Emerging Markets Radar (August 20, 2012)

Sunday, August 19th, 2012

Emerging Markets Radar (August 20, 2012)

Strengths

• Malaysia’s second quarter GDP accelerated to 5.4 percent year-over-year, higher than the consensus 4.6 percent. CPI for July fell to 1.4 percent from 1.6 percent in June, lower than the consensus 1.6 percent.
• Chinese premier Wen Jiabao said China has more room for stimulus policies since inflation has come down. He also told local business people and government officials in Zhejiang province that the economy is stabilizing.
• China railway investment for the next five months is expected to be about 50 percent higher than the amount invested in the same period last year.

Weaknesses

• Indonesia’s current account deficit widened sharply to $6.9 billion or 3.1 percent of GDP in the second quarter. The Bank of Indonesia (BI), therefore, tightened monetary policy by raising the deposit facility rate by 25 basis points to 4 percent which will push up the interbank borrowing rate. BI also strengthened the loan-to-value ratio to 70 percent for housing and vehicle loans.
• China’s July power demand grew 4.5 percent, lower than the 5.4 percent total demand growth year-to-date. Industrial power demand continued slowing.
• Taiwan’s second quarter GDP contracted 18 basis points, more than the estimate of 16 basis points.

Opportunities

• According to research from ING, the dividend effect on stock outperformance is healthy in emerging Europe and is most prominent among Turkish stocks, some of which pay close to a 10-percent dividend.
• Prior to ex-date, the dividend effect is driven by interest from high-yield equity funds. Post the ex-date, the dividend effect exists due to: 1) cheapness on a P/E basis; and 2) a dividend reinvestment effect into the stock and sector.

• Recovery in Property Transaction Should Improve Cash Flow for Chinese Developers

  The chart below shows July’s housing transactions have picked up on a yearly basis. This will help cash flow for developers, and also reduce inventories. The housing market needs further inventory reduction before new starts can go up.

Threats

• The much hoped for bank reserve ratio reduction by the People’s Bank of China has not arrived. Liquidity tightness in the banking system has affected new loan growth, which will slow the growth recovery of the economy.
• As European policy-makers return from their usual long holiday, the German constitutional court may rule against current transfers.
• Republican and Democratic conventions in the U.S. may reduce the opportunity for compromise on the fiscal cliff.

Tags: Bank Of Indonesia, Basis Points, China Railway, Chinese Premier Wen Jiabao, Current Account Deficit, Dividend Reinvestment, Emerging Europe, Emerging Markets, Equity Funds, Five Months, Housing Market, Interbank, Outperformance, Premier Wen Jiabao, Property Transaction, Quarter Gdp, Value Ratio, Vehicle Loans, Wen Jiabao, Zhejiang Province
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Global Lack of Growth versus Central Banks

Tuesday, July 10th, 2012

It’s been just over a week since the euphoria over Euro fix 19.0 came to light, but as we awake Spanish yields are back over 7% and Italian yields are over 6% – the same levels they were at before “the breakthrough” a week ago Thursday night.  Since zombies have become so popular in our culture, one can parallel the European mess to these creatures of the night – it just cannot be killed.  That said, the market recognizes each time push comes to shove, Germany relents – the main trick is figuring out which periods the market is calmed by this, and which periods the market forgets that.  Of course each “solution” thus far has been little more than papering over the structural issues, but at some point the end game comes.

Meanwhile, the drama in Europe has distracted some from the fact global growth is slowing dramatically.  China joined the central bank cutting party last Thursday, riding shotgun with the Bank of England and the ECB – signaling to some to expect some poor economic data out of the country this week.  Overnight Chinese inflation was released at a paltry 2.2% (the lowest in about 2.5 years) – of course you can believe what you wish about the real number, [Sep 13, 2010: BW - What's China's Real Inflation Rate? (What's China's Real Anything?)] [Nov 12, 2010: Even China Accuses China of Fibbing About Inflation] but the weakness in commodities through much of 2012 signals China has slowed significantly.  ”Reported” inflation was 5.5% as recently as November 2011.  Premier Wen Jiabao was reported as saying downward pressure on the economy is still “relatively large.”  Chinese stocks continue to suffer.

Meanwhile the U.S. economic data continues to stagnate as the ECRI predictions of recessions in latter 2011 look much more probable.  Of course the difference between a statistical recession and what it feels like to the common man can be two worlds.   U.S. markets were hit Friday by a weak labor report but a late day “The Fed is coming!” story out of the WSJ helped lift indexes well off their lows.  For those of bullish conviction this was an excuse to work off a short term overbought condition, and the S&P 500 dipped exactly to its gap up open post Euro summit announcement Friday, which also happened to be very near a 38.2% retracement of the move off the June 26th lows – funny how that works.

