Words from the (investment) wise for the week that was (August 18 – 24, 2008)

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As I am traveling at the moment (see “Gone fishing – in Ireland”), this week’s edition of “Words from the Wise” does not provide the customary review of the financial markets’ movements and economic statistics. However, I have been able to put together the section on interesting news items and quotes from market commentators before embarking on a long-haul flight from Cape Town to Dublin (via Johannesburg and Frankfurt).

Firstly, a very topical quote about the economic situation: “The national budget must be balanced. The public debt must be reduced; the arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced if the nation doesn’t want to go bankrupt. People must again learn to work, instead of living on public assistance.”

Take a guess who said this? Bernanke? Paulson? Somebody from Congress? Wrong! The credit goes to … wait for it … Cicero, who issued this warning in 55 BC! (Hat tip: Jim Sinclair’s MineSet.) If only we would learn from the lessons from history!

Next, a tag cloud of the text of all the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. As the saying goes: A picture paints a thousand words …


Economic reports


Time (ET)




Briefing Forecast

Market Expects


Aug 19

8:30 AM

Core PPI






Aug 19

8:30 AM







Aug 19

8:30 AM

Building Permits






Aug 19

8:30 AM

Core PPI





Aug 19

8:30 AM

Housing Starts






Aug 19

8:30 AM






Aug 20

10:35 AM

Crude Inventories






Aug 21

8:30 AM

Initial Claims






Aug 21

10:00 AM

Leading Indicators






Aug 21

10:00 AM

Philadelphia Fed






Source: Yahoo Finance, August 22, 2008.

In addition to the FOMC releasing the minutes of its August 5 meeting, next week’s economic highlights in the US, courtesy of Northern Trust, include the following:

1. Existing Sales (August 25): Sales of existing homes are predicted to have risen in July (market consensus) after a 2.6% drop in June. The elevated inventory of unsold homes does not support this forecast. Consensus: 4.94 million versus 4.86 million in June.

2. New Home Sales (August 26): Sales of new homes fell by 0.6% in June. A larger drop is likely in July, given the large number of unsold new homes. The market consensus is a small decline again. Consensus: 525,000 versus 530,000 in June.

3. Durable Goods Orders (August 27): Durable goods orders (+0.5%) are expected to show an increase mainly due to aircraft orders which fell sharply in April and June and posted a small gain in May. Bookings of defense items probably fell after two monthly gains. Orders of non-defense capital goods excluding aircraft may have dropped in July. Consensus: 0.1% versus +0.8% in June.

4. Real GDP (August 28): An upward revision of real GDP growth for the second quarter is expected (2.5% versus 1.9% advance estimate). A narrowing of the trade gap in June is the primary reason for the upward revision. This report will contain corporate profits which have dropped in five of the last six quarters. Consensus: 2.7%.

5. Personal Income and Spending (August 29): The earnings and payroll numbers for August point to only a small decline in personal income (-0.1%). Auto sales fell to annual rate of 12.55 million from 13.7 million in June. Non-auto retail sales have been soft. Inflation-adjusted consumer spending is predicted to have declined again after a 0.2% drop in June. Consensus: Personal income -0.1%, nominal consumer spending +0.1%

6. Other reports: Consumer Confidence (August 26), Consumer Sentiment Index and Chicago PMI (August 29).

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

A summary of the release dates of economic reports in the UK, Eurozone, Japan and China is provided here. It is important to keep an eye on growth trends in these economies for clues on, among others, which way the US dollar is going to move and how strongly.

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


Source: Wall Street Journal Online, August 24, 2008.

There are a vast number of imponderables investors need to deal with in these troubled times, reminding me of Voltaire’s words: “Common sense is not so common.” Hopefully the words and charts from the investment wise below will assist in making profitable investments. But be careful of convicted opinions, err on the side of conservatism and invest/trade lightly.

That’s the way it looks from Cape Town.


Source: Slate

John Authers (Financial Times): Obama vs McCain
“The summer phony war for the US presidency is about to end. What do markets tell us about the race for the White House?

