Words from the wise for the week that was (Jan 7 – 13, 2008)

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The past week witnessed mounting uncertainty as investors digested news regarding the ongoing credit market problems and deepening gloom about the global economy. In the words of Richard Russell, author of the 50-year old Dow Theory Letters: “If you’re standing on the railroad track and the train is bearing down on you at 90 miles per hour, don’t stand there trying to decide whether the oncoming train is the ‘Midnight Special’ or the ‘Wabash Cannon Ball’. Just get the hell off the tracks. Which train was coming at you can be determined later – right now that’s not the problem.”

In a speech on Thursday (January 10), Fed Chairman Ben Bernanke acknowledged a weaker economy and the need for further relaxation of monetary policy. He assured the American public at large, that the Fed would “take substantive additional action as needed to support growth and to provide adequate insurance against downside risks”.

However, this was cold comfort for The Street as Stock Trader’s Almanac pointed out that 11 of the last twelve easing periods have proved to be tumultuous times for the markets. It certainly does not inspire confidence when considering that the S&P 500 Index registered its worst performance on record (i.e. since 1950) for the first five trading days of 2008. Also, the fact that the Dow Jones Industrial Index closed below its December closing low (on January 2) and continues to trade below it, points to further weakness. Since 1950, 27 of 29 such occurrences saw continued declines with and average loss of 10.1%, according to Stock Trader’s Almanac.

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance chart.

Philadelphia Fed President Charles Plosser said on Friday (January 11) that the Fed’s biggest worry was potential weakness in consumer spending. Many investors fear that consumer weakness could push the US economy into a recession, a concern exacerbated by overall disappointing retail sales. Rising energy prices, weakening housing markets and slower job growth are all weighing heavily on consumer moods.

The annualized growth rate of the ECRI Weekly Leading Indicator continued on its way down, with Moody’s Economy.com remarking that the trajectory was increasingly looking similar to past periods preceding a recession.

With a barrage of economic data coming from all corners of the world, perhaps the more insightful information was the ECB and BOE decisions to leave their benchmark interest rates unchanged at respectively 4.0% and 5.5%. Although growth in the Eurozone is slowing, inflation remains of greater concern to central bankers than a slowdown in economic activity.

On the other hand, the US seems to be heading towards a half-percentage rate cut at the FOMC’s next meeting on January 30. Fed funds futures indicated an 88% chance of a 50 basis point rate cut, up from the pre-Bernanke speech level of 74%. Goldman Sachs sees three further rate cuts after January of 25 basis points each, bringing the Fed funds rate to 3.0% by mid-year.


DateTime (ET)StatisticForActualBriefing ForecastMarket ExpectsPrior
Jan 810:00 AMPending Home SalesNov-2.6%-0.8%3.7%
Jan 83:00 PMConsumer CreditNov$15.4B$8.0B$8.5B$2.0B
Jan 910:30 AMCrude Inventories01/05-6736KNANA-4056K
Jan 108:30 AMInitial Claims01/05322K345K340K337K
Jan 1010:00 AMWholesale InventoriesNov0.6%0.4%0.4%0.0%
Jan 1010:30 AMCrude Inventories01/05NANA-4056K
Jan 118:30 AMExport Prices ex-ag.Dec0.3%NANA0.9%
Jan 118:30 AMImport Prices ex-oilDec0.3%NANA0.7%
Jan 118:30 AMTrade BalanceNov-$63.1B-$60.0B-$59.5B-$57.8B
Jan 112:00 PMTreasury BudgetDec$48.3B$47.0B$52.0B$42.0B

Source: Yahoo Finance, January 11, 2007.

The next week’s economic highlights, courtesy of Northern Trust, include the following:

Retail Sales (Jan 15) The small increase in auto sales during December (16.26 million vs. 16.19 million in November), soft non-auto retail sales and a drop in gasoline prices will be reflected in steady retail sales headline. There is a possibility of a minus sign in the headline. Consensus: 0.0% vs. +1.2% in November; non-auto retail sales: -0.1% vs. +1.8%.

Producer Price Index (Jan 15) The Producer Price Index for Finished Goods is expected to have fallen 0.1% in December after a 3.2% jump in November. The decline is mostly due to lower energy prices. The core PPI is expected to have risen by 0.1% after a 0.4% increase in November. Consensus: +0.2%, core PPI +0.2%.