Long story short if you were not “in” the market Thursday night ahead of a binary outcome Friday (or no announcement at all out of Europe) there were no gains to be had by the end of day Friday.  The extent of the advance that remained was only that gap up Friday morning.   Go forward pulling back not much more than the 50% retracement (134.20 on SPY) or worse case the 61.8% retracement (133.40 on SPY) of this move off June 26th would be the base cases for bulls.  The latter would fill the entire European summit gap.

After a very heavy few weeks of news, and European headlines the news flow should slow down.  China releases GDP later this week along with other news, and the FOMC speculation should be quiet until next week when Bernanke speaks to Congress.   FOMC minutes are released Wednesday so that could move markets.  Most of the U.S. economic data this week is not market moving.  That said, we now transition to earnings season.  Despite all the hubbub across the globe the past few years, U.S. corporate profits have been able to rebound smartly off their dramatic lows of 2008/early 2009.  But that story is now potentially getting long in the tooth, so the tailwind this provided in 2010 and 2011 might be coming to an end.  More on this in a later post.

Tags: Bank Of England, Central Banks, Chinese Stocks, Common Man, Creatures Of The Night, Downward Pressure, ECB, End Game, Euphoria, Global Growth, Inflation Rate, Last Thursday, Poor Economic Data, Premier Wen Jiabao, Recession, Recessions, Riding Shotgun, Two Worlds, Wen Jiabao, Zombies
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The Economy and Bond Market Cheat Sheet (June 27, 2011)

Sunday, June 26th, 2011

The Economy and Bond Market Cheat Sheet (June 27, 2011)

Bond yields continued to fall this week as concerns surrounding the global economy continue to mount. Three key events unfolded late in the week that appear to be a coordinated global effort to jump start the economy. The EU and Greece have apparently come to an agreement to continue to provide funding to Greece in exchange for additional austerity steps by Greece. The International Energy Agency (IEA) announced the release of 60 million barrels of oil from strategic reserves; it was a surprise move and on the surface is oddly timed as oil peaked in early May. Finally, Chinese Premier Wen Jiabao stated that China’s efforts to curb inflation has worked and inflation is expected to slow, which implies China’s tightening measures are over for the time being. The chart below highlights initial jobless claims, which indicates economic growth and job creation has stalled. Economic data has generally deteriorated in recent months and pressure is on governments to implement additional policies to spur the global economy

Strengths

• Existing home prices in China moderated in May, one of the key factors allowing the government to possibly end its tightening program.
• The IEA announced it will release 60 million barrels of oil, immediately impacting oil prices, which should provide a lift to the consumer.
• Durable goods orders for May rose 1.9 percent, beating expectations and bouncing back from a decline in April.

Weaknesses

• Initial jobless claims rose from 15,000 to 429,000 in the week ended June 18, indicating no improvement in the labor market.
• New home sales fell 2.1 percent in May and existing home sales fell 3.8 percent, hitting a six-month low.
• The Fed revised down their economic growth forecast for 2011 as the economy has been surprisingly slow.

Opportunities

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

Threats

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

Tags: 60 Million, Austerity, Bond Market, Bond Yields, Cheat Sheet, Consumer Durable Goods, Durable Goods Orders, Economic Data, Economic Growth, Existing Home Sales, Global Economy, Global Effort, Iea, inflation, Initial Jobless Claims, International Energy Agency, Job Creation, Oil Prices, Surprise Move, Wen Jiabao
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Emerging Markets Cheat Sheet (June 27, 2011)

Sunday, June 26th, 2011

Emerging Markets Cheat Sheet (June 27, 2011)

Strengths

• Chinese Premier Wen Jiabao said that China’s efforts to stem inflation have worked and that the pace of consumer price increase will slow. The market is interpreting his statement as a potential tightening pause.
• China’s National Development and Reform Commission (NDRC) wants to change or remove local government limits on the number of license plates issued, the National Business Daily reported.
• China’s A-share market valuation reached an 11-month low this week, and it is in a move to form a short-term technical rebound.
• Moody’s upgraded Brazil’s credit rating to BAA2 from BAA3. Large reserves, estimated at $335 billion, should permit Brazil to weather any contagion from the Greek crisis.
• Brazil’s unemployment in May declined to 6.4 percent from 7.5 percent last year, the lowest level on record. Growth in retail wages of 4 percent year-over-year has been supportive of growth in financial intermediation and retail activity.
• Retail sales in Mexico in April grew by 4.9 percent in April, ahead of estimates of 2.7 percent.
• The European Union’s 10 eastern states lead the 27-nation bloc in boosting productivity. This chart from Bloomberg plots the ratio of industrial production and industry labor indexes, a gauge of productivity changes. Industry in Romania produces 84 percent more per employee than it did in 2005, followed by Slovakia and the Baltic countries. By contrast, companies in Greece are less productive than they were six years ago.

