Words from the (investment) wise for the week that was (March 3 – 9, 2008)

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The first week of March started off with a deepening credit crisis that appears to have pushed the US economy into recession. This calls to mind the infamous warning to Julius Caesar to beware the “Ides of March” – although referring to March 15 (the date of Caesar’s assassination), the term has come to be used as a metaphor for impending doom.


Richard Russell, 83-year old author of the Dow Theory Letters, remarked: “The end of a costly (for most) and difficult week. … this market has darn near worn me out, and I don’t wear out easily.”

Concerns grew that the Federal Reserve may not be able to prevent the credit slump from worsening and that contagion was spreading into the safest pockets of the US credit universe, leading to further large-scale write-downs but this time of ‘good’ paper. Are the financial problems so vast that we are now in an era of ‘too big to bail’?

Also weighing on markets were the lack of liquidity in the municipal bond and secondary mortgage markets, and the news that mortgage company Thornburg was unable to meet more than half a billion dollars in margin calls and that Amsterdam-listed Carlyle Capital was having similar troubles.

The Fed announced on Friday that in an effort to address “heightened liquidity pressures in term funding markets” it would be increasing its bi-monthly Term Auction Facility (TAF) to $100 billion (from $60 billion) and be providing additional 28-day repos for a further $100 billion.

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 round-up.

Economic and corporate readings during the past week did little to quell investors’ fears, and recession and inflationary concerns remained elevated.

At the top of the list of weaker-than-expected economic reports were non-farm payrolls – reported to have declined by 63,000 positions, marking the biggest decline since March 2003.

Furthermore, home foreclosures in the fourth quarter of 2007 reached their highest level in the history of the Mortgage Bankers Association’s survey. The mortgage delinquency rate was the highest since 1985, pointing to more foreclosure problems ahead.

On a somewhat more positive note, the ISM indexes for the manufacturing and services sectors both checked in a little stronger than expected, although below the 50 mark, which is the dividing line between expansion and contraction.

Summarizing the economic situation, Asha Bangalore of Northern Trust commented as follows: “The details of the February employment report point to a situation comparable to prior recessions, factory sector surveys have been weak, consumer confidence measures have fallen sharply, auto sales in January and February have been discouraging, and housing market data suggest that the bottom is not here yet. The message is that the downside risks to economic growth are growing every day.”

For these reasons, further easing of monetary policy at the FOMC’s meeting on March 18 appears a fait accompli. Following the jobs data on Friday the Fed funds futures market was pricing in a 98% probability of a 75 basis point cut to 2.25% and a 32% chance of a 100 basis point cut to 2%. Speculation that the Fed might step in sooner with an inter-meeting rate cut was rife on Friday.

Elsewhere in the world, inflation worries resulted in the European Central Bank and the Bank of England keeping their benchmark interest rates on hold, and Australia’s Reserve Bank increasing rates by 25 basis points to the highest level in 12 years. In line with the US’s easier monetary policy, Canada’s central bank, on the other hand, cut rates by 50 basis points.



Time (ET)




Briefing Forecast

Market Expects


Mar 3

12:00 AM

Auto Sales





Mar 3

12:00 AM

Truck Sales





Mar 3

10:00 AM

Construction Spending






Mar 3

10:00 AM

ISM Index






Mar 4

12:00 AM

Auto Sales






Mar 4

12:00 AM

Truck Sales






Mar 5

8:15 AM

ADP Employment





Mar 5

8:30 AM







Mar 5

10:00 AM

Factory Orders






Mar 5

10:00 AM

ISM Services






Mar 5

10:30 AM

Crude Inventories






Mar 5

2:00 PM

Fed’s Beige Book

Mar 6

8:30 AM

Initial Claims






Mar 6

10:00 AM

Pending Home Sales




Mar 7

8:30 AM

Nonfarm Payrolls






Mar 7

8:30 AM

Unemployment Rate






Mar 7

8:30 AM

Hourly Earnings






Mar 7

8:30 AM

Average Workweek






Mar 7

3:00 PM

Consumer Credit






Source: Yahoo Finance, March 7, 2008.

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

1. International Trade (Mar 11): The trade deficit is predicted to have widened to $59.5 billion in January from $58.8 billion in December. Consensus: $59.5billion.

2. Retail Sales (Mar 13): Auto sales were nearly steady in February and non-auto retail sales are projected to be soft. Gasoline prices rose in the latter half of February. The headline may show a small gain to reflect the jump in gasoline prices, but excluding autos and gasoline, retail sales should be soft. Consensus: 0.2% versus 0.3% in January; non-auto retail sales: 0.2% versus 0.3% in January.

3. Consumer Price Index (Mar 14) A 0.2% increase in the CPI is predicted for February following a 0.4% gain in January. The core CPI is expected to have moved up 0.2% versus a 0.3% increase in January. Consensus: +0.3%, core CPI +0.2%.

4. Other reports: Inventories, Import prices (Mar 13), Consumer Sentiment Index (Mar14).

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


Source: Wall Street Journal Online, March 9, 2008.

International equity markets were on the receiving end of the latest wave of credit market woes and global stock markets closed the week sharply lower, with the MSCI World Index declining by 3.1%.

The previous week’s top performers, the Japanese Nikkei 225 Average and emerging markets, came under strong selling pressure and lost 6.1% and 4.3% respectively. Individual emerging markets such as India’s BSE 30 Sensex Index (-9.1%) and Hong Kong’s Hang Seng Index (-7.5%) were at the forefront of liquidations.

The US indexes experienced the same fate as global markets during the past week, and also chalked up fairly painful returns for the year to date (given in brackets after the week’s movements), as follows: S&P 500 Index -2.8% ( 11.9%), Dow Jones Industrial Index -3.0% (-10.3%), Nasdaq Composite Index -2.6% (-16.6%) and the Russell 2000 Index -3.8% (-13.8%).

In a repeat from the previous week, US banks (-6.1%) and brokers ( 7.1%) were on the receiving end of the selling orders.