Consumer Price Index (Jan 16) A 0.2% increase in the CPI is predicted for December after a 0.8% jump in November. The core CPI is expected to have moved up 0.2% vs. a 0.3% gain in November. The core CPI could show a milder gain because apparel prices tend to drop in a given month after a sharp increase the previous month. The apparel price index rose by 0.8% in November. Consensus: +0.2%, core CPI +0.2%.

Industrial Production (Jan 16) The 0.7% drop in the manufacturing man-hours index for December implies a drop in factory production. If production at the nation’s utilities rose sharply in December after three monthly declines, there could be an overall gain in December. Assuming the absence of a large contribution from utilities, there should be a 0.3% drop in industrial production. The operating rate is projected to have dropped to 81.2%. Consensus: -0.5%; Capacity Utilization: 81.2.

Housing Starts (Jan 17) Permit extensions for new homes fell by 0.7% in November, marking the tenth monthly drop in the last eleven months. This declining trend suggests continued weakness in the construction of new homes. Starts of new homes are predicted to have fallen to an annual rate of 1.05 million in December vs. a 1.187 million mark in the previous month. Consensus: 1.14 million.

Leading Indicators – (Jan 18) Interest rate spread, initial jobless claims, consumer expectations, and the manufacturing workweek made negative contributions. Vendor deliveries, real money supply, and stock prices made positive contributions. The net impact was a steady leading index during December after a 0.4% drop in November. Consensus: –0.1%.

Other reports Business Inventories (Jan 15), Survey of National Home Builders Association, Beige Book (Jan 16), Federal Reserve Bank of Philadelphia’s Factory Survey (Jan 17), and University of Michigan Consumer Sentiment Index (Jan 18).

The performance chart obtained from the Wall Street Journal Online indicates how different global markets fared during the past week.


Source: Wall Street Journal Online, January 13, 2007.

Equities rallied on the back of Bernanke’s assurances, but it did not take long for subprime fears to resurface and most stock markets closed sharply lower on Friday. The MSCI World Index declined by 1.9% during the week, with Japanese stocks (-4.0%) falling to a 26-month low and European stocks (-2.4%) to a 13-month low.

Friday’s sell-off marked the third straight weekly decline for the US stock markets, with the Dow Jones Industrial Index suffering its steepest first-eight-sessions-of-the-year slide in 17 years.

The S&P 600 Small Cap Index (-2.8%) underperformed the larger caps of the S&P 500 Index (-0.8%). Defensive areas that are more resistant to an economic downturn, such as Pharmaceuticals (+3.3%) and Utilities (+1.5%), were among the few sectors registering positive returns for the week.

The depth of the problems faced as a result of the subprime fallout was underscored by Bank of America’s rescue of troubled mortgage lender Countrywide Financial, Merrill’s expected additional $15 billion write-down, and Citigroup’s second capital-raising effort ($14 billion) in as many months.

Government bond yields fell further around the world as the global economic outlook worsened and investors switched stocks to what is perceived to be a safe-haven asset class. However, fears that inflation could become a problem slowed the decline in long-dated maturities.

On the currency front, the US dollar fell somewhat against the euro as expectations of aggressive cuts in US rates increased. Worries about the deteriorating prospects for the UK economy resulted in the British pound hitting a record low against the euro.

The precious metals complex, however, was propelled higher by inflation jitters, with both gold ($898) and platinum ($1 564) recording all-time highs. Silver played catch-up and rose by 7.1% for the week compared with gold’s 3.8% and platinum’s 2.5%.

Base metals and agricultural commodities also performed strongly. A report by the US Department of Agriculture warned of extremely low inventories and pushed wheat prices to an all-time high, corn prices to an 11-year high and soyabean prices to a 34-year high.

Now for a few news items and some words (and graphs) from the investment wise that will hopefully assist to make sense of financial markets’ shenanigans during the week ahead.


Source: Steve Sack, Slate, January 8, 2008.

Moody’s Economy.com: Survey of business confidence for world
“US business confidence fell to a new record low at the start of 2008 and is consistent with recession. Sentiment is stronger elsewhere across the globe, particularly in Asia, although it is down everywhere since the subprime financial shock began this past summer. Expectations regarding the first half of 2008 are especially bleak, plunging to another new low last week. Businesses have also become notably cautious with respect to their inventories and office space needs. Hiring and fixed investment are soft, but holding up better. Pricing pressures have risen with oil prices near $100 per barrel, but remain very subdued compared to the pressures that prevailed during previous oil price spurts.”

