Groundhog Day: Will September’s Sell-off Repeat?

Tuesday, August 21st, 2012

by Russ Koesterich, Chief Investment Strategist, iShares

Come September investors might feel as if they are trapped in their own version of Groundhog Day. Last year, the Dow dropped 6% in September. Given the month’s consistently negative bias and lingering headline risks, there is a reasonable chance markets will come under pressure again this year.

While investors often pay too much attention to the calendar, September is the notable exception. Looking at data on the Dow Jones Industrial Average, which stretches back to 1896, September has historically been the worst month of the year, with an average return of slightly worse than negative 1%. This is the only month of the year for which the seasonal bias is so great as to be considered statistically significant.

The tendency for markets to fall in September is also evident when you look at the win rate – how often equities move higher. The win rate in September is barely 40%, versus nearly 60% for the other 11-months. Finally, this phenomenon is not limited to the United States. September has historically been the worst month of the year in a number of European markets – including Germany and the United Kingdom, as well as in Japan.

In addition to a negative seasonal bias, there are three other reasons to be concerned about the headline risk to the markets in the coming weeks:

• On September 12, the German Constitutional Court will rule on the constitutionality of the European Stability Mechanism (ESM). Investors currently expect a favorable ruling, so any other outcome is likely to be disruptive.
• The Netherlands holds an election, also on September 12. This is risky for markets as the outcome may very well be a fragmented government, which will call into question the commitment of the Dutch to further fiscal integration and their support for the southern European countries.
• Closer to home, the US Federal Reserve will begin two days of deliberation on September 12 about the economy and monetary policy. Many investors are still expecting, or at least hoping for, an extension of the Fed’s quantitative easing program, but there is considerable scope for disappointment should the central bank stand pat.

In addition to headline risk, there has been a growing complacency in global equity markets. This trend is particularly evident when looking at implied volatility, or the VIX Index. In mid-August the VIX went below 15, well below its long-term average. While there are several technical reasons that the VIX is this low, it should still concern investors. A low VIX reading indicates weak demand for put protection, suggesting that investors are not particularly concerned with downside protection. Previous readings in this vicinity – in March of 2012 and the spring of 2011 – coincided with short-term tops.

How should investors position their portfolios? While I still prefer equities over the long-term, this is probably a reasonable time to consider trimming back on positions and looking for instruments that offer the potential for downside protection. One way to achieve this is to re-allocate from a cap-weighted exposure into a minimum volatility fund, or other instruments which tend to have a lower market beta.

For investors looking for global exposure, I like the iShares MSCI ACWI Index Fund (NYSEARCA:ACWI), the iShares MSCI All Country World Minimum Volatility Index Fund (NYSEARCA:ACWV), or the iShares S&P Global 100 Index Fund (NYSEARCA:IOO).

Source: Bloomberg

Russ Koesterich, CFA is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog. You can find more of his posts here.

The author is long IOO.

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Minimum volatility funds may experience more than minimum volatility as there is no guarantee that the underlying index’s strategy of seeking to lower volatility will be successful.
Index returns are for illustrative purposes only. Indexes are unmanaged and one cannot invest directly in an index.

Tags: Chief Investment Strategist, Constitutionality, Deliberation, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, European Markets, European Stability, Federal Reserve, German Constitutional Court, Groundhog Day, Investors, Koesterich, Month Of The Year, Negative Bias, Netherlands, Phenomenon, Russ, Southern European Countries, Tendency, Us Federal Reserve
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The Big Easing

Friday, May 4th, 2012

by Daniel Gros, Center for European Policy Studies, via Project Syndicate

BRUSSELS – More than three years after the financial crisis that erupted in 2008, who is doing more to bring about economic recovery, Europe or the United States? The US Federal Reserve has completed two rounds of so-called “quantitative easing,” whereas the European Central Bank has fired two shots from its big gun, the so-called long-term refinancing operation (LTRO), providing more than €1 trillion ($1.3 trillion) in low-cost financing to eurozone banks for three years. For some time, it was argued that the Fed had done more to stimulate the economy, because, using 2007 as the benchmark, it had expanded its balance sheet proportionally more than the ECB had done. But the ECB has now caught up. Its balance sheet amounts to roughly €2.8 trillion, or close to 30% of eurozone GDP, compared to the Fed’s balance sheet of roughly 20% of US GDP.

But there is a qualitative difference between the two that is more important than balance-sheet size: the Fed buys almost exclusively risk-free assets (like US government bonds), whereas the ECB has bought (much smaller quantities of) risky assets, for which the market was drying up. Moreover, the Fed lends very little to banks, whereas the ECB has lent massive amounts to weak banks (which could not obtain funding from the market). In short, quantitative easing is not the same thing as credit easing. The theory behind quantitative easing is that the central bank can lower long-term interest rates if it buys large amounts of longer-term government bonds with the deposits that it receives from banks. By contrast, the ECB’s credit easing is motivated by a practical concern: banks from some parts of the eurozone – namely, from the distressed countries on its periphery – have been effectively cut off from the inter-bank market.

A simple way to evaluate the difference between the approaches of the world’s two biggest central banks is to evaluate the risks that they are taking on. When the Fed buys US government bonds, it does not incur any credit risk, but it is assuming interest-rate risk. The Fed acts like a typical bank engaging in what is called “maturity transformation”: it uses short-term deposits to finance the acquisition of long-term securities. With short-term deposit rates close to zero and long-term rates at around 2% the Fed is earning a nice “carry,” equal to about 2% per year on bond purchases totaling roughly $1.5 trillion over the course of its quantitative easing, or about $30 billion.

Read on …

Copyright © Project Syndicate

Tags: Balance Sheet, Big Gun, Central Banks, Daniel Gros, ECB, Economic Recovery, Federal Reserve, Financial Crisis, Government Bonds, Massive Amounts, Periphery, Project Syndicate, Qualitative Difference, Ris, Risky Assets, Term Interest, Trillion, Two Shots, Us Federal Reserve, Us Gdp
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Risks Remain High, But May Be Receding (Doll)

Tuesday, November 8th, 2011

Risks Remain High, But May Be Receding

November 7, 2011

by Bob Doll, Chief Equity Strategist, Blackrock

Volatility Rises Over Greek Surprise

Market action last week was dominated by the early in the week announcement from Greek Prime Minister George Papandreou that he would call for a referendum to allow Greek citizens to vote on whether or not the country would accept the previously announced bailout package in exchange for additional austerity measures. This surprise announcement called into question the stability of the eurozone, renewed risks of a chaotic default of Greek debt and caused risk assets (including stocks) to sink sharply. After it became clear that this decision was politically untenable, the probability of such a referendum faded and markets managed to stage a recovery. For the week as a whole, however, stocks were down, with the Dow Jones Industrial Average falling 2.0% to 11,983, the S&P 500 Index declining 2.5% to 1,253 and the Nasdaq Composite dropping 1.9% to 2,686.

In related European policy news, the European Central Bank (ECB) announced last week that it would lower rates from 1.50% to 1.25%. While we recognize that this is a positive step in terms of promoting a more growth-friendly environment, it only partially unwinds the two ill-timed rate hikes imposed by the ECB earlier in the year.

More Moves From the Fed on the Horizon?

The US Federal Reserve met last week and, as part of its decision to keep rates on hold, also announced that it had lowered its economic growth forecast for the country for the next couple of years. While some viewed this downgrade as a surprise, our view is that the Fed was merely catching up with consensus forecasts that had previously taken a dimmer view of the US economy.

Given the Fed’s comments, it appears the central bank may be paving the way for an additional round of quantitative easing (i.e., a QE3 program). The Fed has been extremely active in recent years and while the central bank’s programs may have prevented a more serious economic disaster, it has failed to deliver the sort of decent economic growth and sharply decreasing unemployment that is typical during the early stages of economic recoveries. To a large extent, this is due to the fact that consumers are still in a deleveraging stage and overall confidence levels remain depressed, which is preventing businesses from hiring.

In any case, we do not think the Fed is quite ready yet to enact QE3, but should we see some sort of combination of further chaos in Europe, inflation levels receding further and economic growth deteriorating, the likelihood would grow. On the economic front, last week saw the release of the October payrolls report. Gains were slightly weaker than expected (up 80,000), but the data also showed that gains in August and September were revised up sharply and that unemployment fell very slightly, from 9.1% to 9.0%.

Market Risks Appear to Be Fading

Notwithstanding last week’s decline, markets have accelerated sharply since early October, and it is worth taking a step back to consider what has changed over the past month. Several weeks ago, investors were facing the dual threats of the inability of European policymakers to solve the debt crisis and what seemed to be a growing likelihood of a double-dip recession in the United States. Given that backdrop, equity risk premiums had moved sharply higher. Today, while the environment can hardly be called great, these risks seem less severe than they previously were, which has allowed the risk premiums to recede somewhat.

In Europe, the odds are growing that policymakers will be able to contain the debt crisis and engineer some sort of stable and organized default of Greek debt. Additionally, the ECB has transitioned to an easing bias, which should provide at least some help for the overall economy. In the United States, risks of a renewed recession have been fading and while growth levels are certainly not robust, the economy does appear to be poised to continue to deliver modestly positive levels of growth. The debt crisis and ongoing economic uncertainty are likely to remain headwinds for stocks for some time, but it does appear to us that markets have moved past the period of greatest risk.

About Bob Doll

Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRock^® a premier provider of global investment management, risk management and advisory services. Mr. Doll is also Lead Portfolio Manager of BlackRock’s Large Cap Series Funds. Prior to joining the firm, Mr. Doll was President and Chief Investment Officer at Merrill Lynch Investment Managers.

Copyright © Blackrock

Sources: BlackRock, Bank Credit Analyst. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 7, 2011, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

BlackRock is a registered trademark of BlackRock, Inc. All other trademarks are the property of their respective owners.

Tags: Austerity, Bailout Package, Bob Doll, Bonds, Consensus Forecasts, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Federal Reserve, George Papandreou, Greek Citizens, Greek Prime Minister, Nasdaq Composite, Paving The Way, Policy News, Rate Hikes, Referendum, Strategist, Surprise Announcement, Us Federal Reserve, Volatility
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Uncertainty Remains, but So Too Does Opportunity (Doll)

Tuesday, September 20th, 2011

Uncertainty Remains, but So Too Does Opportunity

by Bob Doll, Chief Equity Strategist, BlackRock

September 19, 2011

Stocks Rebound Sharply

High levels of market volatility continued last week as the “risk on/risk off” trading pattern continued. Last week was a “risk on” one, with stocks moving sharply higher. For the week, the Dow Jones Industrial Average climbed 4.7% to 11,509, the S&P 500 Index advanced 5.4% to 1,216 and the Nasdaq Composite rose 6.25% to 2,622.

The overall environment continues to be one dominated by high degrees of uncertainty, low conviction and heightened fears of a double-dip recession and policy missteps. Nevertheless, we believe that the current uncertainty creates investment opportunities—particularly for those who are able to bear the short-term risks.