From a technical analysis point of view, all the major US indexes (with the exception of the Dow Jones Transportation Index) breached their January 2008 lows and closed the week at multi-year lows.

Government bonds experienced a great deal of volatility as the week progressed from one announcement to the next. The yields on longer-dated US government bonds were pushed somewhat higher as a result of mounting inflation concerns, whereas the shorter-dated maturities fared better on the expectation of rate cuts.

The US 10-year and 30-year bond yields closed the week 2 and 14 basis points higher respectively, but the two-year yield declined by 13 basis points. This resulted in a spread of 203 basis points between two- and 10-year yields – the widest since June 2004.

The gap between 30-year agency mortgage bonds and 10-year Treasuries increased to 200 basis points, a spread not seen since 1986.

Short-dated government bond yields in Continental Europe were mostly higher as a result of the European Central Bank’s decision not to cut its benchmark rate for the time being.

The past week again saw the US greenback recording lifetime lows on a trade-weighted basis (-0.1%) and against the euro (-1.1%) as market participants focused on grim US economic growth leading to further rate cuts by the Fed.

Rate decisions in Canada, Europe, England and Australia (see “Economy” above) influenced currency movements, but the features of the week were the Japanese yen hitting an eight-year high against the US dollar and the Swiss franc also gaining strongly on the back of risk-aversion flows.

The Dow Jones-AIG Commodity Index, which measures the movement of a basket of 19 different commodities, ended the week with a slight loss of 0.2% after being up 0.5% by mid-week. Contributing to the latter gain was gold’s move to $1,000.10 an ounce on Wednesday and the strengthening of oil prices following OPEC’s decision to leave its production levels unchanged, and an unexpected drawdown in crude inventories.

Oil prices closed at $106.53 on Friday and ended the week up 3.3%. Conversely, gold prices fell back to $979.10 per ounce, which was virtually unchanged from the previous week’s close.

As far as other commodities were concerned, metals scaled new peaks, but soft commodities experienced some profit-taking.

Now for a few news items and some words and graphs from the investment wise that will hopefully assist in guiding us in making correct investment decisions in these troubled times.

Its tough to be a bull


Source: CXO Advisory Group.

Marc Faber (Whiskey and Gunpowder): Plenty of opportunities for nimble traders
“… we have to be mindful that even if the present economic and financial environment doesn’t look particularly enticing … plenty of investment opportunities will present themselves from time to time for the nimble trader and for the long-term investor who will be positioned in the few asset classes that will perform well.

“Moreover, it would be wrong to simply assume that recession and slumping corporate profits will inevitably knock down equity prices. Other factors such as negative real deposit rates and negative real yields on Treasury bonds because of the Fed driving down the Fed Funds rate, a weak dollar, and ‘bubbly’ emerging markets could make US equities a relatively attractive proposition compared to other financial assets.

“With Bernanke at the Fed and Paulson at the Treasury, and a Euro that could face some problems (a breakup, some believe) because of badly deteriorating economic conditions in Italy, Spain, Portugal, and Greece – precious metals are likely to outperform financial assets for some years to come, resulting in the persistent decline of the Dow Jones Industrials/gold ratio.

“As Michael Berry remarked, ‘Gold is no friend to the world’s central bankers. The printing press is their friend.’ In fact, I would be very surprised if the Dow Jones Industrials/gold ratio didn’t decline to between 5 and 10 within the next three years. Therefore, I should like to reiterate my recommendation to accumulate gold.

“Other commodities that could come to life this year are sugar, cotton, natural gas and palladium. Moreover, uranium is unlikely to disappoint the longs. In general, some special situations aside, I am not positive on industrial commodities in a slow growth or recession type of environment.

“Among commodities and currencies, my preferred asset remains physical gold held outside the US, for the simple reason that – depression or inflation – it is very likely to outperform financial assets. For gold, I believe the best is yet to come!”


Source: Marc Faber, Whiskey and Gunpowder, March 4, 2008.

John Authers (Financial Times): What are the markets telling us?
“Let us apply the logic of extremes. Jean-Claude Trichet on Thursday pushed the euro to new unimagined highs against the dollar as he declined to talk down the single currency. He appears set on a starkly divergent path from the Federal Reserve, which is committed to cutting rates to aid growth.

“Meanwhile, commodity prices stayed near record levels, suggesting extreme concern about inflation. And the price of buying insurance against default on the credit market showed that fears for the health of the financial sector, particularly in the US, is at extreme levels.

“Now, let us put the messages from different markets together. The S&P financials was at a new low on Thursday, in dollars. But measure this index in euros and the scale of the collapse in the world’s confidence in the US financial system becomes more apparent. This index has now fallen more than half – 53% – since it peaked in euro terms as long ago as 2001.

“What if gold, close to $1,000 per ounce, is the only true global currency? If we believe that, then it says something interesting about the price of US houses – another asset that can claim to be a store of value.

“In gold terms, US houses have never been as expensive as they were at the beginning of the 1970s when the median house cost more than 700oz gold, according to Tim Lee, of Pi Economics. But they nearly regained that peak in 2001. Their decline since then – even as their prices in dollar terms have gone through the roof – has been precipitous. A US house would now cost you only 220oz of gold. Over history, this price has tended to revert to an mean of about 350oz.

“So, if disparate markets are put together, the US financial industry has lost more than half its value and US housing more than two-thirds of its value since 2001.

“Either the US is on course for disaster or the moves on these markets are overdone.”


Source: John Authers, Financial Times, March 6, 2008

Financial Times: Buffett warns on US recession and dollar
“The US is in recession by ‘any common sense definition’ of the word, the country’s most successful investor said on Monday. Warren Buffett told CNBC that while the US might not have met the formal tests of recession, ‘most people’s situation – certainly their net worth – has been heading south for a while now’.

“Meanwhile, Alan Greenspan, the former Federal Reserve chairman, told the Financial Times that ‘the rate of growth in economic activity is effectively zero’.