Source: Moody’s Economy.com, January 7, 2008.

BCA Research: Global economy – the oil tax
“The surge in oil prices toward the US$100 threshold adds to growth risks for many of the world’s economies. At US$100 per barrel of WTI, the world’s oil bill will approach US$3 trillion, equivalent to roughly 5% of GDP. That would mark a 1% increase compared with last year and comes at a time when growth in the advanced economies is already moderating in response to the US housing collapse and tightening credit conditions. US consumers in particular will feel the pinch, increasing downside risks for the American economy.

“While strong oil demand – especially in China and the Middle East – is contributing to the surge in crude prices, the rising world oil bill is bearish for global growth. This ‘tax’ on growth adds to pressure for major central banks to ease monetary policy. While rising oil prices have temporarily push up headline inflation, the impact of crude on price pressures may already be peaking. Bottom line: High oil prices will require more aggressive stimulus from policymakers in order to support economic growth.”


Source: BCA Research, January 7, 2008.

James Quinn (Telegraph): US recession is already here, warns Merrill
“The US has entered its first full-blown economic recession in 16 years, according to investment bank Merrill Lynch. Merrill, itself one of Wall Street’s biggest casualties of the sub-prime crisis, is the first major bank to declare that a recession in the world’s biggest economy is now underway.

“David Rosenberg, the bank’s chief North American economist, argues that a weakening employment picture and declining retail sales signal the economy has tipped into its first month of recession. Mr Rosenberg, who is well-respected on Wall Street, argues: ‘According to our analysis, this [recession] isn’t even a forecast any more but is a present day reality.’

“His comments are the strongest sign yet that the gloom on Wall Street over the US economy is deepening as the sub-prime mortgage crisis and the credit rout show little sign of easing.

“Mr Rosenberg points to a whole batch of negative data to support his analysis, including the four key barometers used by the National Bureau of Economic Research (NEBR) – employment, real personal income, industrial production, and real sales activity in retail and manufacturing. … he believes that all four of these barometers ‘seem to have peaked around the November-December period, strongly suggesting that we are actually into the first month of a recession.’”

Source: James Quinn, Telegraph, January 8, 2008.

Ambrose Evans-Pritchard (Telegraph): Bush convenes Plunge Protection Team
“Bears beware. The New Deal of 2008 is in the works. The US Treasury is about to shower households with rebate cheques to head off a full-blown slump, and save the Bush presidency. On Friday, Mr Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office. The black arts unit – officially the President’s Working Group on Financial Markets – was created after the 1987 crash.

“It appears to have powers to support the markets in a crisis with a host of instruments, mostly by through buying futures contracts on the stock indexes and key credit levers. And it has the means to fry ‘short’ traders in the hottest of oils.

“The team is led by Treasury chief Hank Paulson, ex-Goldman Sachs, a man with a nose for market psychology, and includes Fed chairman Ben Bernanke and the key exchange regulators.


“Judging by a well-briefed report in the Washington Post, a mood of deep alarm has taken hold in the upper echelons of the administration. ‘What everyone’s looking at is what is the fastest way to get money out there,’ said a Bush aide. Emergency measures are now clearly on the agenda, apparently consisting of a mix of tax cuts for businesses and bungs for consumers.

“‘In terms of any stimulus package, we’re considering all options,’ said Mr Bush. This should be interesting to watch. The president is not one for half measures. He has already shown in Iraq and on biofuels that he will pursue policies a l’outrance once he gets the bit between his teeth.”

Source: Ambrose Evans-Pritchard, Telegraph, January 8, 2008.

Asha Bangalore (Northern Trust): FOMC is ready to ease monetary policy 50 basis points
“Chairman Bernanke was crystal clear about the near term direction of monetary policy when he concluded his remarks with the following: ‘However, in light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary. The Committee will, of course, be carefully evaluating incoming information bearing on the economic outlook. Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.’

“These transparent comments have raised the probability of a 50 bps cut in the federal funds on January 30 to a nearly certain situation and movements in the federal funds futures market reflect this scenario.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 10, 2008.