European Risks Continue to Dominate

We have been saying for some time that the key risk for the world’s economy and financial markets is the deteriorating situation in Europe. There has been much discussion about potential solutions among policymakers, but unfortunately little real action. Last week, many of the world’s central banks, including the European Central Bank, the US Federal Reserve, the Bank of Japan and the Bank of England announced coordinated actions that are aimed at easing pressure on European banks. In addition, European governments are engaging in talks about creating additional programs that may help the debt crisis, but significant action has yet to occur.

The actions that have been taken by Europe’s policymakers to date have been somewhat sporadic and not highly coordinated. Theoretically, Germany could step in and take on a larger role in attempting to stabilize the situation, but that is a difficult political prospect given that many German citizens are against what they perceive to be handouts to economically weaker parts of Europe. For its part, the European Central Bank could also play a larger role by expanding its commitment to purchasing troubled debt (i.e., launching a new quantitative easing program), but that is also unlikely to occur in the immediate future.

Ultimately, we do believe that the parties will come to some sort of resolution since, over the long-term, the costs of keeping the Eurozone intact would be less than letting it dissolve, but the complex political backdrop makes it difficult to predict exactly what the solutions might be. Regarding the specific issue of a potential Greek debt default, we believe that the markets have already priced in a high likelihood of such an event occurring, meaning that if any sort of default is conducted in an organized manner it might not have an oversized impact on financial markets.

US Equities Remain Well Positioned

In contrast to Europe, the United States economy remains in reasonably good health. The United States does, of course, have its own sovereign debt issues to deal with and the future state of the federal deficit is an obvious source of concern. The difference between the United States and Europe is that the United States has the ability to solve its own fiscal problems, even if coming to an agreement about how to do so is a significant challenge.

Given this backdrop, it’s hardly surprising that US stocks have been outperforming on a relative basis over the past couple of months. Before last week’s rebound, European equities have fallen 32% from their highs compared to an 18% decline for US markets and we continue to believe that US stocks also remain relatively attractive going forward. The US banking system has continued to heal since the credit crisis at a faster pace than in most parts of the developed world. Corporate earnings have also been expanding and we believe valuations for stocks are quite attractive. Additionally, the Fed is poised to remain accommodative for quite some time and we expect the central bank to announce a shift in its balance sheet management to promote investments in higher-risk assets (the so-called “operation twist”).

We have been arguing, and continue to argue, that stocks will remain in a trading range of between 1,100 and 1,250 for the S&P 500 unless and until additional clarity emerges. While we expect to see volatility continue in the near-term, the longer-term outlook for US stocks remains a bright one.

The information on this web site is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy, or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.

Sources: BlackRock, Bank Credit Analyst. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 19, 2011, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

BlackRock is a registered trademark of BlackRock, Inc. All other trademarks are the property of their respective owners.

Copyright © BlackRock

Tags: Bank Of England, Bank Of Japan, Bob Doll, Bonds, Central Banks, Debt Crisis, Double Dip Recession, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, European Banks, European Governments, Financial Markets, German Citizens, Market Volatility, Nasdaq Composite, Outlook, Policymakers, Potential Solutions, S Central, Strategist, Us Federal Reserve
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Time to be More Selective in US Markets

Sunday, May 29th, 2011

by Vikash Jain, Vice President, Portfolio Management, ArcherETF

Last Wednesday’s comments by the US Federal Reserve offered another indication that we are at least half-way through the current economic cycle. However, this does not mean sell your stocks; it just means be more selective.

In its Minutes released yesterday, the Fed outlined its plans to gradually end its easy money policy. It said that the economy was recovering, albeit not as quickly as it would prefer. On inflation, the Fed said it did not expect high energy and food prices to persist for very long. The net result was that the Fed said it would keep interest rates low for now. It also said that when the time comes, it will stop buying US Treasury Bonds. This would effectively tighten US money supply without actually raising rates. This “neutral, wait-and-see” statement indicates the Fed sees neither a crisis nor an overheating economy – in other words, an economy that, while still weak, is more or less back to normal. Truly, a mid-cycle hallmark.

The timing is also just about right. It has been 26 months since US (and Canadian) markets hit bottom in March 2009. Economic cycles typically last 48 to 60 months. Over the last 26 months, the S&P 500 has climbed 68% to about 1340, stunning until you look up at the 1558 peak it fell from. Over the next 12 months, given the stage of the cycle, we’d expect returns to be closer to historic norms.

We also expect that quality blue-chip and dividend-paying stocks will outperform. In December, we began shifting the US equity portion of our portfolios into the iShares S&P 100 ETF (OEF). OEF holds the largest US companies with strong balance sheets and global revenue bases.

We would also like to add a US blue-chip ETF with a better dividend yield to add to the portfolio. In our search, we took a closer look at the iShares S&P Preferred Fund (PFF). With a yield of 7.2% it looks tempting. But we find it is too concentrated. 85% of it is invested in big banks like Citi, Deutsche, Bank of America – a group that is still working through issues. And while its total holdings are listed at 245, many of those are different share classes from the same issuer. Unique issuers total 92, of which the top ten – all banks but for one utility – account for 50% of the fund.

There are other US ETFs in this category available. We’ll take a look at one of those next week.

The archerETF Global Tactical Portfolio

archerETF offers Global Tactical Portfolio Management.

Our outlook is Global: we invest across countries, sectors, commodities and other asset classes to improve returns. Our management is Tactical: we strive to select the right opportunities at the right times in response to changing market conditions to manage and minimize portfolio risk.

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Tags: Balance Sheets, Blue Chip, Buying Us Treasury Bonds, Canadian, Canadian Markets, Closer Look, Dividend Paying Stocks, Dividend Yield, Easy Money, Economic Cycle, Economic Cycles, Federal Reserve, Food prices, Ishares, Mid Cycle, Money Policy, Money Supply, Norms, Pff, Portfolio Management, Us Federal Reserve
Posted in Canadian Market, ETFs, Markets | 1 Comment »

Greenspan vs. Strauss-Kahn

Friday, October 2nd, 2009

This post features a discussion at the Yalta Annual Meeting/Yalta European Strategy between Alan Greenspan, former chairman of the US Federal Reserve, and Dominique Strauss-Kahn, the managing director of the International Monetary Fund (IMF). The moderator of the three-part discussion is Chrystia Freeland, US managing editor of the Financial Times.

Part 1: The financial crisis

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

Part 2: Global financial regulation

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

Part 3: Crisis exit strategies

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

Source: Chrystia Freeland, Financial Times (here, here and here), September 29, 2009.

Tags: Alan Greenspan, Annual Meeting, Dominique Strauss Kahn, Exit Strategies, Federal Reserve, Financial Crisis, Financial Times, Global Financial Regulation, International Monetary Fund, International Monetary Fund Imf, Managing Director, Managing Editor, September 29, Us Federal Reserve, Video Source, Yalta
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Words from the (investment) wise for the week that was (February 2 – 8, 2009)

Sunday, February 8th, 2009

Global stock markets shrugged off dire news on the US employment front, arguing that the gloomy data would hasten US lawmakers’ passage of a stimulus package. After falling for four straight weeks and recording the worst performance of the major US indices for January on record, Wall Street reversed course on the back of a stimulus-induced rally.

The US government seems on track to announce two new recovery plans next week. Firstly, Senate Democrats reached an agreement with Republican moderates on Friday regarding a fiscal stimulus package. The deal, in essence, entails about $110 billion in cuts to the roughly $900 billion legislation, according to The New York Times. Secondly, a rescue plan to inject billions of dollars into banks and entice investors to purchase toxic assets will be outlined on Monday by Treasury Secretary Timothy Geithner.

As investors’ risk appetite returned, the MSCI World Index and the MSCI Emerging Markets Index chalked up decent gains of 3.8% (YTD -5.4%) and 5.3% (YTD -1.7%) respectively. Among exchange-traded fund (ETFs), sector leaders were China (see additional comments below), Brazil and South Korea – all recording double-digit gains, according to John Nyaradi (Wall Street Sector Selector).

All the major US indices revved higher, as seen from the week’s movements: Dow Jones Industrial Index + 3.5% (YTD -5.6%), S&P 500 Index + 5.2% (YTD -3.8%), Nasdaq Composite Index +7.8% (YTD +0.9%) and Russell 2000 Index +6.1% (YTD -5.8%). Interestingly, the Nasdaq has been outperforming the Dow and S&P 500 since the beginning of December. Leadership by the technology sector is often good for the market as a whole.

Recent safe-haven trades such as US Treasuries (-0.7% in the case of 30-year bonds), the US dollar (-0.6%) and gold (-1.5%) took a back seat, as investors favored equities and commodities such as copper (+4.9%) and aluminum (+7.7%).

While pundits were speculating about when the Federal Reserve would enter the market as a buyer of US government bonds, Treasuries sold off as a large issuance of sovereign debt looms. However, German bonds gained handsomely on the perception that the European Central Bank was behind the curve with interest rate cuts against the backdrop of poor economic data.

The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.

Giving a glimmer of hope, the Baltic Dry Index (BDI) – measuring freight rates for iron ore and other bulk goods – jumped by 40% last week due to increased Chinese demand for iron ore. The Index has gained 125% over the past two months after plunging by 94% since its May high. The chart below illustrates the close relationship between the BDI (red line) and Reuters/Jeffries CRB Index (green line). (Not shown, the trends of the BDI and US Treasury yields also follow more or less the same path.)

As reported in my “Credit Crisis Watch” review of a few days ago, the past few months saw progress on the credit front, with a number of spreads having peaked. The TED spread, LIBOR-OIS spread and GSE mortgage spreads have all narrowed markedly since the record highs. Corporate bonds have also seen a strong improvement, but high-yield spreads remain at distressed levels. The tide seems to be turning, but the thawing of the credit markets still has some way to go before liquidity starts to move freely and confidence returns to the world’s financial system again.

Speaking of confidence, Montek Ahluwalia, deputy chairman of India’s planning commission, made the following remark at the recent Davos Forum: “Confidence grows at the rate a coconut tree grows. It falls at the rate a coconut falls.”

Back to the planned US rescue packages, and specifically Bill King’s comments: “The main problem plaguing the US economy is too much debt has been accumulated on gratuitous spending and the papering over of declining US living standards. Solons espouse a monstrous surge in debt to fund even more consumer spending. The toxin is not the cure. Inducements to save and invest in production are the remedy. But the welfare state and its ruling class are trying a last grandiose socialist [Keynesian] binge in the hope of salvaging their realm.”

Next, a tag cloud of my week’s reading. This is a way of visualizing word frequencies at a glance. Key words such as “bank”, “economy” and “market” dominated the list, whereas “China” seems to be gaining more prominence.

Stock markets have been in a “holding pattern”, or trading range, since the beginning of December. Key resistance and support levels for the major US indices are shown in the table below. The immediate upside target is the 50-day moving average (the Nasdaq and Russell 2000 are already above this line), followed by the early January highs. On the downside, the December 1 and all-important November 20 lows must hold in order to prevent considerable technical damage.

Here is Richard Russell’s (Dow Theory Letters) interpretation of the situation: “Frankly, I’m very impressed by the stubborn and continuing resistance of the DJ Industrial Average. I don’t think many analysts realize the extreme importance of the Industrial’s steady refusal to violate its November 20 low. The action of the Dow contains the answer to the trillion-dollar question – ‘Is the bear market in a halting process – or will the stock market signal a continuation of the primary bear market?’

