Words from the wise for the week that was (Oct 22 to 28, 2007)
This week’s report has been compiled on airplanes and in airport lounges spanning New Orleans, Washington, Johannesburg and Cape Town. And similar to the turbulence experienced on some of my flights back home, financial markets have also had a real rollercoaster ride.
Before highlighting some thought-provoking quotes from market commentators during the past week, let’s briefly review the markets’ actions on the basis of economic statistics and a few performance charts.
After the housing report, a 25 basis point rate cut at the FOMC’s meeting next week became fully priced into the market, and talk moved to the possibility of a more drastic 50 basis point reduction. Canadian-based BCA Research put it as follows: “Credit markets are not yet out of the woods, which will keep the Fed biased toward easing.”
The pertinent question for investors is: what are the chances of the US economy going into a recession (i.e. two consecutive quarters of negative GDP growth) over the next few months? (Also see my recent posting entitled “Does the Big R (= recession) lie in store for the US?”)
WEEK’S ECONOMIC REPORTS
Source: Gold Seeker Weekly Wrap-Up, October 27, 2007.
This week’s economic highlights include Consumer Confidence on Tuesday, GDP, the Chain Deflator, Employment Cost Index, Chicago PMI, Construction Spending, and the FOMC policy statement on Wednesday, Personal Income and Spending, Core PCE Inflation, Initial Jobless Claims, the ISM Index, and Pending Home Sales on Thursday, and Factory Orders and October’s jobs data on Friday.
Global stock markets
Mature and emerging stock markets alike registered gains for the week as a whole, with the Japanese Nikkei Average and the Shanghai Composite Index being the only exceptions. The star performer, however, was the Indian BSE 30 Sensex Index which recorded a new all-time high after advancing by 9.6% during the week.
Global fixed-interest and currency markets
The US dollar Index fell to a new record low as more poor economic data supported the view that the Fed will cut interest rates by at least 25 basis points next week.
The rise in the oil price, together with a declining dollar, boosted gold as investors again focused on flight-to-quality issues. Silver, having lagged gold and platinum for a while, played catch-up with a 4.7% gain for the week.
As was the case last week, industrial and agricultural commodities were mixed as investors weighed up the positive effect of a plunging dollar against the negative implications of weaker economic growth.
Now for some words (and pictures) from the investment wise to help navigate through the markets’ cross-currents.
Doug Casey: Larry Lindsey’s unbelievably candid speech
“After his speech, I had a chance to talk to him one on one before the rest of the thundering hordes arrived. The most interesting point of all was that he said he was a ‘gold bull’ because of all the inflation in the system. He said that twice, with no solicitation from me, although we had been discussing gold market price management prior to that. I’m sorry that you weren’t there to have heard all this for yourself, as it was an ‘Alice in Wonderland’ experience. He confirmed every reason that I have given as to why you should be out of equities and bonds, and into gold …”
Source: Doug Casey, Casey’s Daily Resource Plus, October 25, 2007.
Asha Bangalore (Northern Trust): Recessionary periods ahead?
Source: Asha Bangalore, Northern Trust, October 23, 2007.
BCA Research: Credit markets – not yet out of the woods
“Investors are also skeptical that Wall Street’s $100 billion “superfund”, designed to avoid forced asset sales by Special Investment Vehicles (SIVs), will help the situation much. Until housing bottoms, there is no respite for subprime-related debt. Bottom line: Credit markets are not yet out of the woods, which will keep the Fed biased toward easing.”
Source: BCA Research, October 22, 2007.
John Mauldin: The $100 billion Superfund to the rescue?
“Mike Shedlock came up with the great line that the Superfund is really a fund that allows the banks to postpone marking to market. Don’t ask what the paper is worth, and don’t sell it so we don’t have to mark down our own paper.
“… the Superfund puts a bottom price to the market. Pardon me for being cynical, but I bet that $.94 plus a 4% note is a mark-down the big banks can live with. It also is an opportunity to make a nice profit on holding the good children to maturity. The Superfund does not solve the problem of what to do with the subprime debt. Those losses are going to find their way onto the balance sheets of the banks eventually. But what it does do is buy time. Instead of having to take all that debt (both good and bad) from day one, it strings things out.”
Source: John Mauldin, Thoughts from the Frontline, October 19, 2007.
Jeremy Grantham (GMO): US house prices will decline
“As for Bernanke, in October 2005 he claimed that advancing house prices merely ‘reflected strong economic fundamentals.’ Also in 2005 and slightly less cavalierly (but only slightly), he said on CNBC, according to The Economist, ‘We’ve never had a decline in housing prices on a nationwide basis. What I think is more likely is that house prices will slow, maybe stabilize.’ Look at the Exhibit for a second. The market was deep into a 40-year (2-standard deviation) bubble based simply on a long and relatively reliable price series and its volatility. What was he thinking? Do he and his assistants not look at long-term prices, or has the mean-reverting nature of house prices not yet revealed itself?”
Source: Jeremy Grantham, GMO’s Quarterly Letter, October 2007.
Bloomberg: Merrill Lynch Reports Loss on $8.4 billion writedown
“Merrill fell as much as 3.1 percent in New York trading and now ranks as this year’s worst performer among the five largest investment banks, after O’Neal misjudged the severity of the decline in the credit markets since July. Investors who lauded the 56-year-old CEO for chasing higher returns now question his management as the firm became the biggest underwriter of debt securities backed by subprime loans.