Reuters: Goldman, JP Morgan sees Fed cutting 50 basis points
“A sputtering job market has convinced economists at key US investment banks that the Federal Reserve will need to resort to a steeper half-percentage point interest rate cut when it meets later this month. Both Goldman Sachs and JP Morgan said on Friday they now see the Fed slashing the benchmark federal funds rate down to 3.75% from the current 4.25%, with Goldman also considering the possibility of an intermeeting move.

“Goldman sees three further rate cuts after January, of 25 basis points each, bringing the fed funds rate to 3.00% by mid-year. JP Morgan expects a 25 basis point rate cut in March. It also revised its growth forecasts – raising fourth-quarter 2007 growth to 2% from 1.5% while lowering first quarter growth to zero from 1%.

“The Fed already has cut the fed funds rate by a full percentage point since mid-September as policy-makers aimed to soften the blow to the US economy of a slumping housing sector and a global tightening of credit conditions.”

Source: Tamawa Kadoya and Pedro Nicolaci da Costa, Reuters, January 4, 2008.

The Wall Street Journal: Paul Kasriel – housing prices to fall sharply
“Northern Trust chief economist Paul Kasriel, recalling the Seinfeld ‘Festivus’ episode, airs some grievances in his latest commentary, particularly noting the ridiculous valuations houses have in relation to consumer income. Between 1980 and 2000, the price of a house averaged about 337% of consumer income, but that rose to 469% in the 2000-2006 period. In order to reestablish the old equilibrium, he notes that housing prices would need to fall 22% – but the median price of an existing home has not declined on a year-over-year basis between 1968 to 2006, ‘so, we are in uncharted waters here,’ he writes.”

Source: David Gaffen, The Wall Street Journal, December 17, 2007.

Bloomberg: Default risk rising strongly
“The risk of companies defaulting rose the most in more than two months this week after US reports showing a slowdown in jobs growth and manufacturing stoked concern that the economy will sink into a recession.

“Defaults may rise almost seven-fold to 2.25 percent this year, analysts at New York-based JPMorgan Chase & Co., the biggest underwriter of high-yield, high-risk corporate bonds last year, said in a report yesterday.

“The US economy is ‘very close’ to recession, ‘if not there already,’ Bill Gross, who manages the world’s largest bond fund as PIMCO’s chief investment officer, said in an interview on Bloomberg Television.”

Source: Kabir Chibber and Shannon D. Harrington, Bloomberg, January 4, 2008.

The Wall Street Journal (via GATA): Citigroup, Merrill seek more foreign capital infusions
“Two of the biggest names on Wall Street are going hat in hand, again, to foreign investors. Citigroup and Merrill Lynch, two companies that just named new chief executives after being burned by the troubles in the US housing market, recently raised billions of dollars from outside investors. Now they are in discussions to get additional infusions of capital from investors, primarily foreign governments.

“Merrill is expected to get $3 billion to $4 billion, much of it from a Middle Eastern government investment fund. Citi could get as much as $10 billion, likely all from foreign governments.

“Such large investments would be the latest sign big banks are undergoing a rapid recapitalization to stabilize their shaky financial foundations. Already, foreign governments have invested about $27 billion in Merrill, Citi, UBS and Morgan Stanley.


“Both Citi and Merrill are scrambling to nail down the details before they report earnings next week that are expected to include additional losses stemming from their exposure to mortgage-related investments. Together, these additional losses could reach as much as $25 billion.”

Source: David Enrich, Randall Smith, and Damian Paletta, The Wall Street Journal (via GATA), January 10, 2008

Bill King (The King Report): Too big to bail
“Our view is that the current financial imbroglio is so massive that ‘too big to fail’ will become ‘too big to bail’. There is no conceivable way to bailout entities that might entail trillions of dollars.”

Source: Bill King, The King Report, January 7, 2008.

Financial Times: Moody’s says spending threatens US rating
“The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moody’s, the credit rating agency, said on Thursday (January 10, 2008).

“The warning over the future of the triple-A rating – granted to US government debt since it was first assessed in 1917 – reflects growing concerns over the country’s ability to retain its financial and economic supremacy.

“Most analysts expect future governments to deal with the costs of healthcare and social security and there is no reflection of any long-term concern about the US financial health in the value of its debt.

“But Moody’s warning comes at a time when US confidence in its economic prowess has been challenged by the rising threat of a recession, a weak dollar and the credit crunch.”

Source: Francesco Guerrera, Aline van Duyn and Daniel Pimlott, Financial Times, January 10, 2008.