Weaknesses

• China’s NDRC says the month of June will see inflation reach the highest level in the last 11 months, and then gradually slow down. Hog prices have reached their highest this week, up 80 percent year-over-year, and pork prices are up 63 percent year over year. Pork prices are expected to continue to rise for the rest of the month.
• China’s Purchasing Manager’s Index (PMI) is in a downward trend, at 50.1 percent for June versus 51.6 percent in May.
• China’s 7-day interbank rate reached 9 percent, reflecting extremely tight liquidity conditions, after recent RRR increases and the expectation for further interest rate increases. China’s monetary tightening this year has slowed the economy and prevented housing prices from dramatic change.
• The La Polar controversy in Chile, related to unauthorized credit activities at the retailer, does not show signs of abating. Following an 80 percent decline in the share price, the stock rebounded by 35 percent in the last two days, prompting an insider trading investigation by the authorities.
• The jobless recovery will make it harder for Central European countries to narrow budget deficits that have ballooned during the crisis, according to Raiffeisen analyst in Prague. Persistent unemployment will cause income-tax revenue to fall short of plan, while welfare spending won’t decline as projected.

Opportunities

• UBS investment research has pointed out that Korean stock market valuation is near a historical bottom. As shown in the chart, implied return on equity is 10.1 percent at the moment, after a market correction of 9 percent in the KOSPI. UBS believes the falling ISM Index and Greek debt crisis have mostly been priced in, and therefore this is a buying opportunity.

• GDP in Colombia in the first quarter grew by 5.1 percent with mining leading the way, up 9.4 percent. Agriculture followed, up 7.8 percent, and commerce, up 6.7 percent. The prospect of lower corporate taxes should be supportive of investment activity in the country.
• The Bogota Stock Exchange is likely to see six to seven IPOs by the end of this year, valued at $3.5 billion. We expect strong demand from investors in this vibrant economy.
• Yesterday, the newly elected president of Peru, Ollanta Humala, indicated he would like to have “strong government that will protect democratic gains of last 10 years and will support investment in Peru’s natural resources.” Mr. Humala will travel to Washington at the beginning of July at the invitation of President Barack Obama, where more clarity on his government program is likely to emerge.
• Global carry trade could finance the current account deficit in Turkey, according to J.P.Morgan. A slowing U.S. economy and the turmoil in Greece mean the rates will likely stay lower for longer, and global fixed-income investors will continue to hunt for yield. And the carry on the lira is one of the highest in the world.

Threats

• China’s industrial production may see a further slowdown. This is the result of credit tightening in China to control housing and consumer goods prices.
• It is still unclear if the merger between Perdigao and Sadia, forming Brasil Foods two years ago, will be allowed to proceed on competitive grounds. The final vote was postponed until mid-July to allow the company to come up with a disposal plan for some of its assets.
• Is the Chairman of ASUR, the airports operator in Mexico, likely to sell his 20 percent stake in the company? The rumor in the local paper has put the stock under pressure this week.
• In Turkey, newly elected Kurdish deputies threatened to boycott the Parliament, creating political tension ahead of the debate on a new constitution and the formation of the new government. The boycott has the potential to upset financial markets.

Tags: Baltic Countries, Brazil, Chinese Premier Wen Jiabao, Contagion, Downward Trend, Eastern States, Emerging Markets, Financial Intermediation, Hog Prices, License Plates, Market Valuation, Month Of June, National Business, Ndrc, Pmi, Pork Prices, Premier Wen Jiabao, Purchasing Manager, Retail Activity, Share Market, Wen Jiabao
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Yuan “Unlikely to Rise,” says Wen

Monday, March 8th, 2010

Three weeks ago I wrote that China was taking advantage of softness in the market t0 ‘talk’ tightening. Despite Jim O’Neill’s assertion that a hike in the currency’s value was imminent, I felt that China was less likely to raise the yuan’s value at present, as it would hamper the recovery of its coveted export sector, and that it would opportunistically continue talking.

New York Times confirms today that China’s bank chief, Wen Jiabao, has officially announced that it is unlikely to so.