“If the prediction markets run by the University of Iowa and Intrade are right, Barack Obama is the frontrunner, but no “sure thing”. His chances are between 58.4% (Intrade) and 59.6% (Iowa). These odds had been as high as 72.2%.

“National polls suggest the markets are too optimistic about Mr Obama. They show the race narrowing in recent weeks, with John McCain improving. A poll of national polls by pollster.com puts Mr Obama’s lead at 45.2% to 43%. The trend favours Mr McCain.

“But state-by-state surveys favour Mr Obama. By pollster.com’s reckoning, 260 votes in the electoral college are strongly behind him or leaning his way. He needs 270 to win.

“Trends in the ‘battleground’ states favour Mr Obama. In Florida, Mr McCain’s lead is down to 1.4 percentage points, according to pollster.com, having once been as high as 7 percentage points. Strong advances by Mr Obama over the summer have seen him overtake Mr McCain in Ohio and Virginia. The markets’ odds are a best effort to reconcile contradictory signals from national and state polls.

“The elections seem to be all about the economy. Mr McCain’s Intrade chances of winning bottomed on the same day that the S&P 500 bottomed last month. Mr Obama’s chances hit their peak a day after the oil price reached a top.

“Mr McCain’s rise in national polls may be chiefly a reaction to easing pressure on pump prices, an economic variable that is very visible to voters.

“On Thursday crude oil shot back above $120 a barrel as traders took fright at the tension caused by the missile deal between the US and Poland.

“Conventional wisdom has it that added international tension is good for the Republicans. Not if it raises the oil price.”


Source: John Authers, Financial Times, August 21, 2008.

Richard Russell (Dow Theory Letters): On the eve of world deflation
“I believe we are on the eve of world deflation. I pulled out a headline from the August 5 Wall Street Journal headline – ‘INFLATION PACE IS FASTEST IN 17 YEARS’.

“Forget it, this is history – this is not what’s happening in the market. From what I see, the markets are telling us to prepare for hard times, and a global spate of the worst deflation to be seen in generations. This is why gold has been sinking, this is why stocks have been falling – big money, sophisticated money, is cashing out, raising cash, preparing for world deflation. This is probably why Lowry’s Selling Pressure stays at its high, smart money is selling into the stock market, day after day. They’re raising cash in preparation for the hard times when deflation is in the saddle.

“Deflation is ushering in the new strong dollar. Big money sees deflation and the lower rates that go with deflation. Look, if you have five million dollars and you are only receiving 2% in interest on your money, that’s only an income of hundred thousand dollars on your five million. Big money realizes that in a deflation you need a mountain of cash to keep up your lifestyle.

“What I see is a coming world deflation, and I believe that’s the message the markets are sending. What’s the best stance in a deflationary situation? Lots of cash, and safe, solid, investments. Two areas that fit that requirement – US dollars and US Treasury paper. What happens to stocks during deflationary times? They’re sold to raise cash. What happens to business in deflationary times? It’s crushed by ever-lower prices. What happens to the average citizen who’s loaded with debt during deflationary times? They’re battered unmercifully, as income buys less and less and as debt crushes them. What happens to assets during deflationary times? They’re worth less and less and their sale brings in fewer and fewer dollars. Isn’t the price of gold and oil already telling us that?

“I just finished reading The New York Times, Los Angeles Times and Barron’s and there isn’t a hint of what I’m writing about above in any of these publications. Unfortunately, these coming deflationary times will come as a complete surprise to most people.”

Source: Richard Russell, Dow Theory Letters, August 18, 2008.

[Editor: Richard suffered a mild stroke a few days ago. Our thoughts are with him and we wish him a speedy recovery. Richard, we need your wisdom to assist us in these unsettled times!]

David Fuller (Fullermoney): Deflation would allow Fed to pump up money supply
“I think the Fed and other central banks would welcome a deflation scare over the next year or two, not least to recapitalise banks through the yield curve and cushion the housing market. Shades of 2001-2002, widespread deflation fears would enable them to pump up money supply once again, with less risk of igniting wage inflation.

