developments in the global financial system.
• While the Bank took the “elevator down” when cleaving rates, ongoing uncertainties and an easing pace of growth point to a very careful pace of tightening. The Bank may not hike at each meeting and might “pause” on increases if near-term financial conditions warrant. The emphasis on global conditions in today’s communiqué is no accident and, after the rocky last couple of years, policy-makers are keenly aware that Canada is not an island.
• Barring unforeseen shocks in global financial markets, based on our outlook for economic growth and inflation, we anticipate a sequence of 25 basis point increases at subsequent announcements, with the overnight rate at a still-stimulative 1.50% by year’s end.

Grant Bishop, Economist
416-982-8063

DISCLAIMER

This report is provided by TD Economics for customers of TD Bank Financial Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Financial Group and the members of TD Economics are not spokespersons for TD Bank Financial Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and fi nancial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affi liates and related entities that comprise TD Bank Financial Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

This note is a guest contribution by Peter Boockvar, Equity Strategist, Miller Tabak, via The Big Picture.

Following yesterday’s 6.1% annualized Q1 GDP gain (vs expectations of 5.9%), the Bank of Canada raised rates by 25 bps to .50% as expected. While some may say that how can a major G7 country raise rates with all the global economic uncertainty, Canada’s strong banking and commodity focused economy is on much stronger footing and the BoC specifically said that even with the hike, “this decision still leaves considerable monetary stimulus in place.” With respect to future moves, the BoC said “given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.” In response to this uncertainty over when they may hike again, the Loonie sold off 1.5 (cents) vs the US$.

Source: The Big Picture

Peter Boockvar – Equity Strategist
Peter Boockvar is currently the Equity Strategist at Miller Tabak + Co., LLC., in addition to his role as a salestrader on the equity desk. He is often seen on Bloomberg TV, Fox Business, CNBC, and CNBC Asia and is frequently quoted on Reuters, Dow Jones Newswires, Financial Times, Wall Street Journal, and The Associated Press. He joined Miller Tabak + Co., LLC in 1994 after working in the corporate bond research department at Donaldson, Lufkin and Jenrette. He is on the Board of Directors of Ameritrans Capital Corporation, a publicly traded Business Development Company. He is also president of OCLI, LLC and OCLI2, LLC, farmland real estate investment funds. Mr. Boockvar graduated Magna Cum Laude with a B.B.A. in Finance from George Washington University.

Tags: Bank Of Canada, Basis Point, Basis Points, Boc, Bond Research, Business Development Company, Canadian Market, Cnbc, Cnbc Asia, Co Llc, Commodity Prices, Consumer Spending, Core Cpi, Donaldson Lufkin And Jenrette, Dow Jones, Dow Jones Newswires, Downside Risks, Employment Growth, Financial Stress, Financial Times, Fiscal Consolidation, Forc, G7 Country, George Washington University, Global Economic Developments, Global Economic Uncertainty, Household Expenditures, Lower Bound, Magna Cum Laude, Miller Tabak, Quarter Growth, Real Estate Investment, Real Estate Investment Funds, Residential Construction, Sovereign Debt, Spillover, Target Rate, Td Economics, Tv Fox, Wall Street Journal
Posted in Bonds, Canadian Market, Markets, Outlook | Comments Off

The Dollar Carry Trade is Collapsing

Friday, January 22nd, 2010

This article is a guest post by Vince Fernando, The Business Insider.

Dollar strength at the end of 2009 sent the dollar carry trade (where by one borrows in dollars, then parks the proceeds in higher yielding assets) into a tailspin. This is why even small upward moves in the dollar could instigate substantial selling for 2009′s star currencies. For example, for the Australian dollar shown to the right.

Bloomberg: Funding the carry trade with the greenback lost money in December for the first time since February as the U.S. currency gained 4.8 percent against the euro amid growing confidence in the U.S. economy and expectations that the Federal Reserve will raise borrowing costs by June. Futures trading on Dec. 31 suggested a 62 percent chance the Fed would increase its benchmark to at least 0.5 percent by mid-year from a range of zero to 0.25 percent, up from 30 percent in November, Bloomberg data show. The Bank of Japan’s target rate is 0.1 percent.

Buying and selling high- and low-yielding currencies to take maximum advantage of global rate moves gained 19 percent from February to November, the carry trade’s best nine months since 2003, a Royal Bank of Scotland Plc index shows. The index fell 0.9 percent in December.

Few engaged in such an arbitrage will want to hang around should last year’s prevailing weak-dollar expectations be substantially reversed by persistent dollar strength.