“So here we are – at a crossroads to history. The market will issue its verdict when, and only when, it is ready. But for now – if there’s anything traders love, it’s a market rising in the face of lousy news.

“An optimistic outcome would be a continued refusal by the Industrials to close below 7,552. An obviously more bullish outcome would be the DJ Industrial Average and the DJ Transportation Average continuing to rally and ultimately (both Averages) bettering their early-January peaks.

“Clearly, the most bearish outcome would be the Industrials finally breaking below the November 20 low and thereby confirming that we are still locked in a continuing primary bear market.”

From across the pond in London, David Fuller (Fullermoney) said: “… there is a scenario which few other people are taking about. As part of our often-mentioned forecast for a ranging, reversion to the mean recovery rally first hypothesized in late October, there is a possibility that stock markets will do surprisingly well in the next few weeks. Strong rallies would eventually leave markets susceptible to partial pullbacks, including some right-hand base formation extension.

“How could strong rallies possibly occur when everyone is talking about depression? The answers can be found in sentiment and liquidity. Today, most people are either incredibly bearish or despondent, but extreme forecasts are seldom accurate, as I have mentioned before. However, there is plenty of liquidity in many portfolios and governments have significantly increased money supply in recent months. A rising stock market would force a reappraisal by bears, leading to a reversal of short positions, while long-only investors put more of their cash back into the stock market.”

My view is that stock markets, in general, are still caught between the actions of central banks furiously fending off a total economic meltdown on the one hand, and a grim economic and corporate picture on the other. While we figure out whether we are in a normal bounce or witnessing the start of something bigger, I am not averse to selective stock picking – picking out the choice morsels, so to speak.

As far as specific countries are concerned, I alluded to the Year of the Ox in my “Performance Round-up” of last week and mentioned that this is regarded as a sign of prosperity that has been very rewarding in the history of China. And what a start to the year it has been with the Shanghai Composite Index gaining 9.6% during the past week.

The chart pattern (see graph below) shows arguably one of the best base formations of the major stock market indices, followed by Friday’s breakout. Although the Index is still down by 64.2% since its high of October 16, 2007, it has moved to the top slot among global stock market performances for the year to date with returns of +19.8% (local currency) and +19.4% (US dollar terms).

For more discussion about the direction of stock markets, also see my post “Video-o-rama: Stimulus ad nauseum“.

Economy
“Global businesses remain very pessimistic. Sentiment is dark across the globe. Those that work in government are most worried, followed by businesses in financial and business services,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Pricing power has sharply eroded, suggesting that deflation is increasingly likely. The only silver lining is that business confidence has not declined further since hitting bottom in mid-December.”

The latest US economic reports were less grim in some instances than in previous reports, with a few indicators showing that the pace of decline could be slowing down. This view is shared by Nouriel Roubini (RGE Monitor) who wrote in Forbes: “In the US … the second derivative of growth and of other economic indicators is approaching positive territory (i.e. growth is still negative, but GDP may be falling at a slowing rate).”

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

Friday, February 6
- Employment Report: Severity of weakness will stimulate votes for fiscal stimulus under consideration

Thursday, February 5
- Initial Claims: Labor market situation is dismal
- Productivity: Advanced in fourth quarter
- Factory Orders: Inventories/shipments ratio keeps advancing

Tuesday, February 4
- ISM Non-Manufacturing Survey: Pace of deceleration is slowing

Monday, February 2
- Senior Loan Officer Survey: Includes positive aspects
- Consumer Spending: Significant reduction
- ISM Manufacturing Survey: Positive news, but more is necessary
- Construction Spending: Remains week

BCA Research added: “In nominal terms, consumer spending declined at an annualized pace of 11% in the three months to December – the largest contraction since the 1930s. For most consumers and companies it is the trend in nominal dollars that matters, not the statistical artifact of ‘real’ dollars, measured in the national accounts. The need for dramatic stimulus is obvious: declining nominal activity points to a deepening financial crisis.”

Elsewhere in the world, the Bank of England (BoE) slashed its key repo rate by 50 basis points to 1.0% (the lowest level since the BoE was formed in 1694), whereas the Reserve Bank of Australia (RBA) cut its cash rate by 100 basis points to 3.25% (the lowest level in two decades). As expected, the European Central Bank (ECB) maintained its key policy rate at 2%, but will in all likelihood reduce the rate further in coming months as economic indicators show the Eurozone still contracting and inflationary pressures easing.

Further afield, the International Monetary Fund halved its 2009 growth forecast for Asia from 4.9% to 2.7%. “Clearly the hopes that Asia would experience a mild downturn while the global economy retrenched have now been firmly dismissed,” said Glenn Maguire, Asia chief economist at Société Générale, in the Financial Times.

Japan, according to Roubini, is entering another severe slump, one that looks worse than that of other advanced economies, and the fall is still accelerating, resembling a severe case of stag-deflation.

More dire news came from the Russian economics ministry, forecasting the economy’s slide into recession in 2009. GDP growth is forecast to be -0.2% this year compared with 5.6% in 2008. Meanwhile, the ruble has slumped by 35% against the US dollar since August to its weakest level in 11 years. Concerns about the downgrading of the country’s credit rating and a $200 billion reduction of its currency stockpile weighed on sentiment.

On a more positive note, strong Chinese bank lending and manufacturing data provided signs that the government’s attempts to spend its way out of the economic slowdown are starting to show results. China may also consider tapping into its $1.95 trillion foreign reserves to help boost demand. With domestic government debt only 16.2% of GDP, the country is in a better position to do so than most major economies, according to US Global Investors.

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

Source: Yahoo Finance, February 6, 2009.

In addition to Fed Chairman Bernanke’s testimony on the Central Bank’s lending programs in Washington (Tuesday, February 10), the US economic highlights for the week include the following: Wholesale Inventories on Tuesday, the Trade Balance and Treasury Budget on Wednesday, Initial Jobless Claims, Retail Sales and Business Inventories on Thursday, and Michigan Sentiment on Friday.

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

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

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

In a world faced with untold uncertainty, my concluding thought today is borrowed from Briefing.com, saying that the situation reminds them of a scene in the Oscar-winning movie Terms of Endearment where Shirley MacLaine’s character is confronted with news from a doctor that her daughter has a malignant tumor. Upon hearing this, she asks what she should do. The doctor responds that she tells family members “to hope for the best, but prepare for the worst”. To this McClain’s character responds, “And they let you get away with that?” Don’t we all feel like the doctor these days?

My bags are packed and I am ready to make my way to the airport for a ten-day visit to Europe (Dublin, London, Geneva and Ljubljana). For those not familiar with Ljubljana, it is the charming capital of Slovenia – a country situated in the heart of Central Europe (see my post “Slovenia – the best-kept secret of Central Europe“). And this country will in future be playing a very special role in my life as I have just been appointed as its Honorary Consul for South Africa. And so begins my career as a part-time diplomat …

That’s the way it looks from Cape Town.

Richard Russell (Dow Theory Letters): Survival plan for unprecedented situation
“Don’t be married to any specific scenario. Anything may happen in response to the current situation. Follow the market – the market will know what’s happening before anyone else.

“The best survival plan is to be diversified. Nobody knows who or what will be ‘the last investment standing’. Will it be Treasury paper, high-grade bonds, real estate, diamonds, T-bills, cash, top-grade corporate stocks or gold?

“T-bills are the choice of many sophisticated investors. But T-bills are denominated in dollars, and dollars are vulnerable as are bonds or any other items denominated in Federal Reserve notes (‘dollars’).

“Real estate and diamonds represent intrinsic wealth, although they are not instantly liquid, meaning that they cannot be instantly turned into cash.

“Gold has been accepted as wealth for thousands of years. When all other forms of supposed wealth crashes (deflates) or becomes suspect, the last wealth asset to stand will be gold. Gold has no counter-party nor has it any debt aligned against it. Gold needs no central bank to ensure its acceptance. Gold is accepted everywhere and in any quantity as a form of indestructible, eternal wealth.

“Today, investment money is so suspicious of the viability of any given asset that they are placing their money in an item that bears the full faith and credit of the US government – I’m referring to Treasury paper. Actually, one major worry with T-bills is a possible collapse of the dollar.

“The following are my suggestions as to where an investor might place his money.

“AIG bonds (the government has bought the preferred stock of AIG, and the bonds should rate higher). Invest with the government.

“PHK – the high-yield fund run by PIMCO – speculative, but an interesting fund that’s 60% in investment-grade bonds.

“CD’s that are backed by the FDIC up to $250,000.

“Gold (GLD or CEF) or actual gold coins if possible.”

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

The New York Times: Senators reach accord on stimulus plan
“Senate Democrats reached an agreement with Republican moderates on Friday to pare a huge economic recovery measure, clearing the way for approval of a package that President Obama said was urgently needed in light of mounting job losses.

“The deal, announced on the Senate floor, was a result of two days of tense negotiations and political theater. Mr. Obama dispatched his chief of staff to Capitol Hill to help conclude the talks and reassure senators in his own party, and he called three key Republicans to applaud them for their patriotism.

“The fine print was not immediately available, and the numbers were shifting. But in essence, the Democratic leadership and two centrist Republicans announced they had struck a deal on about $110 billion in cuts to the roughly $900 billion legislation – a deal expected to provide at least the 60 votes needed to send the bill out of the Senate and into negotiations with the House, which has passed its own version.

“The pact, which is expected to be approved in the next few days, was concluded just hours after the Labor Department announced that 598,000 jobs were lost in January.

“As the negotiations were under way, lawmakers said it was time to stop quibbling about the exact parameters of the legislation – which mixes safety-net spending, tax cuts and a huge infusion of dollars into federal programs – and to begin work toward a final agreement that could be sent to Mr. Obama next week.”

Source: Carl Hulse and David Herszenhorn, The New York Times, February 6, 2009.

CEP News: President Obama says US must avoid a “trade war”
“US President Barack Obama signalled on Tuesday that a controversial ‘Buy American’ provision in his stimulus bill would be reviewed in order to prevent a global trade war.

“In an ABC news interview on Tuesday, Obama said that any clause in the stimulus bill being considered by US lawmakers that would violate World Trade Organization agreements and signal protectionism would be a ‘mistake right now’.

“‘That is a potential source of trade wars that we can’t afford at a time when trade is sinking all across the globe,’ he said. ‘We need to make sure that any provisions that are in there are not going to trigger a trade war.’

“Obama’s comments come following a chorus of criticism from leaders around the world who object to a proposed ‘Buy American’ clause in the stimulus bill that would require infrastructure projects to use only manufactured goods made in the United States.

“Canada’s Ambassador to the United States, Michael Wilson, warned earlier in the day that such a policy could spark a global trade retaliation.

“‘A rush of protectionist actions could create a downward spiral like the world experienced in the 1930s,’ Wilson wrote in a letter to Republican and Democratic Senate leaders.”

Source: CEP News, February 3, 2009.