BEIJING — China’s central bank governor indicated Saturday that the government was unlikely to detach the value of China’s currency from that of the dollar anytime soon, echoing Prime Minister Wen Jiabao’s statement on Friday that exchange rates would remain “basically stable” for now.

… At a Saturday news conference, the central bank head, Zhou Xiaochuan, said China should be “very cautious” about revaluing its currency, also known as the yuan, as long as major economies remained mired in slow growth.

Translation -  We will continue to take advantage of our doubly cheap currency to  drive recovery of our over-advantaged, over-capacity export sector, at the expense of our trade competitors, and Americans will continue to be able to buy cheap goods at Walmart during this difficult economy – sounds like a win-win.

For much more analysis on China, visit AdvisorAnalyst’s China page.

Tags: Assertion, Bank Chief, Beijing China, Central Bank Governor, Cheap Currency, China, China Currency, China Page, China Visit, Exchange Rates, Export Sector, New York Times, News Conference, O Neill, Prime Minister, S Central, Saturday News, Softness, Walmart, Wen Jiabao, Yuan, Zhou Xiaochuan
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Good Reasons to Buy What China Buys

Saturday, July 25th, 2009

This article is a guest contribution by Kathy Lien, Director, Currency Research, GFT (Global Forex Trading).*

July 24, 2009 – Last week, China reported that their foreign exchange reserves exceeded $2 trillion and it is under this environment that the U.S. and China will begin their Economic and Strategic Dialogue on Monday. As forex traders and investors look for opportunities in the second half of the year, we encourage everyone to buy what China buys. On Tuesday, Premier Wen Jiabao pushed Chinese companies to hasten their “going out strategy” and for the first time ever, he said the government could use foreign exchange reserves to help companies invest abroad. In other words, the Chinese government has basically given domestic firms the political and financial support to go on a spending spree. Although they won’t be spending the entire $2.132 trillion, even 10 percent of that would be substantial. With this mandate from China, we explore what areas of the world and sectors of the global economy could benefit the most from a Chinese shopping spree.

First let’s take a look at what China is importing. Based upon the following table, in 2008, China’s top imports were electrical material and equipment followed by mineral fuel, oil, ores, slag and ash. Commodity imports have seen the strongest growth and with their investments into infrastructure, we expect this trend to continue.

Although the U.S. is China’s number one trade partner, they are not the country’s top import supplier, this title belongs to Japan. However what we think is more important are the countries that have seen the most significant growth in their exports to China. Based upon the tables below, imports from Brazil and Saudi Arabia grew by more than 60 percent while imports from Australia rose 45 percent in 2008. China buys products like crude oil rom Saudi Arabia, iron ore from Brazil and copper from Australia.

Resources

Since China likes to take stakes in companies that meet their resource needs, then we would expect their domestic firms to look for investments in companies that produce electrical machinery, power generation equipment and commodities in countries like Saudi Arabia, Brazil, Australia and even Japan or Germany. So from that perspective, we believe that for currency traders, this would provide opportunities in the Brazil Real, Australian Dollar and Japanese Yen. In terms of resource demand, we also believe that China will increase their holdings of gold. Based upon the World Gold Council’s March 2009 data, China’s gold holdings on an absolute and percentage basis pales in comparison to the holdings of major European nations and the United States. Gold’s share of China’s total forex reserves is only 0.9 percent compared to a share of 76.5 percent in the Eurozone and 78.9 percent in the U.S. On an absolute basis, China owns 1.054 tonnes of gold versus the Eurozone’s 11, 065 tonnes and the U.S.’ 8,133.5 tonnes. If China is seriously worried about the safety of their investments in U.S. dollars, then we strongly believe that they will continue to accumulate gold which would be positive for Australia. China is the world’s largest gold producer so they do not need to import gold from Australia but if gold prices rise, so should the Australian dollar.

China also invests heavily into Africa and we expect this trend to continue. By 2010, China’s business interests in Africa are expected to reach $100 billion. Their investments are in products such as oil, lumber, refining, agriculture, mining, textiles and banking.

China’s aggressive stimulus plan to jumpstart the economy has also been focused on infrastructure projects. Therefore companies that provide basic materials that serve the construction sector will also benefit.

Source: Wikipedia

Consumer Demand

From a consumer demand perspective, a growing middle class has boosted demand for luxury items and technology. Hermes for example reported surprisingly strong earnings in the second quarter. Everyone touted the company’s success to the recession proof part of the population in the U.S. economy but beneath the headlines we see that Hermes biggest success was in Asia. Sales to Asia excluding Japan increased 36.7 percent compared to a 13.5 percent increase in sales in America. In particular, they credited their earnings to growing Chinese demand. The strength of Chinese demand has already been displayed in recent quarterly reports by companies like Intel and Cypress Semiconductors. So we should invest in what Chinese consumers buy.