[AA] Looking at the chart below of the dollar index, you can see that the dollar has rallied since the end of November, as a result of the accumulation of large short positions, not being covered. This has been a very profitable trade on both a currency pairs as well speculation in last year’s winning trades.

Currencies fared vary well against the dollar from an exchange rate standpoint as you can see in the following table:

* reflects the percentage change in the value of the non-USD currency compared to USD

Is it really a surprise that risk assets (commodities, the Canadian and Aussie dollars, equities, emerging markets) are selling off as institutional and hedge fund traders unload this increasingly squeezed short trade?

Read Bob Janjuah’s updated outlook for more insight on the short squeeze raising the dollar’s value – Janjuah points out that Senator-elect Scott Brown’s GOP victory in Massachusetts upsets Obama’s applecart so much so, that the resulting backlash will be for Obama to speed up plans for fiscal tightening, which means possibly a more rapid windup of the Fed’s quantitative easing, monetary tightening later this year.

Axel Merk puts it nicely, saying “In that context, the conventional wisdom that a country needs to have economic growth to have a strong currency is, in our assessment, wrong. Such a relationship only applies to countries that depend on foreigners to finance their deficits. In the U.S., foreigners finance the twin deficits; one of the reasons why the U.S. has economic growth as a top priority is to entice foreigners to keep financing U.S. deficits. Australia also has a current account deficit and, as a result, has a currency that is sensitive to economic growth prospects. Japan, however, traditionally finances its deficits domestically; as a result, the value of the yen is not very sensitive to changes in growth forecasts. The same can be said for the euro zone: because the euro zone does not have a significant current account deficit, in our assessment, the euro can do well in the absence of economic growth.

Source: StockCharts

Add my twitter feed: @vincefernando

Tags: Arbitrage, Australian Dollar, Bank Of Japan, Bank Of Scotland, Benchmark, Bloomberg, Business Insider, Canadian Market, Carry Trade, Commodities, Currency Pairs, Dollar Index, Dollar Strength, Emerging Markets, Federal Reserve, Futures Trading, Global Rate, Greenback, Maximum Advantage, Nine Months, Percentage Change, Profitable Trade, Royal Bank Of Scotland, Royal Bank Of Scotland Plc, Tailspin, Target Rate, Weak Dollar
Posted in Commodities, Markets, Outlook | Comments Off

SWOT: Gold Market

Sunday, December 13th, 2009

Gold Market

For the week, spot gold closed at $1,115.40 per ounce down $46.00 or 3.96 percent. Gold equities, as measured by the XAU Gold & Silver Index lost 5.23 percent for the week. The U.S. Trade-Weighted Dollar Index gained 0.84 percent.
 

Strengths

• The Moscow Times has reported that the Russian central bank plans to continue to increase gold reserves to diversify the structure of its reserves, and to seek alternatives to a weakening dollar. Analysts at Renaissance Capital in Moscow estimate that Russia’s gold reserve probably rose by $790 million to $23.1 billion in the week ended Nov 27.
   
• BullionVault has reported that Sri Lanka, whom has already purchased 10 tonnes of gold from the International Monetary Fund, is keen to buy more gold to increase its gold reserves.
   
• Zhu Min, vice-governor of the People’s Bank of China, has said that China is experiencing a clear V-shaped recovery and added that the economy was well on track to meeting or possibly exceeding the government’s target rate of 8 percent growth this year.

Weaknesses

• Gold fell during the week as risk-averse investors sought the safety of the U.S. dollar amidst rising credit problem concerns in Greece, Spain, Italy and Dubai. Fitch ratings lowered Greece’s credit rating one step to BBB+. Similarly, Standard & Poor’s cut Spain’s credit rating outlook, sustaining the selling of currencies in favor of the U.S. dollar.
   
• Also contributing to the resurfacing of risk-aversion are intentions from both Japan and the United States to expand quantitative easing aimed at preventing the economy from tipping back into recession as deflation persists. Treasury Secretary Geithner has decided to extend the Troubled Asset Relief Program until next October and the Japanese government has unveiled an additional $81 billion economic stimulus package.

   

• The world’s largest bullion-backed exchange-traded fund has shed almost 14 tonnes of its reserves in the first few trading days of the week as the dollar strengthened but its holdings was stable thereafter.
   

Opportunities

• David Rosenberg, Gluskin Sheff Chief Economist & Strategist, sees gold going as high as $2,623 per ounce if China follows through on its plans to begin stockpiling the precious metal and sees increased jewelry demand in the country being a further driver in the gold price.

   

• Billionaire investors John Paulson recently spoke at a luncheon presentation at the Japan Society and noted his concern about high rates of inflation in the future and his concern about holding assets denominated in U.S. dollars, “So I looked for another currency in which to denominate my assets in. I feel that gold is the best currency.”
   