Bloomberg: Faber – US stimulus may lead to “dire consequences”
“Marc Faber, publisher of the ‘Gloom, Boom & Doom Report’, talks with Bloomberg’s Carol Massar about the prospects for a US economic stimulus package. Faber, speaking from Hong Kong, also discusses gold prices, the appeal of US technology stocks and the outlook for the banking industry.”

Source: Bloomberg, February 6, 2009.

Yahoo Finance: Peter Schiff – stimulus bill will lead to “unmitigated disaster”
“The fiscal stimulus bill being debated in Congress not only won’t help the economy, it will make the recession much worse, says Peter Schiff, president of Euro Pacific Capital.

“Schiff scoffs at the notion the economic decline is starting to level off and concedes no government action means a ‘terrible’ recession. But the path of increased government intervention will lead to ‘unmitigated disaster’, says Schiff, who gained notoriety in 2007-08 for his prescient calls on the housing bubble and US stocks.

“The problem, he says, is the government is trying to perpetuate a ‘phony economy’ based on borrowing and spending. With the US consumer tapped out, the government is ‘now taking on the mantle’ of consumer of last resort, he continues, predicting the bond bubble will soon burst – if it hasn’t already – ultimately leading to a collapse of the dollar and an ‘inflationary depression worse than anything any of us have ever seen’.

“If nothing else, Schiff is a nonpartisan critic of American policymakers, comparing President Bush to Herbert Hoover and President Obama to FDR, and neither in a favorable way.”

Source: Aaron Task, Yahoo Finance, February 6, 2009.

Bloomberg: Gross says trillions needed to avoid “mini-depression”
“Bill Gross, co-chief investment officer of Pacific Investment Management Co., talks with Bloomberg’s Kathleen Hays about the need for a US stimulus package. Gross, speaking in Newport Beach, California, also discusses his bond picks.”

Source: Bloomberg, February 5, 2009.

Bloomberg: Volcker urges more transparency in hedge funds

Source: Bloomberg (via YouTube), February 5, 2009.

The New York Times: New plan to help banks sell bad assets
“After weeks of internal debate, the Obama administration has settled on a plan to inject billions of dollars in fresh capital into banks and entice investors to purchase their most troubled assets.

“The new financial industry rescue plan, to be outlined in broad terms on Monday in a speech by the Treasury secretary, Timothy F. Geithner, will not require banks to increase their lending. That is despite criticism that institutions that already received money from the Troubled Asset Relief Program, or TARP, either hoarded it or used the funds to acquire other banks.

“The incentives to investors could be in the form of commitments to absorb some of the losses from any assets they purchase, should their values continue to decline. The goal is to relieve the banks of their worst assets so that private investors might then provide more capital.

“Officials hope that part of the plan is not labeled a ‘bad bank’ administered by the government, although they expect that some might call it that.

“No matter what it is called, the government would assume some of the risk of declining assets at the heart of the economic crisis. But by relying on a combination of private investors and government guarantees, the administration hopes to reduce its exposure to losses and avoid the problem of having to place a value on assets that the institutions have been unable to sell.

“A central element of the plan would be a major expansion of a lending facility begun in November by the Federal Reserve Bank of New York when it was headed by Mr. Geithner. The program, which was initially financed by $200 billion in Fed money and $20 billion in seed capital from the $700 billion bailout fund, lent money to investors to buy securities backed by student, auto and credit card loans, as well as loans guaranteed by the Small Business Administration.”

Source: Stephen Labaton, The New York Times, February 6, 2009.

Bill Gross: Stop the decline in asset prices
“The current financial and economic crisis is difficult to appreciate, not only for the drop in elevation, but because of the swiftness of the declines. It’s been a Wile E. Coyote 12 months – straight down like a dead weight.

“A year ago, global equity prices were nearly twice today’s levels and recession was only a whisper on the lips of the gloomiest of economists. Today, descriptions drawing parallels to the Great Depression make it obvious that a major shift in economic growth and its historic financial model, as well as policy prescriptions for its revival, are underway. Most of the world’s connected economies and its citizens are in shock, conscious but not fully aware of the seismic shifts that will unfold in future years.

“PIMCO’s thesis for several years has held that the levered global economy long ago morphed from a banking-dominated regime to one that hid behind securitized lending and structures resembling a ‘shadow banking’ system. SIVs, hedge funds, CDOs and increasingly levered mortgage and investment banks fueled asset appreciation in all investment markets, which in turn propelled real economic growth and employment to unsustainable levels.

“But, with the US housing prices as its trigger, the deleveraging process did a Wile E. Coyote and headed over the cliff in mid-year 2007, dragging down almost all asset prices except government bonds. The real economy followed shortly thereafter, not just in the US, but globally, proving that linkages work on the ‘down’ as well as the upside.

“To PIMCO, the remedy for this deflationary deleveraging and mini-depression is simple and almost axiomatic: stop the decline in asset prices. If that can be done, the real economy will level out as well. When home prices stop going down, newly created households will be more willing to take a chance on ownership as opposed to renting. If stock prices consolidate, recently burned investors will be more willing to invest, as opposed to stuffing their 401(k) mattresses with Treasury bills. Business investment, jobs, and profits should follow quickly behind.”

Source: Bill Gross, Pimco – Investment Outlook, February 2009.

Edmund Conway (Telegraph): Recession – glimmers of hope?
“The pace of economic decline is slowing. Housing sales are picking up, even if prices are falling. Credit markets have begun to thaw.

“This is the time-honoured pattern you expect to see when the downward spiral burns itself out and the cycle slowly starts to turn, helped this time by an unprecedented global monetary and fiscal blitz. But it may equally be a false dawn.

“The Baltic Dry Index measuring freight rates for iron ore and other bulk goods has been creeping up for two months after crashing 94% in the worst fall in shipping history. Copper prices are also edging up after plunging by two-thirds from their June peak. So are lumber prices.

“The debt markets have opened like a flower in spring, at least in one sense. Companies issued $246 billion in bonds in January, the most since the credit crisis began. Blue-chip groups can borrow again.

“‘The mood is upbeat. There are swathes of cash pouring back into credit,’ said Suki Mann, a credit strategist at Société Générale. ‘The market closed down after the Lehmans collapse so there was a lot of pent-up demand, but they are having to pay materially higher spreads than pre-Lehmans.’

“So far this has not helped the rest of the corporate universe. Average yields on BBB-rated debt are a prohibitive 19.6%. ‘The market is absolutely closed. There is no trickle-down yet,’ he said.

“The interbank freeze has started to thaw, again in one sense. David Buik, from BGC Partners, said interest spreads on three-month dollar Libor have come down to 1% from the extremes above 2% at the height of the panic. ‘The cost of money is coming down, but the banks are still not lending to each other. It’s virtually moribund,’ he said.

“The US Federal Reserve’s loan survey this week showed that lending is again picking up, albeit tentatively. The number of banks expecting to tighten credit has fallen from 80% in the autumn to nearer 60%, the lowest in a year.”

Click here for the full article.

Source: Ambrose Evans-Pritchard, Telegraph, February 5, 2009.

Bloomberg: Roubini says ECB “wrong”, rate cuts too little, too late
“Nouriel Roubini, professor at New York University’s Stern School of Business, talks with Bloomberg’s Ellen Pinchuk about the global economy and European Central Bank monetary policy.”

Source: Bloomberg, February 4, 2009.

European Commission: Escalating public debt

Hap tip: Phil’s Stock World.

Financial Times: IMF cuts forecast for Asian growth
“The scale of the economic slowdown in Asia was starkly underlined on Tuesday when the International Monetary Fund virtually halved its 2009 growth forecast for the region.

“The IMF slashed its forecast to 2.7% from an estimate of 4.9% made only two months ago. The move came as both Australia and Japan announced new measures to sustain their flagging economies.

“In Australia, the government unveiled a A$42 billion ($26.5 billion) fiscal stimulus and the central bank cut interest rates to 3.25%, the lowest level since the 1960s. In Tokyo, the Bank of Japan unveiled a plan to spend up to Y1,000bn ($11.2 billion) to buy shares owned by banks amid growing concerns over the impact of falling stock prices on the financial system.

“‘Clearly the hopes that Asia would experience a mild downturn while the global economy retrenched have now been firmly dismissed,’ said Glenn Maguire, Asia chief economist at Société Générale.

“‘There is a clear realisation that this is going to be a major economic readjustment and economies that are most leveraged to the global trade cycle will be most affected.’”

Source: Raphael Minder and Christian Oliver, Financial Times, February 3, 2009.

CEP News: Obama unveils economic recovery advisory board
“US President Barack Obama unveiled a new advisory board consisting of former government officials, union members and executives from some of the country’s largest firms who will provide guidance on how the US should respond to the economic crisis.

“The Economic Recovery Advisory Board will be led by former Fed Chairman Paul Volcker, Obama announced.

“The members will include: former Securities and Exchange Commission Chairman William Donaldson, former Fed Vice-Chairman Roger Ferguson, UBS Americas CEO Robert Wolf, GE CEO Jeffrey Immelt, Yale University’s CIO David Swensen, Caterpillar CEO Jim Owens, and Service Employees International Union Secretary-Treasurer Anna Burger.
“If the US government does not act soon, the US economy will continue to lose jobs and the downturn will accelerate, Obama said as he unveiled the board on Friday.”

Source: CEP News, February 6, 2009.

CEP News: Citigroup unveils plans to lend $36.5 billion
“In an effort to pass the benefits of the TARP onto the real economy, Citigroup unveiled plans to spend $36.5 billion in a series of new initiatives to spur credit card, mortgage and other consumer and business lending operations.

“The aims of the initiatives are, ‘to help expand available credit for consumers and businesses; restore liquidity and stability to the capital markets; and support the recovery of the US economy’, according to a new quarterly publication from Citigroup detailing how it plans to spend part of the $45 billion it borrowed from the US Treasury’s Troubled Asset Relief Program.

“The firm plans to make $25.7 billion in direct loans available to homebuyers and support the mortgage-backed securities market, spend $2.5 billion in consumer and business loans, $1.0 billion for student loans, $5.9 billion in credit card lending and $1.5 billion in corporate lending activity.

“Citigroup also said it made $75 billion in loans in the fourth quarter and plans to continue its partnership with the government, ‘to increase available lending and liquidity in the US financial markets and to help put the US economy back on track,’ Citi Chief Executive Officer Vikram Pandit said.”

Source: Financial Times, February 3, 2009.

Bespoke: Cumulative job losses – getting worse with time
“While they say things get better with time, the jobs picture is at least one exception. Today’s release of monthly non-farm payrolls showed that employers cut 598K jobs during the month of January. As shown, the US economy has lost a total of 3.6 million jobs since the start of 2008 with the bulk of those declines (80%) coming during the last five months. While the magnitude of the decline in jobs has been large, the pace of downward revisions is making things even worse.

“In the chart below, we show the cumulative decline in monthly jobs using the reported figures on the day of the initial release as well as the most recently revised numbers. As shown, based on reported numbers, the US economy would have lost 2.48 million jobs since the start of 2008. However, once we take into account the negative revisions, the US economy has lost another 1.1 million jobs, representing a 44% increase in jobs lost.”