“This would be bullish for Fullermoney themes – precious metals, industrial commodities, agricultural commodities (subject to weather conditions), global infrastructure development and emerging markets – which have weakened during the last year due to deleveraging and recession fears. However, while there will always be opportunities, it would be prudent to recognise that we may be journeying further into the trough of this global economic slowdown, before we really profit from the next upside. Fortunately, stock markets have a history of bottoming months before recessions and slowdowns are judged to have officially ended.”

Source: David Fuller, Fullermoney, August 21, 2008.

Ifo: World Economic Climate Index declines again
“The Ifo World Economic Climate has worsened in the third quarter of 2008 for the fourth time in succession. The decline is primarily the result of more unfavourable assessments of the current economic situation, but also the expectations for the coming six months have been revised downwards.

“The worsening of the Ifo World Economic Climate has affected above all Western Europe and Asia. In North America, however, the indicator has not worsened further. In the US the economic expectations for the coming six months are no longer as pessimistic as in the first half of the year. The current economic situation continues to be assessed unfavourably, however.

“In Western Europe the economic climate indicator has worsened in nearly all countries. Especially the economic expectations for the coming six months have been clearly revised downwards. However, in many countries, the current economic situation is still regarded as favourable, especially in Finland, Austria, Germany and the Netherlands. In contrast, the World Economic Survey (WES) experts gave poor assessments to the economic situation especially in Italy, Spain and the UK.

“The climate indicator fell also in Asia, particularly in India, Malaysia, Taiwan, Thailand, South Korea and the Philippines. In Japan, the climate indicator worsened marginally but remained at a very low level.

“Inflation expectations for 2008 in the US at 3.8% are clearly higher than the price increases for 2007 (2.8%). Also in Western Europe inflation expectations for 2008 at now 3.5% are considerably above inflation registered for 2007 (2.1%). A similar picture was determined for Asia, where inflation expectations for 2008 are nearly three percentage points higher than price increases in 2007 (5.3% vis-à-vis 2.4% in 2007).

“In contrast to the previous survey, the WES experts expect an increase in central bank interest rates. Also long-term interest rates will rise in the coming six months, in their estimation.

“Especially the US dollar and to a lesser extent the Japanese yen continue to be seen as undervalued. The euro is regarded as overvalued. On a world-wide average, WES experts see no further weakening of the US dollar in the coming six months.”


Click here for the full report.

Source: Ifo, August 20, 2008.

Telegraph: Recession fear for half the globe, says Goldman Sachs
“Half the world economy, including the UK, is in recession or on the brink, according to research from Goldman Sachs.

“The investment bank has warned that the world’s major economies, including the US, Japan, the eurozone and the UK, are ‘either in recession or face significant recession in the months ahead’.

“It also raised fears that the slump could have a profound knock-on effect for China, whose thirst for raw materials and consumer products has been propping up many economies. The bank’s international economist Binit Patel warned: ‘Given its importance to world growth in recent years, a world recession would in all likelihood involve a hard landing in China.’

“America, the world’s largest economy, has so far avoided recession – news that has helped the dollar’s recent recovery. However, Goldman warned that the country is now facing a major downturn as the effect of the credit crisis takes its toll, having been delayed for some months by a series of tax cuts and interest rate reductions.

“France and Germany’s economies have shrunk in the second quarter of the year along with Japan’s. Meanwhile, many fear that the UK’s official statistics will soon show the economy shrinking.

“Martin Feldstein, the Harvard University economist and former head of the National Bureau for Economic Research – which determines whether a recession is in place – said he was ‘much more pessimistic than a year ago’.”

Source: Chris Irvine, Telegraph, August 22, 2008.