“Goldman Sachs said: ‘We expect more and steeper declines’.

“Mr Buffett said stocks were ‘not cheap’. He said the financial markets were experiencing ‘waves of deleveraging’ and warned that the dollar would continue to decline. He said Ben Bernanke, the Fed chairman, had a difficult task balancing the risks to growth and inflation, but said ‘it is nothing like 1973, 1974 yet’.”

Source: Krishna Guha and Michael Mackenzie, Financial Times, March 3, 2008.

Bloomberg: Goldman’s Blankfein says credit-market crisis may be half over
“Goldman Sachs Group Chief Executive Officer Lloyd Blankfein said the credit-market contraction that started with subprime mortgages is at least halfway over.

“‘We’re not in the ninth inning by any means, we’re maybe two-thirds through, a half to two-thirds,’ Blankfein, 53, said today in an interview. ‘I think it will consume our attention for the rest of this year.’

“‘It’s going to be difficult, there’s going to be stress and pain, not just for Wall Street but more importantly for citizens, but it is being worked through,’ Blankfein said. ‘The signs of it are all the attention, the writedowns, the fact that assets are being disposed of’ and sold to ‘more patient capital’.

“The current market decline ‘feels broader and longer and more severe’ than previous declines in his career, Blankfein said. ‘But I caution that almost any crisis that’s been resolved feels like a lesser crisis than any one that’s unresolved.’”

Source: Christine Harper, Bloomberg, March 6, 2008.

Ambrose Evans-Pritchard (Telegraph): The Fed’s rescue has failed
“The verdict is in. The Fed’s emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.

“The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe.

“Last week, the spreads on high-yield US bonds vaulted to 718 basis points. The iTraxx Crossover index measuring corporate default risk in Europe smashed the 600 barrier. We are now far beyond the August spike. Sub-prime debt is plumbing new depths. A-rated securities issued in early 2007 fell to a record 12.72% of face value on Friday. The BBB tier fetched 10.42%. The ‘toxic’ tranches are worthless.

“Why won’t it end? Because US house prices are in free fall. The Case-Shiller index for the 20 biggest cities dropped 9.1% year-on-year in December. The annualised rate of fall was 18% in the fourth quarter, and gathering speed.

“As the graph shows below, US households are only halfway through the tsunami of rate resets – 300 basis points upwards – on teaser loans.


“Contagion is moving up the ladder to prime mortgages, commercial property, home equity loans, car loans, credit cards and student loans. We have not even begun Wave Two: the British, Club Med, East European, and Antipodean house busts.

“As the once unthinkable unfolds, the leaders of global finance dither. The Europeans are frozen in the headlights: trembling before a false inflation; cowed by an atavistic Bundesbank; waiting passively for the Atlantic storm to hit.”

Source: Ambrose Evans-Pritchard, Telegraph, March 4, 2008.

Asha Bangalore (Northern Trust): A financial checkup of households
“The Fed published Flow of Funds data for the fourth quarter of 2007 today. A preliminary reading of data indicates no improvement in the already well known fact that households in the US have a shaky financial status.

“Will households continue to spend? Our prediction is that consumer spending will take a back seat in the months ahead. Evidence of this already available – consumer spending stalled in three out of the last four months. We have to add that the latest financial data support out forecast. Household net worth dropped $533 billion in the fourth quarter, the first decline since the third quarter of 2002. The downward trend of equity prices in January and February and lower home prices in January imply a strong possibility of another quarterly decline in net worth. A major impact of this event is the likely adverse effect on consumer spending.

“In addition, equity in homes has dropped for three straight quarters. The equity households have in their homes was 47.9% in 2007, the lowest on record.


“This financial scorecard of households is not supportive of even moderate growth consumer spending as the economy goes through a recessionary phase.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 6, 2008.

BCA Research: US Consumers – feeling the squeeze
“US consumer spending growth continues to decelerate, but the magnitude of the retrenchment will depend on how well the job market holds up.

“Consumer spending remains highly vulnerable to the headwinds from the deflating housing bubble, soaring energy prices and now even higher food prices. Spending on discretionary items will continue to get squeezed as higher prices for necessary items, like food and energy, act like a tax on discretionary spending. The good news is that more Fed stimulus is in the pipeline, and lower rates should eventually offset some of these headwinds. In the meantime though, concerns about job security and eroding house prices will keep consumers in a cautious mood.”


Source: BCA Research, March 3, 2008.

Bill King (The King Report): What do those not panicking see?
“James Stack of InvestTech Research writes, ‘To find the last time the Fed made two discount rate cuts within 10 days, you have to step all the way back to the financial panic of 1914. One thing is certain; the government entities are running scared. What do they see that has them so panicked?’

“Jim, the question is: What do those not panicking see? … The NYSE closed for 4.5 months in 1914.”

Source: Bill King, The King Report, March 6, 2008.

Financial Times: Bernanke asks banks to ease loan terms
“Ben Bernanke, Federal Reserve chairman, on Tuesday called on banks to forgive chunks of mortgage loans issued to troubled borrowers as pressure grew in Congress for government intervention to resolve the worsening US housing crisis.

“Mr Bernanke’s plan targets home buyers who owe more on their mortgages than their homes are worth. He suggested banks ease terms in such cases to give borrowers more of an incentive to stay in their homes and avoid foreclosure.

“‘Efforts by both government and private sector entities to reduce unnecessary foreclosures are helping but more can, and should, be done,’ Mr Bernanke told a gathering of community bankers in Florida.

“‘The fact that many troubled borrowers have little or no equity suggests that greater use of principal writedowns or short payoffs, perhaps with shared appreciation features, would be in the best interest of both borrowers and lenders.’

“Mr Bernanke’s plan could face criticism that it will place additional strains on mortgage lenders, who are typically reluctant to forgive the principal on loans. It could also lead to criticism that regulators are creating ‘moral hazard’ – bailing out borrowers who have made overly risky purchases. But the Fed chairman’s willingness to tread into this territory shows how policy-makers are considering increasingly drastic measures to tackle the troubles in the housing industry, where Mr Bernanke said ‘delinquencies and foreclosures will continue to rise for a while longer’.”