Source: Bespoke, February 6, 2009.

CNBC: El-Erian on the employment picture
“The big loss of jobs will push the Obama administration to do more, says Mohamed El-Erian, Pimco co-chief investment officer/co-CEO.”

Source: CNBC, February 6, 2009.

Asha Bangalore (Northern Trust): Significant reduction in consumer spending
“The reduction in consumer spending in the past few months is noteworthy not only because it has declined in six out of the last seven, but at the same time the savings rate has increased rapidly in an environment when income is not advancing rapidly.

“The significance of an appropriately targeted fiscal stimulus package is evident … In other words, external stimulation is necessary to offset the weakness in consumer spending because an endogenous increase is unlikely in the months ahead. A decline in consumer spending in the first quarter is nearly certain. Also, the decline will be hefty because the level of consumer spending in December was considerably large such that there is an arithmetical disadvantage also.”

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

Asha Bangalore (Northern Trust): Factory sector – inventories/shipments ratio keeps advancing
“Factory orders fell 3.9% in December following a 6.5% drop in November, reflecting a reduction in orders of both durable (-3.0%) and non-durable goods (-4.8%). Inventories (-1.4%) and shipments (-2.9%) also declined in December.

“The most important aspect of the report is the inventories-shipments ratio which rose to 1.44 in December, up from 1.29 in September and 1.23 in December 2008. The upward trend of this ratio is consistent with the underlying weakness of the economy. The December reading is the highest since April 1996.”

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

Asha Bangalore (Northern Trust): ISM Survey – positive news, but more is necessary
“The ISM manufacturing composite index rose to 35.6 in January from 32.9 in December. The level of the index remains below 50.0 signifying a contraction in factory activity. However, the gain of the index suggests that factory activity is contracting at a slower pace in January compared with December. This is positive news.

“Indexes tracking production, new orders, and new export orders moved up in January, the employment index held steady, inventories and supplier delivers moved down. The 10.1 point increase in the new orders index warrants watching because these large jumps are associated with the end of recessions. Additional improvement in the subsequent months will be necessary to confirm that a recovery is underway given that the composite index and sub-components are far below 50.0 still.”

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

Asha Bangalore (Northern Trust): Second tier reports – ISM non-manufacturing survey, mortgage applications
“Second tier economic reports published today include mixed signals. The composite index of the ISM non-manufacturing survey results contained positive indications, while mortgage applications for purchase of homes fell.

“The ISM composite index of the non-manufacturing rose to 42.9 in January from 40.1 in the prior month. Although the level of the index continues to signal a contracting non-manufacturing sector, it is noteworthy because the increase suggests the pace of deceleration has slowed.

“Mortgage applications index for the purchase of homes dropped to 261.4 during the week ended January 30, the third weekly decline. The level of the index now matches the reading seen in the 2001 recession, excluding the November 2008 low.

“Although the Housing Affordability Index is at a record high, severely weak labor market conditions are holding back sales of homes.”

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

Forbes: Roubini – is America going the way of Japan?
“William Pesek, a savvy Asia columnist for Bloomberg, reports, in his latest column, views about the structural crisis faced by Japan that I first outlined in a 1996 paper, ‘Japan’s Economic Crisis’. Thirteen years later, Japan is entering another severe slump, one that looks like even worse than that of other advanced economies. In the US, Europe and some other advanced economies, along with China, the second derivative of growth and of other economic indicators is approaching positive territory (i.e. growth is still negative, but GDP may be falling at a slowing rate). In Japan, it is still highly negative. There, the fall is accelerating, resembling a free fall – a severe case of stag-deflation.

“The sad case of Japan’s free fall is a cautionary tale of what happens when a high-flying economy has a real estate and equity bubble that goes bust, avoiding (for too long) doing the painful structural reforms and clean-up of the financial system that is necessary to avoid a lengthy, L-shaped near-depression. Japan had over a decade of stagnation and deflation, then a mild, sub-par growth recovery that lasted only three years, and is now spinning into another severe stag-deflation.

“Keep alive zombie banks and zombie corporations with balance sheets and debts that haven’t been restructured, as in Japan, and you end up in an L-shaped near-depression.

“Let me explain why the US and the global economy face the risk of an L-shaped near-depression if appropriate policy actions are not undertaken.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, February 5, 2009.

BCA Research: The US economy is already in deflation
“The details of the fourth quarter US GDP data were terrible. GDP is declining in nominal terms and that is a better measure of deflation than a negative CPI rate.

“In real terms, the US economy contracted at a 3.8% annualized pace in 2008 Q4, the worst decline since 1982, but slightly better than many had expected. But the underlying picture provided no grounds for optimism. For most consumers and companies, it is the trend in nominal dollars that matters, not the statistical artifact of ‘real’ dollars, measured in the national accounts. In nominal terms, consumer spending declined at an annualized pace of 11% in the three months to December – the largest contraction since the 1930s.

“Meanwhile, total final sales to domestic purchasers also fell sharply in nominal terms in the fourth quarter. Deflation is not a risk, it is a reality. Demand, profits and asset prices are all contracting in nominal terms – which is more important than what the consumer price index is doing.

“In any case, the CPI is also in deflationary territory, down at a 13% annualized pace in the final three months of 2008. The need for dramatic stimulus is obvious: declining nominal activity points to a deepening financial crisis.”

Source: BCA Research, February 4, 2009.

CEP News: US home ownership rate falls to 7-year low
“The number of Americans who own their own home fell to a seven-year low in the fourth quarter of 2008 compared to a year ago, the Census Bureau reported Wednesday.

“The rate of home ownership fell to 67.5% in the fourth quarter, down from 67.8% during the same quarter a year ago. The report also said 2.9% of homes, excluding rental properties, were vacant and on the market, up slightly from 2.8% a year ago.

“Home ownership in the US peaked at a rate of 69.2% in 2004, at the height of the real estate boom.”

Source: CEP News, February 3, 2009.

Zillow: Americans lose $1.4 trillion in home values in Q4
“Home values in the United States fell for the eighth consecutive quarter, declining 11.6% during 2008 to a Zillow Home Value Index of $192,119, according to the fourth quarter Zillow Real Estate Market Reports, which encompass 161 metropolitan areas.

“The declines mean that US homeowners lost a cumulative $3.3 trillion in home values during 2008, with much of that loss coming in the fourth quarter.

“Homeowners lost $1.4 trillion during the fourth quarter alone; more than the $1.3 trillion lost during all of 2007. Since the housing market’s peak in 2006, $6.1 trillion in home values have been lost.

“Foreclosures made up nearly one in five (19.9%) of all transactions in 2008.”

Source: Zillow, February 3, 2009.

The New York Times: Rents are falling fast
“In this painful economic climate of layoffs and shrinking investments, there is a sliver of positive news: it’s a good time to be a renter in New York City. Prices are falling, primarily in Manhattan, and concessions like a month of free rent are widespread.

“Although it is notoriously difficult to quantify the state of the rental market, rents fell in almost every sector of the Manhattan market last year, according to the Real Estate Group, a New York brokerage. The steepest drop was in one-bedrooms, down 5.7% in buildings with doormen and 6.53% in buildings without. The only category that rose: rents for two-bedroom apartments in doorman buildings, up just a bit, by 0.61%.

“But these numbers, like most available data, represent asking rents rather than the final price. Anecdotal evidence suggests that some people are negotiating rents as much as 20% lower than the original prices asked by landlords. These figures also leave out incentives, like a month of free rent or a landlord’s paying the broker fee, which can add up to real savings.

“Fritz Frigan, executive director of sales and leasing at Halstead Property estimates that when these incentives are considered, rents are actually down some 10% to 15% since the market peak in mid-2007.”

Source: Elizabeth Harris, The New York Times, January 30, 2009.

Financial Times: S&P forecasts 200 defaults
“About 200 US junk-rated companies are likely to default this year, according to Standard & Poor’s, affecting almost $350 billion worth of debt and adding impetus to alternatives to bankruptcy, such as distressed debt exchanges.

“About half of the 17 US defaults seen in December were a result of distressed exchanges, where a company offers lenders new securities of a lesser value than the debt they are owed, usually to cut interest costs or delay principal repayment.

“Debt exchanges are becoming an increasingly common way to restructure debt outside of bankruptcy in the US – they remain rare in Europe – as US companies struggle to refinance $500 billion worth of bonds and more than $1,000 billion worth of bank loans amid the credit crunch.

“S&P said that there was a higher proportion of rated companies in the single-B category than ever before, with 800 business that make up one-third of all corporate ratings. ‘We expect nearly 200 speculative-grade companies to encounter some form of financial distress, leading to default in 2009,’ S&P said. ‘Currently, we have more than 180 companies rated B-minus or below with negative outlooks. That is where we expect many of the defaults will occur.’

“The agency added that the 185 companies most at risk had about $341 billion of debt outstanding. Outside the US, 61 junk-rated companies with another $56 billion worth of debt are also seen as highly likely to default.”

Source: Anousha Sakoui, Financial Times, February 2, 2009.

CEP News: US bankruptcies soar 33% in 2008
“More than 1.1 million Americans filed for bankruptcy in 2008, a 32% increase from the year before and the largest annual total since 2005, according to Automated Access to Court Electronic Records (AACER).

“Filings for companies were up 50% to 64,318, while individual filings were up 1.03 million.

“On September 15, 2008, the Lehman Brothers bankruptcy was the largest Chapter 11 filing of all-time. That was followed several days later by Washington Mutual, which became the biggest bank failure in US history.

“The largest increases in bankruptcy filings were in California (85%) and Arizona (81%), as those states also had the highest foreclosure rates.”

Source: CEP News, February 2, 2009.

CEP News: US credit card delinquencies at record high, says Fitch
“US credit card delinquencies reached all-time highs in January on the back of ongoing deteriorating conditions in the US economy, according to a study released by Fitch on Thursday.

“The rate of payments missed by more than 60 days advanced 0.47 percentage points to an all-time high of 3.75% in January, according to the report.

“‘US consumers continue to struggle in the face of mounting pressures on multiple fronts, from employment to housing to net worth,’ according to Michael Dean, a managing director at Fitch.

“The news comes at a difficult time for the United States with the economy shedding more than half a million jobs per month, and no signs of a turnaround in the near term.

“In addition, the Fed has pledged $200 billion in an initiative geared at backing holders of asset-backed securities including credit card debt, education and auto loans.”

Source: CEP News, February 5, 2009.

Financial Times: CDS regulation in Europe moves closer
“The prospect of legislation which would force banks and dealers in Europe to clear their deals in the huge credit default swap market centrally moved closer on Tuesday, when a top EU regulator asked parliamentarians to support the move.

“Charlie McCreevy, EU internal market commissioner, told a parliamentary committee in Strasbourg that both the European Central Bank and European regulators considered that ‘clearing of credit default swaps on a central counterparty in the EU is essential for financial stability and oversight’.

“Talking in the context of the capital requirements directive, which is currently passing through the parliament, Mr McCreevy said: ‘I would urge the parliament to support an amendment to give effect to this’.

“The commissioner’s move comes a few weeks after talks between Brussels and the industry to devise a central clearing system for the CDS market, which generally trades on a one-to-one basis between banks and dealers, broke down.”