“’We’re very disappointed,’ said Rose Grant, who helps manage about $2 billion at Eastern Investment Advisors in Boston, including Merrill shares. ‘I don’t think Stan O’Neal will step down, but you do have to look at top management and wonder why they didn’t know the extent of this loss.’”
Source: Bradley Keoun, Bloomberg, October 24, 2007.
Eoin Treacy (Fullermoney): Banking losses bigger than expected
Source: Eoin Treacy, Fullermoney, October 24, 2007.
Wall Street Journal: China’s hand for Bear
“Citic, one of China’s largest investment banks, and Bear, the New York securities firm known best for its bond operations, plan to fuse their Asian businesses outside of mainland China, creating a more broad-ranging footprint. How much access the joint venture will have to business within mainland China is yet unclear. As part of the newly minted Citic alliance, the 84-year-old Bear now has a crack at one of the fastest-growing underwriting and trading markets in the world, Asia.
“The tie-up is the latest sign of China’s growing ambitions in global financial markets, one outgrowth of the country’s fast-developing economy and efforts by Beijing to create world-class competitors in various industries.”
Source: Kate Kelly and James T. Areddy, The Wall Street Journal, October 23, 2007.
David Fuller (Fullermoney): Banks hold key to rest of markets
“That said, I would be very surprised if many of the broader stock market indices retested their August lows anytime soon.”
Source: David Fuller, Fullermoney, October 22, 2007.
Edward Tapamor (Resource Investor): $100 oil, here we come!
“What is more prescient is the question of what news is there now that can bring the price down? What can move crude oil back to the levels where ordinary folk can feel comfortable and secure? The answer at the moment is nothing”.
Source: Edward Tapamor, Resource Investor, October 19, 2007.
Gavekal: Will Chinese growth to keep driving commodities prices higher?
Source: GaveKal Checking the Boxes, GaveKal Research, October 25, 2007.
Dennis Gartman: Disclosure of US gold lending, swaps
“Last week James Turk, one of GATA’s leading lights and a gentleman whose work ethic and tenacity we have come to admire over the years, wrote that: ‘… the US Treasury quietly made a subtle change to its weekly reports of the US International Reserve Position, which includes the US Gold Reserve. This change was first made May 14. It says the US Gold Reserve is 261.499 million ounces and importantly, that the gold is now reported ‘including gold deposits, and, if appropriate, gold swapped.’ This description provides clear evidence that the US Gold Reserve is in play. Gold has been removed from US Treasury vaults and placed on deposit, presumably in the couple of bullion banks the Treasury has selected to assist with its gold price-capping efforts. Gold placed on deposit gets loaned out by these bullion banks, and then sold into the spot market to try capping the gold price.’
[The gold price’s rise against this backdrop] “… is enormously bullish news of gold.”
Source: Dennis Gartman, The Gartman Letter, October 22, 2007.
BCA Research: Agriculture – structurally bullish
“Furthermore, water scarcity will be increasingly problematic. First, water availability is relatively scarce in China (water resources per capita are 25% of the world average). Second, water pollution is widespread, with 44% of Chinese rivers classified as polluted. Third, demand for water increases dramatically as meat consumption increases. The net result of the above two phenomena is dangerously low inventories of agricultural products.”
Source: BCA Research, October 22, 2007.
Mark Mobius (Templeton Asset Management): Outlook for emerging markets
Source: FT.com, October 2007.
GaveKal Research: Hong Kong – H-shares versus A-Shares
Source: GaveKal Checking the Boxes, GaveKal Research, October 24, 2007.
BCA Research: Valuations of Chinese stocks resemble Japan of 1980s
Source: BCA Research, October 23, 2007.
MarketWatch: Paulson keeps up pressure on China’s yuan
“Facing pressure from manufacturers and labor groups, the US and other countries have been pressuring China to let its currency rise in value. Paulson said that hastening the appreciation of the yuan ‘will help China deal with the imbalances that have grown in the economy and make monetary policy much more effective in responding to inflation.’ ‘Currency appreciation to date has not slowed the Chinese economy,’ Paulson said.”
Robert Schroeder, Market Watch, October 23, 2007.
Bloomberg: Jim Rogers Shifts Assets Out of Dollar to Buy Yuan
Rogers … said he expects the Chinese currency to quadruple in the next decade and that he is holding on to commodities such as platinum, gold, silver, and palladium. ‘It’s the official policy of the central bank and the U.S. to debase the currency,’ said Rogers, a former partner of George Soros.
The Chinese currency, known as the renminbi, or yuan, is ‘the best currency to buy right now,’ Rogers said. ‘I don’t see how one can really lose on the renminbi in the next decade or so. It’s gotta go. It’s gotta triple. It’s gotta quadruple.’ Rogers also is buying Swiss francs and Japanese yen, which he said have been ‘pounded down’ because of the so-called carry trades.
The bull markets in bonds and stocks are ‘over,’ he said. ‘Bonds will be a terrible place to be for many years and will in fact be going down for many years.’ Rogers said he remains bullish on commodities because ‘that’s where the big fortunes are going to be made in the world in the next five, or 10 or 15 years. The current bull market is going to last until sometime between 2014 and 2022.’
Platinum, gold, silver and palladium will ‘be much, much higher during the course of the bull market,’ he said. He added, ‘I think I’m going to make more money in agriculture than I make in precious metals.’
Source: Marcel van de Hoef and Danielle Rossingh, Bloomberg, October 24, 2007.
Richard Duncan: Flaws in the dollar standard
Source: Richard Duncan, FinanceAsia, September 2007.
John Hussman: Treasuries are significantly overbought
Souces: John Hussman, Hussman Funds, October 22, 2007.
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