John Hussman (Hussman Funds): Minding the hinges on Pandora’s Box
“The stock market is oversold short-term, which invites the potential for a spectacular ‘clearing rally’ of the typical variety – fast, furious, and prone to failure. While such an upward spike might be embraced as some sort of message that the market has ‘fully discounted’ negative conditions and mark a successful ‘test’ of prior lows, the data suggest that underlying market and economic conditions are rapidly deteriorating. In that context, a spectacular short-term rally (particularly a one-day barn burner) could provide a setup for concerted selling. As usual, I have no intention of encouraging investors to depart from well constructed investment plans, but investors should recognize that a 30% market decline is only a standard run-of-the-mill bear. It’s a good idea to evaluate your investment portfolio to ensure you could tolerate that outcome, should it occur, without abandoning your discipline.

“The expectation of oncoming recession may be gaining some amount of sponsorship, but it is still far from the consensus view, and is therefore most probably far from being fully discounted in stock prices. In short, if the potential negatives such as profit margin contraction and credit problems turn out to be only passing, minor events, then it might be true that the market has fully discounted them. However, my impression is that the scope of these problems is likely to be much broader than anticipated at present, and that the combination of worsening outcomes and a growing consensus could result in substantially more weakness than we’ve observed thus far.

“Though P/E multiples have come down a bit, they are still very rich on the basis of normalized profit margins. The notion that rich valuations on record profit margins can be overlooked, and will not be followed by sub-par long-term returns, is a speculative idea that runs counter to all historical evidence.

“On the issue of whether the recent correction removes any further potential for market weakness, Jim Stack of Investech notes that prolonged correction-less periods have generally been resolved by much deeper losses than 10%. At 55 months, the period since 2003 has been the second-longest stretch in 80 years without a 10% correction. The record was the 84-month period during the 1990’s. Though that instance ultimately led to a series of 10-18% corrections between 1997 and 2000 before the market finally dropped in half, the other most prolonged periods (40 months from Oct 1962 – Feb 1966, and 37 months from Jul 1984 – Aug 1987) were followed immediately by full bear markets.”

Source: John Hussman, Hussman Funds, January 7, 2008.

Richard Russell (Dow Theory Letters): Primary stock market trend has turned down
“The operative thesis for investors at this time is that the primary trend has turned down. A bear market is in progress. What does this mean? I’ve outlined this many times before, but here goes again – the position I favor here is cash and gold, a lot of gold. You can buy GLD, you can buy gold coins, and you can also buy GDX, which represents a list of gold mining shares. The important thing is to have a good position in all things golden.

“I don’t know how far this bear market is fated to carry. Nor do I know how long it will last. My advice – be prepared for the worst and hope for the best. To hope costs you nothing, but to be unprepared can cost you much, maybe more than you can imagine at what probably is this early phase of the bear market.

“Through over half a century of experience, I’ve learned to respect bear markets. I don’t trade them, I don’t fade them, I don’t short them – I stay out of them. I’ve learned to stay on the sidelines.”

Source: Richard Russell, Dow Theory Letters, January 9 & 11, 2008.

Bill King (The King Report): Corporate earnings in negative territory
“S&P 500 Q3 y/y earnings growth declined 4.3%. Expectations were +4% at the beginning of Q3. This is the lowest quarterly growth rate for the S&P 500 since Q1 2002.
“What is astounding about the S&P 500 earnings decline is that it’s with 4.9% GDP growth!!! Obviously something is not kosher with that GDP number. And what will happen to earnings in a recession?!”

Source: Bill King, The King Report, January 11, 2008.

Ben Abelson (Resource Investor): Staying afloat in a sea of red
“Anyone who has been paying a lick of attention to the world at large should be rightfully concerned about the health of their financial portfolios. While market watchers loudly proclaim that 2008 will be another ‘strong year’ for domestic equities and mainstream economists downplay the risk of recession, the economic reality observable by the man on the street is quite clearly troubling.

“For anyone who has any industry experience in the mortgage markets or leveraged finance (this correspondent included) it’s quite clear that the excesses of the past several years will take significant time to work off – and will strongly impact the ‘real’ economy in the process.