Source: Nikki Tait, Financial Times, February 3, 2009.

Bespoke: Worst post-election day returns since 1900
“Not many people thought that running the country was going to be an easy job for President Obama, and based on the Dow’s returns since election day, the market doesn’t think so either. Below we highlight the performance of the Dow this many days past election day for all Presidential elections since 1900. As shown, the Dow’s decline of 17.78% since Obama’s election 93 days ago is the index’s biggest drop following any election in the last 108 years.”

Source: Bespoke, February 5, 2009.

CNN Money: Buffett’s metric says it’s time to buy
“According to investing guru Warren Buffett, US stocks are a logical investment when their total market value equals 70% to 80% of Gross National Product.

“Is it time to buy US stocks?

“According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of US stocks and the output of the US economy – its GNP.

“Fortune first ran a version of this chart in late 2001. Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.

“But he visualized a moment when purchases might make sense, saying, ‘If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you.’

“Well, that’s where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham’s statement about the stock market: ‘In the short run it’s a voting machine, but in the long run it’s a weighing machine.’”

Source: Carol Loomis and Doris Burke, CNN Money, February 4, 2009.

Bespoke: Positive guidance at decade lows
“Bespoke tracks a number of indicators during earnings season, and one of them is the percentage of companies that are raising guidance. Below we highlight this guidance indicator on a quarterly basis based on the 50,000+ individual earnings reports in our Earnings Report Database. During the current earnings season, just 2.3% of companies have raised guidance, which is the lowest reading since at least Q3 ‘01. Last quarter’s reading of 3% was the lowest at the time, but unfortunately, it has gotten even worse. At least expectations are about as low as they can get, and when the time comes that companies do start besting their guidance, it should propel stocks higher.”

Source: Bespoke, February 6, 2009.

Barry Ritholtz (The Big Picture): Bad Januarys equal bad Februarys?
“Last month, the S&P 500 index dropped 8.6%, which was the worst January on record. Naturally, that has some people wondering if this month will be any better. Unfortunately, history suggests otherwise.

“Since 1928, the market has declined in the first month of the year on 29 out of 81 occasions, or 35.8% of the time. The median loss during those losing Januarys has been 3.8% versus an overall average gain of 1.6%.

“On balance, performance in the month after a weak January has also been a downer. Over the past eight decades, the follow-on February has seen the S&P 500 decline on 18 separate occasions, or 62.1% of the time, with a median loss of 1.8%. That compares to an average rise of 0.1% for all Februarys from 1928 – 2008.

“So, while I have been among those who have been anticipating a first-half recovery (before a resumption of the bear market later in the year), the historical record suggests I just might have to wait until this month blows over first.”

Source: Barry Ritholtz, The Big Picture, February 4, 2009.

Bespoke: Nasdaq outperforms
“The Nasdaq has outperformed the S&P 500 and Dow Jones Industrial Average year to date, and it is actually up on the year while the other two are down between 3.5% and 6%.

“So how does this recent Nasdaq performance affect the index’s ratio with the Dow? Below is a chart of the DJIA/Nasdaq ratio since the start of 2002. When the line is rising, the Dow is outperforming the Nasdaq, and vice versa for a falling line. After getting slaughtered versus the Dow from August 2008 to November 2008, the Nasdaq has been outperforming. And judging by the range of the ratio over the past few years, this trend could continue for some time.”

Source: Bespoke, February 6, 2009.

Bespoke: US and BRIC world market share
“Earlier today we released a report showing just how off the ‘decoupling’ theory has been during the current global bear market. During the global bull market from ‘03 to ‘07, many pundits believed that developed and emerging markets outside of the US were strong enough to not catch a cold when the US sneezed. The BRIC countries of Brazil, Russia, India, and China were probably the most talked about countries when ‘decoupling’ came up, but as we’ve all seen, these countries have in fact gotten hit much harder than the US during the downturn.

“This couldn’t be highlighted better than in the chart below that shows both the US and the BRIC countries as a percentage of world market cap since mid 2003. As global equity markets rallied across the board from ‘03 to ‘07, the US lost a huge amount of world market share, falling from about 45% to a low of 24%. At the same time, BRIC countries went from about 4% of world market cap to nearly 16%.

“Once the credit crisis hit, however, US markets fell, but the rest of the world fell even harder. And as the chart shows, the US has been steadily gaining back market share over the last year or so, while the BRIC countries have fallen. Bear market: 1, Decoupling: 0.”

Source: Bespoke, February 2, 2009.

Bespoke: Performance of country ETFs
“Below we highlight ETFs that track equity markets for various countries. For each ETF, we provide its 5-day change, how far it is trading from its 50-day moving average, and how overbought or oversold it currently is. For overbought/oversold levels, we calculate how far the ETF is trading above or below the top or bottom of its trading range (using one standard deviation above and below the 50-day moving average as the trading range).

“As shown, four countries (Brazil, South Korea, Belgium, Canada) are trading above their 50-day moving averages, and just one (Brazil) is trading in overbought territory. The Russia ETF (RSX) is trading the furthest below its 50-day moving average, followed by Italy (EWI), Spain (EWP), Mexico (EWW), and Australia (EWA). Switzerland, Australia, Mexico, Spain, Italy, and Russia are all trading in oversold territory.”

Source: Bespoke, February 4, 2009.

CNBC: Dr. Doom – Asian markets pay you to wait
“Marc Faber, Editor of The Gloom, Boom & Doom Report, feels that the US market at current levels isn’t cheap. Asian markets, on the other hand, are much more value for money – there are stocks that pay you to wait out the recession. He shares his thoughts with CNBC’s Martin Soong.”

Source: CNBC, February 6, 2009.

Eoin Treacy (Fullermoney): Chinese stock market looks promising
“I find it interesting that the more sentiment deteriorates with regard to the future prospects for growth in the USA and Europe and as stock markets continue to disappoint; the same dire conclusions are rolled out to Asia and especially to China. There is no denying that the slowing global economy is having a knock-on effect in almost every country and China is no exception.

“Major job losses in Guangdong, slowing economic output, massive declines in the stock market and a peak in the housing market are seen as justifications to support this view. In addition, a communist system is by definition corrupt because it is unaccountable and concentrates power in the hands of too few people, media is heavily censored and citizens are indoctrinated to accept the status quo from an early age. However, with China, everything is seldom as it seems.

“The decline in the wealth effect in the West has been led by the fall in house prices. It is exaggerated by the home equity withdrawals which allowed home owners to leverage up their debt on the back of house price appreciation. To the best of my knowledge this option is simply not available to Chinese residents. 100% mortgages do not exist and the norm is for large down payments. The automotive loan industry is still in its infancy and credit / debit cards are used to far less an extent than in the West. It is still not surprising for large transactions to take place in cash rather than any other means. China does not have a futures market, although one is promised, and financial leverage available to retail investors is limited.

“Following a massive decline and 4-months of ranging, there has been little to encourage new money into the market. Ranging suggests supply and demand have come back into balance, but the Shanghai A-Share market needs to sustain a move above 2200 and ideally 2500 to indicate the bulls are back in control. In the short-term, the progression of higher or equal lows from the October nadir indicates that demand is returning at incrementally higher levels.

“The argument about the pace, course and impact of China’s re-emergence has being going on for a number of years and will continue to spark powerful emotions on both sides. At Fullermoney, we will continue to give the greatest weight to the charts, and right now, China shows the best base formation development characteristics of any globally significant market.”

Source: Eoin Treacy, Fullermoney, February 3, 2009.

Bloomberg: Roubini – Russia, east Europe stocks face “massive” drop
“Russian and eastern European equities may fall further because earnings and other fundamental measures mean little in the current economic turmoil, said Nouriel Roubini, the New York University professor who forecast a US recession two years ago.

“‘In market dynamics, prices can move far below what fundamentals justify,’ Roubini said in an interview in Moscow. ‘There is still a massive downside for equities in the region.’

“‘They may stagnate there for a while, and there’s not going to be any recovery,’ Roubini said. ‘For the time being, it’s going to get ugly.’

“The Russian Trading System Index is trading at 0.5 times book value, or the net asset value of its 50 companies, lower than the 1.4 times book value for the MSCI Emerging Markets Index according to weekly data compiled by Bloomberg.”

Source: William Mauldin, Bloomberg, February 4, 2009.

John Authers (Financial Times): Are Tips pointing to a return of inflation?
“The deflation scare that hit the world last year seems almost to be over. But markets disagree over whether this is the prelude to another inflation scare.

“Last year, the ‘breakeven’ rate at which US 10-year inflation-linked bonds (or Tips) would offer the same return as fixed-income Treasuries dipped below 0.1%. This implied there would be virtually no inflation at all, on average, over the next decade. Breakeven rates also implied there would be outright deflation over the next five years. Nothing like this had happened since the Depression of the early 1930s.

“If there was any inflation at all, this meant that Tips would outperform. Many seem to have bought them on this basis, as Tips now imply an inflation rate of 1.1% for the next 10 years. This is very low, but is its highest in four months.

“Meanwhile the real yield on conventional US Treasury bonds (obtained by subtracting current inflation from the nominal yield) is 2.8%, the highest in two years. That is in part due to low headline inflation. However, this figure makes it harder to believe US bonds are in a bubble.

“The inflation rate is fundamental to the valuation of many asset classes. Higher inflation expectations should hurt bonds and boost commodities and stocks. As it implies returning consumer activity, it should help consumer discretionary stocks most.

“Looking around the markets, there are many contradictions. Gold is gaining, but other commodities are not significantly above their lows. Stocks are not doing so well.

“An explanation might be as follows. Markets recognise that last year’s deflation panic was extreme, but are still not certain that the money-printing measures will push up inflation. The Tips market is relatively inefficient, and investors took the opportunity to make money out of it – but markets could move much further if inflation returns as governments hope.”

Source: John Authers, Financial Times, February 3, 2009.

Guardian: Soros – euro may not last without global plan
“The euro may not survive unless the European Union pushes for an international agreement on toxic assets, billionaire investor George Soros told Austria’s Der Standard newspaper.

“‘One would need a type of agreement on lost capital, so that the burden is shared, and in which every country is part of, otherwise more countries will suffer,’ said Soros in an interview with the paper, which was published on its Website.

“‘The EU should do this. If they don’t do this then the euro may not survive the crisis.’

“A warning from European Central Bank President Jean-Claude Trichet that the ECB could push interest rates below 2% and use other measures to boost growth also hit the euro, as did data showing the biggest monthly jump in German unemployment in four years.”

Source: Guardian, January 29, 2009.

Bloomberg: Ruble falls to 11-year low
“The ruble slumped to its weakest level against the dollar in 11 years as investors speculated Russia will be forced to give up its currency defense after draining reserves.

“‘The pace of the move to the target is definitely going to be a source of concern to the central bank,’ said Martin Blum, head of emerging-market economics and currency strategy at UniCredit SpA in Vienna. ‘Global risk appetite is continuing to deteriorate so the pressures on the ruble will continue.’