Source: James Politi, Financial Times, March 4, 2008.

Asha Bangalore (Northern Trust): Will bankers adopt Bernanke’s suggestion?
“Chairman Bernanke’s speech to the Independent Community Bankers of America this morning contained measures to address the current housing market crisis from a new front. In other words, the Fed is attempting to manage the market turmoil by more than easing monetary policy.

“The crux of the subprime mortgage problem is that a vast number of these mortgages are subject to reset at prohibitively higher rates in the months ahead, and holders of these mortgages have little or no equity with every incentive to walk away as house prices continue to decline.

“Consequently, delinquencies and foreclosures will continue to rise with a lower federal funds rate per se being of no immediate assistance to correct the situation. In light of these circumstances, Bernanke suggested that bankers and other mortgage lenders should write down a part of the principal on these mortgages to minimize foreclosures and enable refinancing under new terms.

“The Chairman’s suggestion is essentially to reduce the negative spill over effects of the housing market crisis and contain the adverse effects on the larger macroeconomy. He also added that ‘this arrangement might include a feature that allows the original investor to share in any future appreciation.’

“The implementation of this strategy will be complex but could be worthwhile considering because there are benefits for both the lender and the borrower – the lender is minimizing loss instead of facing a spate of defaults and foreclosures, and the borrower and community are saved from imminent economic disaster. … it is becoming abundantly clear that the housing market crisis and credit crunch has a larger role in the near term path of the economy than the Fed is willing to admit in its forecast about the economy.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 4, 2008.

Asha Bangalore (Northern Trust): Employment report is weak on all fronts
“Payroll employment dropped 63,000 in February following a revised decline of 22,000 in January, previously reported as a loss of 17,000 jobs. The net downward revisions for December and January add up to a loss of 46,000 jobs. On a year-to-year basis, payroll employment rose only 0.6% in February, the smallest gain in four years.


“The FOMC is most likely to lower the federal funds rate 50 bps on March 18. Fed actions announced today, which increased the magnitude of the TAF auctions and extended the term for open market repurchases, are an attempt to address financial market stress. These actions have reduced the possibility of an intermeeting rate cut but we do not rule out intermeeting actions completely given the nature of the turmoil underway.

“The details of the February employment report point to a situation comparable to prior recessions, factory sector surveys have been weak, consumer confidence measures have fallen sharply, auto sales in the January and February have been discouraging, and housing market data suggest that the bottom is not here yet. The message is that the downside risks to economic growth are growing everyday. For this reason, further easing of monetary policy on March 18 or earlier should not be surprising.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 7, 2008.

Stephen Roach (The New York Times): Double bubble trouble
“Amid increasingly turbulent credit markets and ever-weaker reports on the economy, the Federal Reserve has been unusually swift and determined in its lowering of the overnight lending rate. The White House and Congress have moved quickly as well, approving rebates for families and tax breaks for businesses. And more monetary easing from the Fed could well be on the way.

“The central question for the economy is this: Will this medicine work? The same question was asked repeatedly in Japan during its ‘lost decade’ of the 1990s. Unfortunately, as was the case in Japan, the answer may be no.

“If the American economy were entering a standard cyclical downturn, there would be good reason to believe that a timely countercyclical stimulus like that devised by Washington would be effective. But this is not a standard cyclical downturn. It is a post-bubble recession.

“Japan’s experience demonstrates how difficult it may be for traditional policies to ignite recovery after a bubble. In the early 1990s, Japan’s property and stock market bubbles burst. That implosion was worsened by a banking crisis and excess corporate debt. Nearly 20 years later, Japan is still struggling.

“Like their counterparts in Japan in the 1990s, American authorities may be deluding themselves into believing they can forestall the endgame of post-bubble adjustments. Government aid is being aimed, mistakenly, at maintaining unsustainably high rates of personal consumption. Yet that’s precisely what got the United States into this mess in the first place – pushing down the savings rate, fostering a huge trade deficit and stretching consumers to take on an untenable amount of debt.

“A more effective strategy would be to try to tilt the economy away from consumption and toward exports and long-needed investments in infrastructure.”

Source: Stephen Roach, Morgan Stanley Asia (via The New York Times), March 5, 2008.

The Wall Street Journal: Wall Street gears for its new pain – commercial real estate
“After suffering a beating from their exposure to home loans, banks and securities firms are about to take their lumps from office towers, hotels and other commercial real estate. And the losses could last longer than those from the subprime shakeout.

“As the economy wobbles and financing costs rise because of the credit crunch, commercial-real-estate values are starting to slide, with analysts at Goldman Sachs Group projecting a decline of 21% to 26% in the next two years. That means misery for securities firms with exposure to commercial-real-estate loans and commercial- mortgage-backed securities.

“William Tanona, a Goldman analyst, expects total write-downs of $7.2 billion by Bear Stearns, Citigroup, J.P. Morgan, Lehman Brothers, Merrill Lynch and Morgan Stanley in the first quarter. Those firms had combined commercial-real-estate exposure of $141 billion at the end of the fourth quarter.


“A team of Goldman analysts predicts the financial damage from commercial real estate could last as long as two years, which would mean ‘a significantly longer tail than subprime’. That is because only 28% of commercial-real-estate loans have been packaged into securities since 1995, while about 80% of subprime loans have been securitized; the higher level of securitization subjects the subprime assets to more-immediate mark-to-market accounting, which is playing out in the form of the write-downs that are dominating headlines.

“Wall Street has set itself up for a hard fall in commercial real estate. Banks and securities firms are facing exposure from loans and financing commitments made on commercial-real-estate projects, property they own directly and commercial-mortgage-backed securities that no one wants to buy.”

Source: Lingling Wei and Randall Smith, The Wall Street Journal, March 3, 2008.