Buy What China Buys

The sheer size of reserves that China has in its coffers makes for many new investment opportunities. For the individual, it is important to recognize China’s high demand for metals and their interest in technology companies. Furthermore, development in countries like Saudi Arabia and Brazil should create new markets of interest. As a savvy investor, China knows that it pays to diversify and therefore U.S. Treasuries will not be the only thing that China is interested in investing in. The best opportunities in the second half of the year could be to buy what China buys.

Copyright 2009, Kathy Lien – REPRINTED WITH PERMISSION

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Tags: Australia Resources, Brazil, Chinese Companies, Chinese Government, Commodities, Commodity Imports, Crude Oil, Currency Research, Electrical Material, Foreign Exchange Reserves, Forex Traders, Fuel Oil, Global Economy, Global Forex Trading, Iron Ore, oil, Premier Wen Jiabao, Resou, Saudi Arabia, Shopping Spree, Slag, Spending Spree, Top Import, Trade Partner, Trillion, Wen Jiabao
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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

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
Posted in Economy, Emerging Markets, Energy & Natural Resources, Markets, Oil and Gas, Outlook | Comments Off

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

Sunday, January 18th, 2009

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

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

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

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

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

Source: Daryl Cagle

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

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

Source: StockCharts.com

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

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

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

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

Source: Fullermoney

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Daryl Cagle

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

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

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

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

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

Source: Moody’s Economy.com

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

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

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

Source: Yahoo Finance, January 16, 2009.

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

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

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

Click the links below for the following reports:

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

- Wachovia’s Global Chartbook (January 2009)

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

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

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

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

That’s the way it looks from Cape Town.

Source: Daryl Cagle

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

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

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

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

Click here for CNBC video.

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

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

Source: CNBC, January 15, 2009.

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

Click here for full article.

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

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

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

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

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

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

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

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

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

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

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

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

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

Click here for Financial Times article.

Source: Bloomberg, January 13, 2009.

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

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

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

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

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

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

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

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

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

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

Economix (The New York Times): Stimulus pie chart

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: BCA Research, January 14, 2009.

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

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

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

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

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

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

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

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

Source: BBC News, January 13, 2009.

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

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

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

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

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

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

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

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

“Its nothing short of madness …”

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

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

Source: CNBC, January 16, 2009.

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

Source: Bloomberg, January 16, 2009.

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

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

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

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

Source: CEP News, January 12, 2009.

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

Source: Financial Times, January 8, 2009.

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

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

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

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

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

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

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

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

Source: Charlie Rose, January 14, 2009.

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

Source: CNBC, January 15, 2009.

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

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

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

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

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

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

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

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

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

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

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

Source: PRNewswire, January 14, 2009.

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

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

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

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

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

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

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

Source: Bespoke, January 12, 2009.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, January 16, 2009.

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

Source: CNBC, January 12, 2009.

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

Source: CNBC, January 12, 2009.

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

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

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

Source: BCA Research, January 12, 2009.

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

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

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

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

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

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

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

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

Click here for the full article.

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

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

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

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

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

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

Source: CNBC, January 16, 2009.

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

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

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

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

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

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

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

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

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

Source: Bespoke, January 14, 2009.

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

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

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

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

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

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

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

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

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

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

Source: Alaric Nightingale, Bloomberg, January 14 2009.

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

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

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

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

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

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

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

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

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

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

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

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

Source: CEP News, January 13, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Financial Times, January 9, 2009.

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

Sunday, December 28th, 2008

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

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

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

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

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

Source: Daryl Cagle

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, December 22, 2008.

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

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

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

Week’s economic reports

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

Source: Yahoo Finance, December 26, 2008.

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

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

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

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

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

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

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

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

Source: Daryl Cagle

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

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

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

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

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

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

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

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

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

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

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

Source: CNBC, December 22, 2008.

BNN: Conversation with BMO’s strategist Don Coxe

Source: BNN, December 23, 2008.

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

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

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

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

Source: CNBC, December 26, 2008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Fox News, December 16, 2008.

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

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

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

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

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

Click here for the full article.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Marketplace, December 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: CNNMoney.com, December 26, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, December 24, 2008.

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

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

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

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

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

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

Source: Bespoke, December 23, 2008.

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

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

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

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

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

Source: Bespoke, December 22, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: CNBC, December 23, 2008.

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

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

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

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

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

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

Source: Commodity Online, December 27, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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