• Bloomberg has reported that Russia is considering an easing of mining laws designed to attract foreign investors by offering tax breaks and increase compensation should the state decide to take back assets.
   

Threats

• Due to the recent agreement between the United States and Colombia permitting the U.S. to increase its military presence within the state to subdue narcotics, Venezuelan President Hugo Chavez has raised border tensions with neighboring Columbia on assumptions Washington and Bogota are working together to engage in a military offensive against Venezuela.
   
• Politico has reported that Democrats are preparing to raise the federal debt ceiling by as much as $1.8 trillion before New Year’s rather than having to face the issue during election season and has also added that the legislation sets no specific targets for deficit reduction.
   
• According to the Tax Foundation, one-third of those filing tax returns in 2007 paid zero income tax, while about half of those received money from the government. This translates into almost 62 million workers that paid no income tax in 2007.
   

Tags: Bank Of China, China, David Rosenberg, Economic Stimulus Package, Emerging Markets, Geithner, Gold, Gold Bullion, Gold Equities, Gold Market, Gold Reserve, Gold Reserves, International Monetary Fund, Japan And The United States, Moscow Times, Problem Concerns, Renaissance Capital, Risk Aversion, Rsquo, Russia, Russian Central Bank, Silver Index, Spot Gold, Target Rate, Treasury Secretary, Vice Governor
Posted in Canadian Market, China, Markets, Outlook, Silver | Comments Off

Setting the Bull Trap

Wednesday, January 7th, 2009

This post is a guest contribution by Bennet Sedacca*, President of Atlantic Advisors Asset Management.

Long time students of the market will tell you that “the crowd is usually wrong at the extremes”. Judging by what I see, hear and read in the media, the current consensus is that stocks bottomed on November 20th-21st, an economic recovery will begin in the second half of 2009, corporate bonds are a buy, stocks are cheap and the stock market is now discounting all the bad news. This is surely a sign that the worst is likely behind us.

Even though I was looking for a low in the S&P 500 around 750 (it bottomed around 740 on November 21st only to close at 800 the same day), I continue to believe that was a low point, but not THE low point for this bear market. We were large buyers of Mortgage Backed Securities during the Wall Street de-leveraging and have been rewarded with handsome gains, although we began to take some profits on Friday where appropriate.

Corporate bond spreads have tightened during a slow holiday season as well as spreads in CMBS (Commercial Mortgage Backed Securities). Corporate spreads may or may not tighten further as I believe there will be a wave of issuance at every level – Government, Emerging Markets, Corporations, Municipalities, etc. Treasury yields have crashed as the Fed has taken the Federal Funds Target Rate to a range of 0-0.25%.

Stocks have rallied even more to S&P 931 and could possibly make a run at 1,000-1,100 if “performance anxiety” sets in among those portfolio managers that are afraid to miss the rally. We are not afraid of missing the rally because we are absolute return investors and have the luxury of having missed the big down move from nearly 1,600. The managers that are subject to performance anxiety are the same group that managed to a market benchmark only to get tattooed during the downturn.

The Fed is punishing savers and the Prudent Man by manipulating interest rates to zero. You can sit in cash and earn zero or you can be forced out on the risk spectrum just so you can keep up with inflation or your benchmark. Forcing money into risky assets is perhaps the most dangerous experiment ever done, and is so large in scale and so unprecedented that we have no idea how it will end. I expect it to end poorly and with hyper-inflation. The funneling of assets into risk is masking the deteriorating fundamentals and giving the appearance of a market that has bottomed. But this is sleight of hand, an illusion.

The Fed has declared a war on savers, a war on prudence and provided the ultimate Moral Hazard Card – and with our money no less. They are also setting up the ULTIMATE BULL TRAP – a trap so large that when it is sprung, perhaps as early as the end of the first quarter/beginning of second quarter, there will only be sellers left.

Click here for Bennet’s full report.

* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. In 1997 he formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions.

Bennet graduated from Rutgers University in 1982 with a degree in Economics.

Tags: Absolute Return, Atlantic Advisors Asset Management, Bear Market, Buy Stocks, Commercial Mortgage Backed Securities, Corporate Bond Spreads, Corporate Bonds, Downturn, Economic Recovery, Emerging Markets, Holiday Season, Issuance, Level Government, Mortgage Backed Securities, Performance Anxiety, Portfolio Management, Portfolio Managers, president, Prudent Man, Rutgers University, S&P 500, Sedacca Capital Management, Stock Market, Target Rate, Time Students, Treasury Yields, Us Federal Reserve
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