Bloomberg: Citigroup, banks may need more capital
“Banks and securities firms led by Citigroup may need more money from Arab states as losses stemming from the collapse of the US subprime mortgage market increase, the head of Dubai International Capital said.

“Citigroup, the biggest US bank by assets, received a $7.5 billion cash infusion from Dubai’s neighbor, Abu Dhabi, on Nov. 27 to replenish capital after record mortgage losses destroyed almost half its market value, leading to the departure of Chief Executive Officer Charles ‘Chuck’ Prince III. Citigroup has since received cash from Singapore and Kuwait.

“‘In my view it will take a lot more than that to rescue Citi and other financial institutions,’ Sameer al-Ansari told a private equity conference in Dubai today.

“Abu Dhabi is Citigroup’s largest shareholder, ahead of Los Angeles-based Capital Group and Saudi billionaire Prince Alwaleed bin Talal, data compiled by Bloomberg show.”

Source: Will McSheehy and Matthew Brown, Bloomberg, March 4, 2008.

MarketWatch: US foreclosures hit another record high
“The percentage of mortgages that were in foreclosure hit a record high in the fourth quarter, while mortgage delinquencies rose to a 23-year high, the Mortgage Bankers Association said Thursday. A record 2.04% of US mortgages were somewhere in the foreclosure process at the end of the year, while a record-high 0.83% of loans entered foreclosure in the fourth quarter, the trade group’s quarterly survey found. More homeowners fell behind on payments as well, with 5.82% of loans past due in the quarter. That was the highest delinquency rate since 1983. MBA Chief Economist Doug Duncan said declining home prices were the driving force behind the foreclosure record.”

Source: Steve Kerch, MarketWatch, March 6, 2008.

Bill King (The King Report): Students loans under threat
“SLM Corp, the biggest US educational lender, completed arrangements for $31.3 billion in new 364-day financing that will help the company to keep making student loans. Borrowing short to lend long during stagflation is the prescription for financial disaster.

“And get this: The financing will be in the form of asset-backed commercial paper and term loans … The amount may increase to as much as $34 billion … The company received commitments of funds from Bank of America, JP Morgan Chase, Barclays Capital, Deutsche Bank, Credit Suisse, the Royal Bank of Scotland and UBS …

“This is another ‘daisy-chain’ bailout to prevent further system implosion. Several of the providers of funds have severe crappy paper and capital issues of their own to remedy.”

Source: Bill King, The King Report, March 3, 2008.

Jeffrey Saut (Raymond James): A conversation with Buffett
“We agree with Warren Buffett, ‘It’s an enormously rich country, and we can continue trading it away for a very long time. It’s a powerful machine, and it can take a lot of abuse.’ While it has been 20 years since he made that statement, we think it is as true today as it was then. That’s why we are betting that this government-sponsored economic stimulus package will be like all the other since 1948 and be successful and allow the US to skirt a recession. This morning, however, Mr. Buffett is waxing that the US is already in a recession and that stocks are not cheap. We continue to be opportunistic buyers.”

Source: Jeffrey Saut, Raymond James, March 3, 2008.

BCA Research: US equities – stay globally focused
“We continue to favor globally geared sectors within the US equity market. Amidst the US economic gloom, global growth prospects remain more appealing (especially in the emerging world where structural factors are driving growth).

“Until the US housing headwinds abate and credit markets begin to function properly, equities with earnings leveraged to the domestic economy are likely to remain at risk and underperform their globally geared counterparts.

“Similarly, US large caps and growth stocks (which tend to be globally exposed) remain well positioned to outpace small caps and value stocks in the months ahead on the back of stronger relative earnings conditions. In addition, large caps and growth companies should continue to benefit from the downward adjustment in the US dollar.

“Finally, these holdings have a decent track record of outperforming when US consumer confidence stumbles and risk aversion climbs. Bottom line: Stick with globally geared stocks within the US equity market and steer clear of domestically exposed holdings. Specifically, we like industrials, tech, energy and health care.”


Source: BCA Research, March 6, 2008.

GaveKal: Rising inflation could be bad for stocks
“We should note that in the past when US inflation expectations, as derived from TIPS, broke above +2.6%, equities always sold off aggressively. At this stage, of course, the question has to be how much of this bad news is already reflected in valuations? In stark contrast to the situation in the middle of the TMT bust, US and global equities are by and large already offering relatively attractive valuations. And corporate and municipal bonds are now trading at levels against government bonds that imply that massive bankruptcies are around the corner … which, given the strength of balance sheets today, seems unlikely.

“Nevertheless, as we write, markets are selling off aggressively, reminding us of Charles Gave’s old adage: ‘In a bear market, never do on a Monday what you wish you had done on Friday.’”


Source: GaveKal – Checking the Boxes March 3, 2008.

Puru Saxena Wealth Management: Great prospects for Asia
“Skeptics of the bullish Asian story should take note of the fact that the cash-rich region intends to spend a mind-boggling US$1 trillion on infrastructure projects over the coming year alone! This development will create additional employment in the rural areas and lift hundreds of thousands out of poverty.

“Furthermore, given the great economic prospects of Asia, I find it absurd that the region’s market capitalization (excluding Japan) accounts for less than 10% of the money invested in equities worldwide. Conversely, I find it equally strange that America’s share of the pie comes in at roughly 50%! Call me biased but I believe that in the future, a significant amount of capital will flow out of the US stock market and head towards Asia.”

Source: Puru Saxena – MoneyMatters (via Fullermoney) February 20, 2008.

Financial Times: Flight of cash into money market funds
“Investors are pouring their cash into money market funds at a record rate as they seek a safe harbour from the credit turmoil.

“Money market mutual fund assets rose $19.34 billion to a record $3,428 billion for the week ending February 27, according to the Investment Company Institute. Money market funds have risen from $2,763 billion at the end of August, and $2,399 billion a year ago.