“While there are certainly some bears rumbling at the periphery, much of the Wall Street selling machine continues to call for ‘double-digit gains’ in 2008, often touting the market’s relatively undervalued P/E ratio. Looking at this one (often useless) measurement alone, however, reveals much to be concerned about. While the market’s backward looking P/E is certainly relatively low, any prognosticator who uses this as a reason to invest is overlooking one crucial point: After normalizing profit margins only to historical averages, the ‘E’ portion of the ratio sinks quite dramatically, making the markets look much less favourable. When one factors in (and extrapolates) the type of losses currently being seen from all major financial institutions these days (which make up approximately 20% of the S&P 500), the picture is considerably more bleak.

“Investment bank economists also continue to tout the ‘underlying’ strength of the domestic economy. But economics isn’t called the ‘dismal science’ without reason. While economic common sense is immensely valuable in explaining how and why individuals and firms make rational business decisions, many economic prognosticators have a woeful track record in predicting future events. Given that the entire field is often predicated on the usage of backward-looking indicators and data – rather than common sense future observations/predictions – this isn’t terribly surprising.”

Source: Ben Abelson, Resource Investor.com, January 7, 2008.

Financial Times: Gold is the new global currency
“There was a time when gold was money. In today’s uncertain world, the yellow metal is back in fashion. Bullion prices rose to a record nominal high after the assassination of Benazir Bhutto in Pakistan added to nervousness about the world economy. Part of gold’s allure is its traditional status as a safe haven. It is seen as a store of value when everything else seems risky. But the bigger drivers behind the rising spot price are a depreciating dollar and the prospect of negative US real interest rates.

“A better way to think of gold may be as central bankers used to before America dropped the gold standard: not as a commodity, but as another currency. As long as the dollar stays weak, gold’s bull run will last.

“The arguments for further gains in the gold price are compelling. It looks cheap, despite climbing from a low of about $250 a troy ounce in 1999, when central banks were selling reserves. The UK’s decision back then to sell 60 per cent of its official holdings looks particularly poor judgment.

Gold is … benefiting from diversification away from equities. Commodities have emerged as a distinct asset class, with billions of dollars poured into exchange traded funds. Physical demand for jewellery may have stalled in Asia, but consumption remains strong in the Middle East. Declining output in South Africa will help support spot prices.

“But it is the relationship between the dollar and the reaction of the world’s central banks to the credit squeeze that some bulls would say really makes gold an attractive bet. The US Federal Reserve’s aggressive, rate-cutting response to the credit squeeze has created a risk of a sharp rise in American inflation. That in turn creates the risk of a precipitous fall in the dollar and so makes gold more attractive as a hedge.

“The world’s major economies have experienced rapid money supply growth of 10 per cent plus per annum in recent years. The Fed remains the world’s biggest holder of gold, yet supplies of the metal are no longer growing annually. If gold is a finite currency, its value against not just the dollar, but sterling and the euro too, should rise.

“Moreover, a sharp decline in US real interest rates – financial markets expect another half percentage point cut this month – means that the low yield on gold matters less. It may have been a poor hedge against inflation in the past but the combination of rising consumer prices and economic stagnation may make it a better store of value.”

Source: Financial Times, January 7, 2008.

Richard Russell (Dow Theory Letters): Gold is a bargain
“What can I buy today at 1979-1980 prices? Russell, you’ve got to be kidding. Everything is much more expensive today. Forget those prices of 1979-1980. Get into reality, man.

“Wait, there is one thing that I can buy today at around 1979-1980 prices. That one thing is gold. Gold today is selling just a bit higher than it sold for back in January 1980. How can that be? Brother, it be. Today you can buy gold for just a few percentages more than gold sold for at its high in January 1980.

“‘Hey Russell, does that mean that gold is a bargain?’ My answer is that I don’t think of gold in terms of it being bargain-priced, I simply think of it as real money that is catching up to the times. I can’t buy the Dow at its 1980 price of 850. Hardly, the Dow is selling at 14 times its 1980 prices. Well then, how is it that gold is still under 900? That’s a long story, but let’s just say that I really don’t know. I do know that gold is underpriced compared with almost anything else. So yeah, when I think about it, yes, gold is a bargain. And I like bargains – particularly when the bargain happens to be real money.”

Source: Richard Russell, Dow Theory Letters, January 10, 2008.

David Fuller (Fullermoney): Gold’s advance may pause for a while
“My only concern at the moment is that everyone is talking about gold, including bullish forecasts aplenty. I think they are right but sentiment is often a contrary indicator so gold’s advance may pause for a while.”

Source: David Fuller, Fullermoney, January 7, 2008.