“The ruble slumped 35% against the dollar since August as a 63% drop in Urals crude oil prices and the worst global economic crisis since the Great Depression spurred investors and Russian citizens to withdraw about $290 billion from the country, according to BNP Paribas SA.

“Bank Rossii expanded its trading range for the ruble 20 times since mid-November before switching policy to let ‘market’ forces help determine the exchange rate within a widened limit.”

Source: Emma O’Brien, Bloomberg, February 2, 2009.

Ambrose Evans-Pritchard (Telegraph): Putin calls for end of dollar stranglehold
“Russian prime minister Vladimir Putin has called for concerted action to break the stranglehold of the US dollar and create a new global structure of regional powers.

“‘The one reserve currency has become a danger to the world economy: that is now obvious to everybody,’ he said in a speech at the World Economic Forum.

“It is the first time that a Russian leader has set foot in the sanctum sanctorum of global capitalism at Davos.

“Mr Putin said the leading powers should ensure an ‘irreversible’ move towards a system of multiple reserve currencies, questioning the ‘reliability’ of the US dollar as a safe store of value. ‘The pride of Wall Street investment banks don’t exist any more,’ he said.

“Mr Putin said: ‘We are witnessing a truly global crisis. The speed of developments beats every record, and the strategic difference from the Great Depression is that under globalisation this touches everyone. This has multiplied the destructive force. It looks exactly like the perfect storm.’

“However, Mr Putin’s own government in Russia is facing mass protest as unemployment surges and austerity measures start to bite.”

Source: Ambrose Evans-Pritchard, Telegraph, January 29, 2009.

Bloomberg: Rogers says Russia may break up
“Jim Rogers, chairman of Rogers Holdings, talks with Bloomberg’s Ellen Pinchuk about the outlook for the Russian economy, the ruble and his investment strategy. Rogers, speaking in Moscow, also discusses the outlook for oil prices and emerging markets.”

Source: Bloomberg, February 5, 2009.

Richard Russell (Dow Theory Letters): Gold trade getting crowded
“An interesting article appeared in yesterday’s Financial Times. The title of the piece was ‘I Don’t Like the Big Shiny Crowds Around Gold’ by John Dizard.

“Russell comment: This sudden wide spread interest in gold has bothered me too. Ads for gold are appearing in the newspapers, articles about gold are now commonplace. Writes Dizard, ‘I don’t like crowds, and the one around gold is just too big at the present. Let’s say that Western civilization is coming to a bloody end. That won’t happen for a few months at least. So why not wait until you don’t have to pay an unjustifiable premium for something as common as a Krugerrand.’

“‘Having said all this, I agree with the gold buyers that we are in a multi-year gold bull market that will eventually take the price to an integer multiple of where it is now, not a big integer multiple. But enough to approximate now much inflation must shrink the real burdens of debt to what the developed country taxpayer and consumer can afford.’

“‘Gold is one of, if not the most, treacherous trading markets there is. Ian Shapolsky, a New York investor, who trades for his own account, and whose tactical gold trading strategy I described in his space a couple of years ago, has abandoned the metal after a reasonably successful run.’

“As he says, ‘The gold market is thinner than it was, and it seems that the larger players can push it around more than they could in the past. The larger traders are aware of the chart points (price targets) followed by the investing public; and there seems to be a lot of effort to push prices above breakout points or moving averages.’

“So stay out of the deep end, average in. Don’t buy in a panic.”

Source: Richard Russell, Dow Theory Letters, February 4, 2009.

Commodity Online: Gold accumulation plan from India Post
“Buoyed by the runaway success of its gold coins sale scheme across the post offices in the country, India Post, the postal services department of the government of India, has announced a Gold Accumulation Plan.

“India Post, in association with the World Gold Council and Reliance Money, a financial services company of the Reliance Group, on Wednesday said that the Gold Accumulation Plan (GAP) will be carried out through its wide postal networks across the country.

“As per GAP, customers can purchase gold coins from any India Post offices across nine states in the country. ‘The GAP project ensures that people have the options like the Systematic Investment Plans of investing in gold by accumulating small quantities of the yellow metal,’ Sunita Trivedi, Chief General Manager, India Post told Commodity Online.

“‘This is to promote gold investment in India. Going forward, we not only plan to further expand this service to another 100 India Post outlets but also launch our Gold Accumulation Plan to help customers make systematic investments in gold,’ she said.”

Source: Commodity Online, February 5, 2009.

Telegraph: China falls into budget deficit as spending balloons
“China’s attempts to spend its way out of economic depression led to a fiscal deficit of 111 billion yuan (£12 billion) last year.

“Despite a near 20% rise in tax revenues and a record surplus of 1.19 trillion yuan (£128 billion) in the first six months of the year, the dramatic scale of government spending in November and December was enough to plunge the entire year into deficit.

“The figures are the first indication of how quickly and forcefully China reacted to the economic crisis after it announced a fiscal stimulus package of 4 trillion yuan in November to build new roads, railways, schools and hospitals.

“Government spending in December surged to 1.66 trillion yuan, more than triple the previous month’s total and 31% higher compared to the same month last year.

“The news came as Wen Jiabao, the Chinese prime minister, said that he was mulling over another fiscal stimulus package. ‘We may take further new, timely and decisive measures. All these measures have to be taken pre-emptively, before an economic retreat,’ he told the Financial Times.

“Although Mr Wen did not mention any concrete details, it is widely believed that the Chinese government wants to put together a social benefits package, in order to encourage people to up their spending and reduce their saving.”

Source: Malcolm Moore, Telegraph, February 2, 2009.

Financial Times: MDC agrees to join Mugabe government
“Zimbabwe’s opposition has bowed to pressure and agreed to join a national unity government with President Robert Mugabe in a last-ditch effort to halt a humanitarian catastrophe.

“In spite of deep misgivings on the part of some party leaders and trade unionists, the Movement for Democratic Change (MDC) decided that it had no choice but to accept the terms of a deal negotiated by southern African leaders this week, even though its key demand – control of policing through the home affairs ministry – was not met.

“Morgan Tsvangirai, the MDC leader and winner of a first round of presidential elections last year, emerged from a party vote on the issue on Friday sounding sanguine. He will be sworn in as prime minister on February 11. MDC politicians will occupy 11 of the 31 cabinet posts, including finance, education and health.

“The scale of the humanitarian crisis that the new administration will face was underlined when the World Health Organisation warned that ‘the deadliest cholera outbreak in Africa for 15 years is gaining momentum, with 1,493 new cases including 69 deaths reported in the last 24 hours alone’. About 60,000 Zimbabweans have caught the illness and more than 3,000 have died.”

“‘We are not saying that this is a solution to the Zimbabwe crisis,’ said Mr Tsvangirai. ‘Instead our participation signifies that we have chosen to continue the struggle for a democratic Zimbabwe in a new arena.’”

Source: Tony Hawkins and Richard Lapper, Financial Times, January 30, 2009.

Tags: 30 Year Bonds, Abc News, Africa, Ambrose Evans-Pritchard, America, Asha Bangalore, Asia, Australia, Austria, bad bank, Baltic Dry, bank, Bank Failure, bank lending, Bank Loans, Bank Of England, Bank Of Japan, banking, Barack Obama, Barry Ritholtz, Belgium, Ben Graham, Bernanke, Bill Gross, Bill King, Bloomberg, Brazil, BRIC, BRICs, broker, Brussels, Bush, California, Canadian Market, Cape Town, Carol Massar, Caterpillar, Ceo, chairman, Chief Economist, Chief Executive Officer, China, Chinese Government, Cio, Citi, Citigroup, Cnn, CNY, Columnist, Commissioner, Congress, Crb, credit strategist, Crude Oil Prices, David Fuller (Fullermoney), David Swensen, Davos, Department Of Labor, DJ Transportation, Doom, Doris Burke, Dow 30, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Dublin, Economic Recovery Advisory Board, editor, Edmund Conway, Ellen Pinchuk, Emerging Markets, Eoin Treacy (Fullermoney), ETF, Euro Pacific Capital, Europe, European Central Bank, European Commission, European Union, Exchange Traded Fund, Executive Director, Fdic, Federal Government, Federal Reserve Bank Of New York, Finance, Fiscal Stimulus, Gbp, GE, George Soros, Glenn Maguire, Global Stock Markets, Herbert Hoover, Housing Affordability, India, International Monetary Fund, Internet Bubble, Italy, Japan, Jean Claude Trichet, Jeffrey Immelt, Jim Rogers, John Authers, John Dizard, Kathleen Hays, Labor Department, Lehman Brothers, London, major US indices, Managing Director, Marc Faber, Martin Soong, metal, Mexico, Mohamed El Erian, Mortgage Applications, Moscow, Msci Emerging Markets, Msci Emerging Markets Index, Msci World, Msci World Index, Nasdaq 100, Nasdaq Composite, Nasdaq Composite Index, New York, New York City, New York University, New York University’s Stern School of Business, Newport Beach, Nikki Tait, non-manufacturing, non-manufacturing sector, Northern Trust, Nouriel Roubini, Obama administration, oil, Oil Prices, Oil Sands, Pacific Investment Management Co, Paul Volcker, Peter Schiff, president, Prime Minister, professor, Republican Moderates, Reserve Bank Of Australia, Richard Russell, Risk Appetite, Rogers Holdings, Russell 2000, Russell 2000 Index, Russia, Russian Trading System, S&P 500, Secretary, Sector Leaders, Securities And Exchange Commission, Senate, Senate Democrats, Senior Loan Officer, shadow banking, Shanghai, Small Business Administration, Societe Generale, South Africa, South Korea, Spain, SSE 50, Standard & Poor, Stimulus Package, Straight Weeks, Survey, Switzerland, Technology Sector, Technology Stocks, the Financial Times, The Gloom, the New York Times, Timothy Geithner, Tokyo, Treasury Secretary, United States, Us Federal Reserve, Us Government, Us Treasury, usd, Vice Chairman, Vienna, Vikram Pandit, Vladimir Putin, Wachovia, Wall Street Journal, Warren Buffett, Washington, Washington Mutual, Wen Jiabao, William Pesek, World Economic Forum, World Gold Council, World Trade Organization, Yahoo, Yale University, yellow metal, Youtube, Zimbabwe
Posted in Bonds, Commodities, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, ETFs, Gold, India, Infrastructure, Markets, Oil and Gas, Outlook, Silver, US Stocks | Comments Off

Major hurdles to stimulus

Saturday, February 7th, 2009

This post is a guest contribution by Richard Berner of Morgan Stanley.

Hopes are strong that a combination of timely fiscal stimulus and a fix for the financial system will end the US and global recession and promote recovery. Eventually, we think they will, but there are three major hurdles.

First, only 20% of the $819 billion fiscal stimulus package moving through the Congress will occur in FY2009, much of the spending and tax cut thrust will be deferred into 2010 and 2011, and it would be difficult to accelerate the spending.

Second, any plan to clean up lenders’ balance sheets, mitigate mortgage foreclosures and recapitalize lenders will also take time. Encouragingly, the Fed’s January Survey of Bank Lending Practices suggests that banks stopped tightening their lending standards last month. But credit is still tight. For example, “only” 47.5% of respondents (on a weighted-average basis) reported tightening their mortgage lending standards last month versus 79% in July, and an index of willingness to lend to consumers bounced to -16% from -47.2% in October. But both readings still indicate a bigger credit crunch than any in the survey’s history, and the cumulative impact of past tightening is still working its way through the economy with a lag.