“‘There is a flight to cash and the build-up has been massive and unprecedented,’ said Peter Crane, publisher of the monthly Money Fund Intelligence newsletter.

“A series of Federal Reserve interest rate cuts since September has also prompted investors to move cash into money market funds, as the interest earned from these investments tends to lag the decline in the Fed funds rate.”

Source: Michael Mackenzie and Saskia Scholtes, Financial Times, March 2, 2008.

David Fuller (Fullermoney): Little upside for US dollar
“Regarding the dollar, with US short-term interest rates declining, the economy weak and the Fed printing, I see very little upside other than periodic bouts of short covering within the overall downward trend. The next medium-term recovery for the dollar is unlikely to occur much before the US economy is firming and the Fed indicates that short-term rates will rise. However I would begin to turn bullish of the greenback in the event of multilateral intervention.”

Source: David Fuller, Fullermoney, March 3, 2008.

Ambrose Evans-Pritchard (Telegraph): Hawkish European Central Bank risks central bank fight on rates
“The European Central Bank has dashed hopes for an interest rate cut in the coming months, defying mounting calls for monetary stimulus to head off a sharp slowdown.

“Jean-Claude Trichet, the ECB’s president, brushed off warnings that the soaring euro would lead to a wave of job losses in European industry, insisting the top priority of the bank is to prevent food and energy inflation spilling over into wage demands.

“‘The economic fundamentals are sound. We emphasize that maintaining price stability over the medium term is our prime objective,’ he said.


“Mr Trichet offered no hint of lower rates in coming months despite the darkening economic picture and the unprecedented signs of stress in the eurozone’s Latin bloc, where spreads on government bonds in Italy, Spain, Greece, and Portugal have surged to record levels.”

Source: Ambrose Evans-Pritchard, Telegraph, March 7, 2008.

Reuters: Eurogroup not yet looking at currency market intervention
“Euro zone finance ministers and the European Central Bank did not discuss a currency market intervention at their meeting on Monday, Greek Finance Minister George Alogoskoufis said on Tuesday.

“He noted however, that the ministers and the ECB, who met in the so-called Eurogroup, have become more concerned about exchange rate developments with euro at new highs against the dollar on Monday.

“Asked if there was a discussion of a currency market intervention, Alogoskoufis told reporters: ‘No, no, there was no discussion of that.’”

Source: Jan Strupczewski, Reuters, March 4, 2008.

BCA Research: Bank of England – on hold, but not for long
“The Bank of England (BoE) opted to leave the official Bank Rate unchanged at 5.25%, as expected. However, significant easing can be expected in the months ahead.

“In our opinion, the BoE should take note of the Fed’s mistake and be preemptive in providing stimulus. The real estate fallout in the U.K. could be much more severe than in the U.S. Commercial real estate prices are already contracting on a year-over-year basis and our models warn that house prices will follow later this year, resulting in significant knock-on effects to the economy and banking system.

“While consumer spending has held up so far, our consumption and retail sales models both point to a marked deceleration in the months ahead. In turn, weakening domestic demand should create disinflationary pressures and help alleviate policymakers’ concerns.

“Bottom line: The BoE is behind the curve and will be forced to ease significantly in the months ahead. Stay overweight gilts within a global hedged fixed income portfolio and bearish sterling.”


Source: BCA Research, March 7, 2008.

Bloomberg: Japan’s wages rise at fastest pace in 19 months
“Japan’s wages rose at the fastest pace in 19 months in January, a boost to consumers at a time when the economy’s export-led expansion is set to slow.

“Monthly wages, including overtime and bonuses, climbed 1% from a year earlier, the most since June 2006, the Labor Ministry said in Tokyo today.

“The increase provides relief to households whose confidence is at a four-year low as prices of gasoline, bread and noodles rise. Bank of Japan Governor Toshihiko Fukui said last month that a cycle of higher profits feeding into individual income and spending remains ‘intact’, even after wages fell in 2007. Consumer spending accounts for more than half of the economy.

“‘An upward trend in regular income may be the beginning of a positive story for consumer spending,’ said Kenichi Kawasaki, chief economist at Lehman Brothers Japan Inc. in Tokyo. ‘What matters for consumer spending is not sentiment but wages.’”

Source: Toru Fujioka, Bloomberg, March 3, 2008.

Ambrose Evans-Pritchard (Telegraph): Japan may move to support tumbling dollar
“Pressure is building in Japan for official intervention to cap the surging yen before it triggers a sharp industrial slowdown and tips the country back into slump.

“The currency has appreciated by 19% against the dollar to yen103 since July as Japanese investors retreat from global markets. Foreign hedge funds that borrowed at near zero-rates in Tokyo to chase higher yields abroad are scrambling to unwind ‘carry trade’ positions, estimated at $1.4 trillion in its varied forms.

“Fukoku Life, the giant life assurance company, said it planned to ‘pull out’ of US bonds in preference for Japanese debt, a move underway across the Japanese corporate sector as the US yield advantage vanishes. ‘People are reconsidering the risks (in the US), and see the subprime problems as not being solved at all,’ said Yuuki Sakurai, the group’s finance chief.

“‘It’s starting to look as if the markets may have to start factoring in a dollar worth 100 yen. This March could be very rough,’ said Jujiya Securities.

“The global outlook is becoming increasingly worrying for Japan’s export-geared economy. Vice-finance minister Hiroki Tsuda has refused to confirm or deny Japanese press reports that plans are afoot to cap the yen. ‘We won’t make any comments on interventions. We can only say that we will carefully monitor daily moves,’ he said.

“Often forgotten, Japan is still the biggest creditor nation by far, with net overseas assets of $3,000 billion. Major shifts in strategy by Japanese investors can have huge effects on global markets, all too often catching the rest of the world by surprise.”

Source: Ambrose Evans-Pritchard, Telegraph, March 4, 2008.

BCA Research: Bank of Canada gets aggressive
“A strong currency and a weakening economy are positive for Canadian bonds, even versus hedged global benchmarks.