John Hussman (Hussman Funds): Market climate extremely favorable for precious metals
“In precious metals, the market climate appears extremely favorable, featuring downward yield trends, upward inflation trends (and in combination, a very hostile environment for the US dollar), economic weakness evidenced by a weak ISM Purchasing Managers Index among other factors, and a gold/XAU ratio that is well above 4. This combination of conditions has historically generated an unusually strong return/risk profile for precious metals shares.”

Source: John Hussman, Hussman Funds, January 7, 2008.

GaveKal: Ideal environment for gold
“Gold has been an exceptional play, having risen +36% since mid-August. Of course, this marks the period in which the credit crunch drove the Fed to cut its discount rate, join the ECB in a series of liquidity injections, and begin stepping down the Fed Funds rate. However, these were not the only factors at play. The past six months has provided the ideal environment for gold:

1. Demand from Asia was on the rise;
2. Demand from the Middle East was also on the rise;
3. Real rates around the globe were fairly low;
4. And then came the credit crunch and the housing bust; and
5. Fears of currency debasement have escalated.

“Indeed, when it seems like things cannot get any better, they often do not. And, for example, if China were to really liberalize its capital markets, gold prices could lose a lot of steam. However, until something significant knocks off this surge in demand, it is hard to see gold retreating.”


Source: GaveKal – Checking the Boxes, January 9, 2008.

Financial Post: Forget oil, the new global crisis is food
“A new crisis is emerging, a global food catastrophe that will reach further and be more crippling than anything the world has ever seen. The credit crunch and the reverberations of soaring oil prices around the world will pale in comparison to what is about to transpire, Donald Coxe, global portfolio strategist at BMO Financial Group said …

“‘It’s not a matter of if, but when,’ he warned investors. ‘It’s going to hit this year hard.’

“Mr. Coxe said the sharp rise in raw food prices in the past year will intensify in the next few years amid increased demand for meat and dairy products from the growing middle classes of countries such as China and India as well as heavy demand from the biofuels industry.

“’The greatest challenge to the world is not US$100 oil; it’s getting enough food so that the new middle class can eat the way our middle class does, and that means we’ve got to expand food output dramatically,’ he said.”

Source: Alia McMullen, Financial Post, January 7, 2008.

Richard Spencer (Telegraph): China is quietly revaluing the yuan
“The People’s Bank of China may at last be substantially revaluing its currency – even if officially it has told no-one. Dramatic changes in recent months and especially the last week in the crawling dollar peg the central bank sets for the renminbi (RMB) are leading to big cumulative shifts in its rate.

“The changes this month alone would see a 15%-16% hike on an annualised basis, and markets are starting to estimate that the gain may be as much as 9% over the year. That would bring the total change since the government abandoned the fixed peg in July 2005 to nearly 20%.

“The move may have striking repercussions for a global economy in which China’s currency policies have often come under fire for creating liquidity imbalances, but which is now also fighting the threat of higher prices.

“Most analysts say fear of domestic inflation is the prime reason for a policy change. The consumer prices index rose 6.9% in November, up from 6.5%, despite government hopes that inflation had peaked. It blamed big rises in food prices, but there are also signs that inflation is creeping into the wider economy.”

Source: Richard Spencer, Telegraph, January 9, 2008.

David Fuller (Fullermoney): China’s and India’s stock markets attractive for long term
“I have often referred to China and India as the king and queen of emerging markets, for their current and especially long-term growth potential. China’s A-Share valuations, which the government has gently deflated somewhat since the peak, reflect not only earnings growth but also China’s high savings rate and very limited access to other stock markets. India’s appeal is also earnings growth, which is currently seen as more secure since exports account for only 15% of GDP. In theory, the Indian economy is less susceptible to the US economic slowdown.

“My view is that China’s and India’s stock markets will inevitably be volatile from time to, for all the usual reasons, but remain extremely attractive for the long term. I have no intention of reducing my holdings in these markets but have often said that I prefer to buy following setbacks. Currently, of the two this only applies to China.”

Source: David Fuller, Fullermoney, January 10, 2008.

Bloomberg: Goldman says Japan recession risk at ‘danger level’
“Goldman Sachs cut its economic growth estimate for Japan and said there’s a 50% chance of a recession in the world’s second-largest economy.