Finally, and reflecting that lag, declining output, prices, and profits are connected in a vicious circle that is unlikely to abate soon. Pricing power is dwindling and margins are shrinking, in turn weakening corporate credit quality, access to credit, and capital spending. Although GDP declined by a less-than-expected 3.8% in the fourth quarter of 2008, the upshot is that we expect the economy to weaken further through the first half of 2009.

One more macro risk keeps us awake at night: Recessions always raise the threat of protectionism, and the threat of barriers to trade and capital flows this time may be especially high. Globalization has knit economies closer in the past two decades, bringing benefits for consumers but pressure on companies and workers in developed markets. Efforts to protect old jobs rather than create new ones would prolong the global recession, hobble productivity and raise the specter of stagflation. Signs of incipient protectionism and trade tensions are rising: Some EM countries have raised employment barriers. Officials in various countries have discussed directing credit from institutions that receive government assistance to domestic borrowers only. The US stimulus package contains Buy American clauses. And US officials are revisiting the question of whether China is manipulating its currency. None of these creates a favorable backdrop for financial markets.

Source: Morgan Stanley, February 5, 2009.

Tags: Awake At Night, Balance Sheets, Barriers To Trade, Berner, China, Congress, Credit Crunch, Credit Quality, Cumulative Impact, Fiscal Stimulus, Fourth Quarter, Global Recession, Hurdles, Morgan Stanley, Mortgage Foreclosures, Mortgage Lending, Protectionism, Recessions, Richard Berner, Stimulus Package, Tax Cut, United States, Upshot, Us Federal Reserve, usd, Vicious Circle
Posted in Credit Markets, Economy, Markets | Comments Off

Video-Rama: Stimulus ad nauseum

Friday, February 6th, 2009

“Stimulus” and “fixing the banks” are the key words dominating this week’s batch of video clips.

Although the mood is decidedly gloomy, if not outright doom, good viewing material was produced. A few of the more interesting clips are shared below, with the likes of Robert Arnott (whose Reseach Affiliates is a business partner), Frederic Mishkin, Julian Robertson, Paul Volcker, Carl Icahn, Nouriel Roubini, Martin Wolf, Ron Paul and Jim Rogers in attendance.

In lighter vein, this week’s compilation kicks off with Stephen Colbert stimulating the psyche in his own unique way.

Colbert Nation: The audacity of nope
“If Republicans can’t have a perfect bill to stimulate the economy, they’d rather have no economy at all.”

Source: Stephen Colbert, Colbert Nation, January 29, 2009.

Morningstar: Arnott – where the investment opportunities are

Source: Morningstar, February 3, 2009.

Bloomberg: Interview with Oppenheimer’s Meredith Whitney

Source: Bloomberg (via YouTube), February 4, 2009.

Bloomberg: Mishkin says US must fix banks for stimulus to succeed
“Former Federal Reserve Governor Frederic Mishkin talks with Bloomberg’s Kathleen Hays about the need to ‘fix’ the US financial system for President Barack Obama’s economic stimulus package to succeed. Mishkin, an economics professor at Columbia University, also discusses the outlook for the US economy, proposals to rescue banks and Fed policy.”

Source: Bloomberg, February 3, 2009.

CNBC: Julian Robertson – how to fix the banking mess
“Hedge fund legend Julian Robertson, chairman of Tiger Management, and David Roche, of Independent Strategy, discuss the best ways to fix the banking mess.”

Source: CNBC, January 30, 2009.

CNBC: Volcker on regulation
“Former Fed Chairman Paul Volcker tells the Senate Banking Committee what he believes needs to be done to modernize the financial regulatory system.”

Source: CNBC, February 4, 2009.

CNBC: Obama & Geithner on executive compensation
“President Barack Obama and Treasury Secretary Tim Getihner discuss executive compensation limits for TARP recipients.”

Source: CNBC, February 4, 2009.

CNBC: Icahn on Wall Street pay caps
“President Obama unveiled new rules to curb executive pay at companies that accepted TARP money. Billionaire investor Carl Icahn and the Fast Money traders discuss.”

Source: CNBC, February 5, 2009.

Bloomberg: Roubini says ECB “wrong”, rate cuts too little, too late
“Nouriel Roubini, professor at New York University’s Stern School of Business, talks with Bloomberg’s Ellen Pinchuk about the global economy and European Central Bank monetary policy.”

Source: Bloomberg, February 4, 2009.

Charlie Rose: A conversation about the World Economic Forum with Martin Wolf

Source: Charlie Rose, February 2, 2009.

Financial Times: Chris Giles on the gloomiest Davos in memory
“FT economic editor Chris Giles explains the lessons from this year’s annual WEF meeting in Davos.”

Source: Financial Times, January, 2009.

CNBC: Odey’s Carn – recession gets global
“Every country is in the same boat with the ongoing global recession and all will be affected, Nick Carn from Odey Asset Management told CNBC Tuesday.”

Source: CNBC, February 3, 2009.

YouTube: Ron Paul at Mises Institute on “End the Fed”

Source: YouTube, January 24, 2009.

CNBC: Blackrock’s Bob Doll on sectors to invest in

Source: CNBC, February 2, 2009.

Bespoke: Bespoke’s Hickey on the January effect

Source: Bespoke, January 30, 2009.

CNBC: Dr. Doom – Asian markets pay you to wait
“Marc Faber, Editor of The Gloom, Boom & Doom Report, feels that the US market at current levels isn’t cheap. Asian markets, on the other hand, are much more value for money – there are stocks that pay you to wait out the recession. He shares his thoughts with CNBC’s Martin Soong.”

Source: CNBC, February 6, 2009.

Financial Times: Lionel Barber profiles Wen Jiabao
Lionel Barber discusses his in-depth interview with Wen Jiabao, dubbed the “mandarins” mandarin. He looks at the Chinese premier’s disagreement with the US over the renminbi, and his plans to boost China’s consumer speding.

Source: Financial Times, February 2, 2009.

CNBC: More stimulus measures for China?
“Following comments from China’s premier Wen Jiabao that more stimulus measures may be needed to boost the economy, Glenn Maguire, Asia Pacific chief economist at Societe Generale tells CNBC’s Martin Soong China’s efforts have so far helped to stabilize some sectors.”

Source: CNBC, February 2, 2009.

Bloomberg: Rogers says Russia may break up
“Jim Rogers, chairman of Rogers Holdings, talks with Bloomberg’s Ellen Pinchuk about the outlook for the Russian economy, the ruble and his investment strategy. Rogers, speaking in Moscow, also discusses the outlook for oil prices and emerging markets.”

Source: Bloomberg, February 5, 2009.

Tags: Asia Pacific, Asia Pacific chief economist, Barack Obama, Blackrock, Bloomberg, Bob Doll, Carl Icahn, chairman, Charlie Rose, Chief Economist, China, Chris Giles, Colbert Nation, Columbia University, David Roche, Davos, Doom, economic editor, Economic Stimulus Package, Economics Professor, editor, Ellen Pinchuk, European Central Bank, Executive, Financial Regulatory System, Financial Times, Frederic Mishkin, Geithner, Glenn Maguire, Governor, Independent Strategy, Jim Rogers, Julian Robertson, Kathleen Hays, Lionel Barber, Marc Faber, Martin Soong, Martin Wolf, Meredith Whitney, Mises Institute, Moscow, New York University, New York University’s Stern School of Business, Nick Carn, Nouriel Roubini, Odey Asset Management, Oil Prices, Paul Volcker, Premier, president, professor, Reseach Affiliates, Robert Arnott, Rogers Holdings, Ron Paul, Russia, S Meredith, Senate Banking Committee, Societe Generale, Stephen Colbert, The Gloom, Tiger Management, Tim Getihner, Treasury Secretary, United States, Us Federal Reserve, Wen Jiabao, World Economic Forum, Youtube
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Bill Gross: Investment Outlook – BEEP BEEP!

Wednesday, February 4th, 2009

Bill Gross, Co-CEO, PIMCO, has published his latest (February) investment outlook, titled BEEP BEEP!

Here are some highlights:

…PIMCO’s thesis for several years has held that the levered global economy long ago morphed from a banking-dominated regime to one that hid behind securitized lending and structures resembling a “shadow banking” system. SIVs, hedge funds, CDOs and increasingly levered mortgage and investment banks fueled asset appreciation in all investment markets, which in turn propelled real economic growth and employment to unsustainable levels. But, with U.S. housing prices as its trigger, the delevering process did a Wile E. Coyote and headed over the cliff in mid-year 2007, dragging down almost all asset prices except government bonds. The real economy followed shortly thereafter, not just in the U.S., but globally, proving that linkages work on the “down” as well as the upside. To PIMCO, the remedy for this deflationary delevering and mini-depression is simple and almost axiomatic: stop the decline in asset prices. If that can be done, the real economy will level out as well. When home prices stop going down, newly created households will be more willing to take a chance on ownership as opposed to renting. If stock prices consolidate, recently burned investors will be more willing to invest, as opposed to stuffing their 401(k) mattresses with Treasury bills. Business investment, jobs, and profits should follow quickly behind.

The simplicity of the solution, however, is not easily achieved once deflationary momentum takes hold. Animal spirits, once dampened, are hard to reignite; “fear of fear itself” dominates greed. Under such circumstances, the benevolent hand of government is required and Keynes is reincarnated in an attempt to plug the dike via fiscal spending and imaginative monetary policies that support asset prices. PIMCO has recently been contracted to assist in several publically announced programs which have helped in that effort: the CPFF, which has benefitted commercial paper yields, and the Federal Reserve’s purchase program for agency-backed mortgage loans, which has lowered 30-year mortgage rates to 4.5% and fostered the affordability of new and secondary housing prices. These two programs, in our opinion, have been the major policy successes to date – not because of our involvement – but because they have supported and increased asset prices whose decline has been the major deflationary thrust behind the real economy. Stop asset prices from going down and with a 12-month lag, unemployment will stop going up, and President Obama’s targeted three million new jobs will have a fighting chance of being achieved.

…Rather, asset prices securitizing commercial real estate and credit card receivables, as well as plain old-fashioned municipal bonds, must stop going down if the real economy has any chance to revive by 2010.

Example: CMBS or commercial real estate mortgage-backed securities are now priced to yield over 12% vs. 5% in recent years. As real estate financing comes due and rolls over in the next few years, it is imperative these yields return to mid-single digits if shopping centers, retail malls, and office buildings are to remain viable. How best to bring those yields down is debatable: another CPFF-like structure with self-insurance and contributed fees as its equity backstop? A generous portion of remaining TARP billions providing a reserve cushion for Federal Reserve funding? A good bank, bad (aggregator) bank structure? All three are being debated by policymakers and we should have clarity within a week’s time. But one thing is certain: an economic recovery is dependent upon commercial real estate prices stabilizing and most retail stores staying open for business in the months and years ahead.

Read the complete newsletter here.

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