“The Bank of Canada (BOC) aggressively cut its target rate by 50 basis points, to 3 ½%, in light of what it sees as ‘important downside risks’. Retail sales outside of the volatile autos and gasoline sectors have softened, consumer confidence has dropped sharply, Canadian credit conditions have tightened markedly and real industrial GDP fell by 0.7% (not annualized) in December.

“Moreover, Canadian exports are beginning to contract as the US economy slips into recession. Policymakers correctly argue that an economic decoupling from the US is unlikely. The BOC cannot afford to lag the Fed significantly in the pace of rate cuts because it would place additional upward pressure on the C$, which is again trading above par with the US$. Bottom line: The recent outperformance of Canadian bonds versus global bond benchmarks will continue.”


Source: BCA Research, March 5, 2008.

Yahoo Finance: Zimbabwe currency tumbles
“The Zimbabwe currency tumbled to a record low of 25 million for a single US dollar Wednesday, currency dealers said. With Zimbabwe dollars mostly available in bundles of 100,000 and 200,000 notes, one $100 note bought nearly 20 kilograms (40 pounds) of local notes at the new market rate Wednesday.

“Currency dealers said uncertainties ahead of elections scheduled March 29 and the world’s highest inflation of 100,500% led holders of hard currency to hang on to their money at the same time as the state central bank pumped more local cash into the market for election costs.

“The price of the US currency was also pushed up by central bank buying on the unofficial market to pay for power, gasoline and vehicle imports ahead of the polling, said one black market dealer who could not be identified out of fear of reprisals.

“With industry and production collapsing, Zimbabweans have become heavily dependent on imports of the corn meal staple and basic goods. Until last year, the former regional breadbasket was self sufficient in canned and processed foods, household goods, soap, toothpaste, toiletries and other items now imported from neighbors Malawi, South Africa and Zambia and from as far afield as Egypt, Germany, Iran and Malaysia.”

Source: Angus Shaw, Yahoo Finance, March 5, 2008.

Richard Russell (Dow Theory Letters): Gold – ride the bull
My advice on gold, as it has been all along – ride the bull, and buy more on pull-backs.

“Those holders of gold shares are, in many cases, disappointed. I have preferred buying GDX rather than the individual gold shares. GDX closed at a new high Friday, but it is still lagging bullion. If gold can close above 1,000 and hold above 1,000. I believe we’ll see GDX gather upside momentum. Somewhere ahead the gold shares will separate themselves from the rest of the common stocks and get more in harmony with gold itself.”

Source: Richard Russell, Dow Theory Letters, March 3, 2008.

John Reade (UBS): Gold will plough through $1,000
“John Reade, precious metals analyst at UBS, has substantially raised his short-term targets for the gold price as he believes a different, dominant buying force has entered the market. He expects gold to reach $1,025 an ounce in one month’s time and $1,075 in three months, compared with his previous targets of $850 and $800 respectively.

“‘We have argued regularly that fundamental support for gold lies between $700 and $750,’ he says. ‘Yet gold stubbornly refuses to correct despite occasional periods of dollar strength, crude softness and the waxing and waning of risk appetite.’

“Mr Reade believes that investors and asset managers are turning to the metal as a safe haven against financial market stress and fears of stagflation – evident from the very large volumes of physical investment buying, together with some large-scale transactions.

“‘This is not a table-banging recommendation to buy gold; although the balance of arguments favours a move to the upside, any deterioration in sentiment could trigger profit taking.’”

Source: John Reade, UBS (via Financial Times), March 4, 2008.

Times Online: Buying by Russia and Qatar spurs gold price rise towards $1,000
“Britain accumulated so much gold in its Imperial heyday that the floor of the Bank of England vault is said to have collapsed beneath the weight. More than a century later, the boom in oil and mineral prices has led to another bout of state-driven gold-buying.

“This time, however, the beneficiaries of the oil-price explosion are driving the demand for gold. Research by the World Gold Council shows that Qatar, the gas-rich Gulf state, has been buying about one tonne of gold – worth more than $34 million today – every month for at least the past year.

“Russia, a large producer of oil, gas and metals, has also been hoarding gold. It increased its reserves by 44 tonnes last year, spending more than $1.5 billion, and holds 438 tonnes of gold compared with the 310 tonnes held by the Bank of England.

“Countries such as Russia and Qatar want gold because they are generating huge surpluses from exports of natural resources but do not want to hold them all in US dollars, because the dollar’s value is sliding.

“Most European central banks are selling their gold reserves and the International Monetary Fund (IMF) indicated this week that it, too, may start to sell gold.”

Source: David Robertson, Times Online, March 3, 2008.

MarketWatch: OPEC keeps oil output steady
“Ministers of the Organization of Petroleum Exporting Countries, convening in Vienna as oil prices stubbornly hold above $100 a barrel, decided Wednesday to leave the group’s production levels unchanged.

“The 13-nation cartel said the market was well supplied, pinning the steep run-up in oil prices on the weak US dollar and big bets on energy futures by investors fleeing poor returns in the world’s equities and bonds markets.

“‘The market continues to be well-supplied with crude oil. Commercial oil stocks – crude and products – are in line with the seasonal trend and are expected to remain within their five-year average during the traditionally lower-demand season,’ said Chakib Khelil, president of OPEC and minister of energy and mines in Algeria.

“Crude prices were ‘detached’ from the fundamentals of supply and demand, he said, calling it a ‘disturbing’ development.

“Khelil told reporters in Vienna on Tuesday that a steep economic downturn in the US is slowing economic growth worldwide, a trend that would curb the world’s appetite for oil. Given the weaker demand outlook and already high stockpiles of oil, boosting production did not make sense, he said.”

Source: MarketWatch, March 5, 2008.

Tim Bond (Barclays Capital): Financial system faces commodity-led crisi
“The global economy is facing twin shocks. Natural resource markets are delivering a supply shock of 1970s dimensions, while the financial system is delivering a shock comparable to the bank and thrift crises of the 1988-1993 period. The magnitude of each shock is very different.