“‘The probability of a recession in Japan has risen to the danger level,’ Tetsufumi Yamakawa, chief Japan economist at Goldman, said in a report to clients today. ‘We project weaker- than-expected growth in Japan.’

“The nation’s economy will continue to slow ‘for the time being,’ Bank of Japan Deputy Governor Toshiro Muto said today. The housing slump in the US, which Goldman yesterday said may already be in recession, could prompt overseas investors to sell real estate holdings in Japan, Credit Suisse Group said today.

“Yamakawa cut his 2008 growth estimate to 1 percent from 1.2 percent, citing slower demand from emerging markets. Sluggish spending by consumers has left Japan more dependant on overseas markets, just as cooling US demand threatens to spread to Asia, where Japan sells half its exports.”

Source: Jason Clenfield, Bloomberg.com, January 10, 2008.

BCA Research: Euro area slowdown will continue
“The euro area economy is likely to expand by roughly 1.5% in 2008 versus trend growth of slightly over 2%. Growth in the euro area is starting to downshift rapidly on the back of historically tight monetary conditions.

“Export growth is slowing, business activity and sentiment measures have eroded markedly and our industrial production model warns of a sharp deceleration in the coming months. On the domestic demand front, spending remains lackluster but stable employment conditions and high levels of accumulated savings should prevent a significant deceleration.

“The ECB will be slow to ease but below trend growth should erode inflation pressures in the coming months and help alleviate concerns of policymakers, opening the door to rate cuts by the end of the first half of 2008.”


Source: BCA Research, January 8, 2008.

GaveKal: Europe is heading for a recession
“Last month, we again made the case for a European recession, citing three reasons why we expect Europe to face even bigger economic problems in this coming year than the US, namely:


Cyclical timing is not currently in Europe’s favor: Given that the ECB began tightening in December 2005 and the standard 18-month lag for monetary policy, conditions in Europe should continue to deteriorate this year.


Europe’s real estate market is even more precarious the US’s: Both prices and quantities have gotten much more out of hand in much of Europe than they ever did in the US.


Currency movements do not bode well for European exports: With the euro having risen so sharply against the USD, RMB and yen, the narrowing of the US trade deficit should come at the expense of European exports.

“Today, it seems the cracks are finally starting to show in Europe. France just posted a record trade deficit of -€4.8 billion, as exports dropped by -1.8% in November. And with sales to the US and Asia declining, the French Finance Minister is promising to push for a weaker Euro at next month’s Group of Seven meeting. And she may get support from her German counterpart, as German exports also dropped -0.5% MoM in November, while industrial production fell -0.9% MoM.

“What is perhaps even more telling is the fact that European retail sales have already started to falter. In Germany, for example, retail sales fell -3.2% YoY in November, and then Christmas shopping failed to match last year’s levels. And this comes while the Euro is still extremely strong and labor markets are still relatively tight (German unemployment fell from 8.6% in November to 8.4% in December – this may be high by US standards, but it represents Germany’s lowest reading since 1993.

“We are now evermore convinced that Europe is heading for recession. And to make matters worse, Europe does not excel at making the necessary adjustments at such transition points in the business cycle.

“All in all, we see troubling times ahead for European markets.”

Source: GaveKal – Checking the Boxes, January 10, 2008.

Moody’s Economy.com: UK Halifax Housing Price Index
“Growth in the average house price, as calculated from the mortgage portfolio of HBOS, rose 1.3% (seasonally adjusted) in December, though on a year ago basis, price growth slipped to 5.2%. The monthly figures represent the first positive rate of month-ago growth since August, when prices grew 0.3%. In that month, the year ago rate stood at 11.4%. Overall, the data continue to point to a softening in house-price growth in the UK and follow a downwardly revised contraction of -1.3% m/m in November.”

Source: Moody’s Economy.com, January 8, 2008.

Reuters: UK property development slowdown deepens
“Property development work shrank for a second month in December, posting its biggest fall in at least four years and 9 months as tumbling commercial property values hit builder sentiment, data showed on Friday.

“In a monthly survey, property services firm Savills said commercial developers were also pessimistic on average about the outlook for work in the first three months of 2008, despite last month’s cut in the Bank of England base rate.

“‘While tenant demand has stayed steady, it is evident that the combination of the credit squeeze and falling capital values is affecting developers’ sentiment,’ Mat Oakley, head of Savill’s commercial research, said.”

Source: Paul Bolding, Reuters.com, January 11, 2008.

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