“The financial markets require a recapitalization of the banking system, with estimates ranging from $300 billion to $1,000 billion. By contrast, prospective capital requirements in the resource markets dwarf the current needs of the banking system. According to the International Energy Agency, the global energy sector alone needs a real $22,000 billion over the next two decades to meet the anticipated rise in primary energy demand.

“Scarcity is endemic across most commodity markets, as existing capacity has struggled to meet a demand shock from the rapidly developing middle income economies. Historically low stock-to-consumption ratios show how severely the supply-demand imbalance has eaten into the margins of comfort in many – if not most – commodity markets. Global grain inventories, for example, are at 40-year lows, equivalent to just 15-20% of annual demand. Most industrial metal inventories are at a 30-year trough relative to consumption.

“The broad story is of depletion. Most of the easily obtainable resource deposits have already been exploited and most usable agricultural land is already in production. Natural resource discoveries, where they continue to occur, tend to be of a lower quality and are more costly to extract. Meanwhile, the dwindling supply of unutilized land faces competing demands from biodiversity, biofuels and food production.”

Source: Tim Bond, Barclays Capital (via Financial Times), March 5, 2008.

Jim Sinclair (Mineset): Urbanization points to opportunities in commodities
“The percentage of the population living in urban areas (by continent) today and the estimates for 2050 are:


“The message is that Africa and Asia are the most rapidly urbanizing continents. In addition to population growth, Africa is expected to experience a 60% growth in the percentage of urban dwellers by 2050. Of course Asia, by far the most populous continent on earth, will also see its percentage of urban dwellers grow by over 60%.

“By 2050 about 70% of the world’s population of over eight billion will by living in urban areas. This trend is the main reason that we have been pointing out opportunities in energy, gold, base metals and the growth in the developing nations of Asia, Latin America and Eastern Europe.”

Source: Jim Sinclair’s Mineset, March 4, 2008.

Financial Times: Rice prices surge to 20-year high
“Rice prices have surged to a 20-year high in the latest sign of global food inflation, creating policy headaches in Asia where more than 2.5 billion people depend on cheap and abundant supplies of the grain.

“Robert Zeigler, director at the International Rice Research Institute in Manila, said policymakers should be concerned. ‘If history is any indicator, we should be worried because rice shortages have in the past led to civil unrest,’ he said.

“Experts have attributed the surge in rice prices to bad weather that has hit supply; urbanization that has cut the acreage given over to the grain; and strong demand on the back of rapid income growth in China, India and other Asian countries.

“Vichai Sriprasert, honorary chairman of Riceland International, a leading Thai rice trading company, said he expected the price of rice to rise ‘much, much more’.

“Asia, where most of the world’s rice is consumed, has not known famines since the 1970s, and recent price rises for rice and other basic foodstuffs have sparked unrest.”

Source: Javier Blas and Raphael Minder, Financial Times, March 4, 2008.

David Fuller (Fullermoney): Rise in soft commodities could end badly
“There has always been an element of speculation in commodities, which provided additional liquidity and helped the smooth functioning of these markets, more often than not. However they were never intended to be major investment alternatives to shares and bonds. Nevertheless that is what has happened, resulting in a tsunami of money pouring into commodities, exacerbating price rises that were already occurring as a consequence of rapidly increasing demand.

“I fear that this could end badly for the food industry, consumers, the functioning of commodity markets, and for investors. If prices continue to rise, attracting more money to commodity funds and ETFs as could easily be the case, I think the US government will become involved. Their attitude is unlikely to be: OK, you are prudent investors so the mayhem doesn’t matter.

“So what should one do? Tread warily. If / when food prices become a frequent front-page item, the danger signs will be flashing, particularly if commodity market officials and politicians are complaining. Meanwhile, many trends have accelerated. This is an ending signal of unspecified duration and downward dynamics will signal the onset of corrections, as we have so often seen with other markets. If / when investors / speculators in foods take fright, this is likely to spread to other commodities where dramatic price rises have occurred.

“Over the longer term, these markets remain in secular bull trends as demand is rising faster than supply, more often than not.”

Source: David Fuller, Fullermoney, March 6, 2008.

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4 comments to Words from the (investment) wise for the week that was (March 3 – 9, 2008)

  • Words from the investment wise (March 3 – 9, 2008)…

    The first week of March started off with a deepening credit crisis that appears to have pushed the US economy into recession. Read all about this in Prieur du Plessis’s regular weekly blog post, highlighting some thought-provoking news items and quot…

  • PdP: Over 90% of your headlines pertaining to US Economy/ equities are negative. Interesting. I am not sure what it means other than there being a lot bad news out there or that maybe it is discounted. Rates decreases by the Fed are not helping, but this has been obvious ever since the first rate cut back in September. In many respects they are hurting equities as they fuel speculation in gold and oil. In general,higher gold and oil will be a major headwind for equities.

    I have already made the case (see http://www.thetechnicaltake.com) that prices on SP500 and NASDAQ have broken below support levels this past week while market sentiment remains bearish is a bad omen – not always but about 50% of the time. A bounce was expected; it did not materialize. Often times when the market does not do what you expect you should look for an extreme reaction in the opposite direction. All this has me more defensive and will take a less speculative and a more wait and see attitude.

  • Very good interview from Dr. Faber.
    Prieur, Dr. Faber mentioned the derivitive markets melting down in the next 6 months. What do you think would be the catalyst for this?

    With the problems with auction rate sec, commericial paper, etc…I could def see the problems spreading.

    This would trump all other headlines because of the sheer amount of money involved. I read a book from mr. das “traders guns and money” which convinced me that these products at some point will be major problems. The question is when and how bad it could get.

    Having $500 TRILLION in these crazy markets sure does not give me the warm fuzzy.

  • Rick Mayor

    Great wrap-up as usual – really do appreciate this site.

    Keep up the good work!


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