Asha Bangalore (Northern Trust): Bernanke’s remarks reinforce view that Fed is on hold, for now
“Chairman Bernanke’s comments were largely focused on measures necessary to reduce systemic risk and maintain financial market stability. He made brief remarks about the economy and inflation. Similar to our forecast, the Fed expects prices of oil and other commodities to stabilize in the near term as a result of slower growth in the global economy. Evidence supportive of this view has become available in recent weeks in reports from the Euro-Zone, Japan, and the UK. Inflation expectations, which he mentioned, remain well anchored.

“Bernanke’s remarks implied that the Fed is optimistic about a moderation in inflation in the near term (see excerpt below). The recent rally of the dollar is seen in positive light. The uncertainty about inflation remains justified, while the overall tone of his remarks leaned toward a Fed willing to watch and wait. Hints about movements in the federal funds rate in either direction were entirely absent. The futures market has consistently reduced the probability of a higher federal funds rate.”


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

Bloomberg: Arthur Levitt says Fannie, Freddie should be privatized
“Former US Securities and Exchange Commission Chairman Arthur Levitt talks with Bloomberg about the need for Fannie Mae and Freddie Mac to be privatized, the outlook for possible regional bank failures and the Federal Reserve’s performance in regulating the banking industry. Levitt is a senior adviser to the Carlyle Group and a board member of Bloomberg LP, the parent company of Bloomberg News.”


Source: Bloomberg, August 20, 2008.

John Authers (Financial Times): Fannie and Freddie are back on deathwatch


Click here for the full report.

Source: John Authers, Financial Times, August 19, 2008.M

The New York Times: No end in sight
“A year into the financial crisis, the news is grim and there are signs of even worse troubles ahead. The mortgage bust continues and has begun to spread to loans for construction and commercial property, as well as credit cards and auto loans.

“There may soon be more bank failures and a spate of corporate bankruptcies. That means that unemployment will almost certainly rise – employers have shed nearly half a million jobs this year – and those who keep their jobs will have to cope with fewer hours, measlier raises and evaporating bonuses.

“In an election year, sound policy making is almost always trumped by political posturing, making the situation even bleaker. A case in point is the new foreclosure-prevention law. President Bush threatened for months to veto it, before signing it in July. The law’s main feature – allowing the government to guarantee hundreds of billions of dollars in new mortgages to troubled borrowers – won’t take effect until October 1.

“The law’s other important feature – a contingency plan for a government bailout of Fannie Mae and Freddie Mac, the nation’s biggest mortgage companies – was a last-minute, crisis-driven addition, the opposite of the ahead-of-the-curve action that is now needed.

“The country cannot afford more delay and more posturing. Before the crisis gets any worse, Congress must take several steps.

“Lawmakers need to start crafting the next stimulus bill – without repeating the mistakes of the last one. Composed mainly of tax rebates, as the White House wanted, the first stimulus was too broad to deliver a powerful punch. The next package has to focus on actions that are known to yield big economic benefits: bolstered food stamps, which rapidly boost consumption; and aid to states and cities so they can continue to provide essential services. Lawmakers should also invest in infrastructure projects, like repairing bridges and roads. If not, projects that are already under way may have to be canceled, creating more unemployment.

“Congress also needs to ensure that a $4 billion grant to states and cities to buy up vacant properties is quickly and efficiently distributed. The Department of Housing and Urban Development is developing the formula for allocating the money, and early indications suggest it is on top of the process. But the White House is contemptuous of the grant, calling it a gift to speculators when it is actually a lifeline for ailing communities. That means Congress will have to be especially vigilant.

“Congress also cannot wait to see if its anti-foreclosure measures work. It must begin to vet other ideas and be ready to move quickly if the crisis worsens. Most important, lawmakers should be ready to reform the bankruptcy law so that homeowners can have their mortgages modified under court protection. That is arguably the best way to prevent foreclosures, but it is also the policy most reviled by the mortgage industry. Lawmakers should let the industry know that if lenders are not willing to back the foreclosure prevention effort wholeheartedly – before the government can step in, the law requires that the balances be reduced – they will be seeing the homeowners in bankruptcy court.

“The work doesn’t end there. The Bush administration and federal regulators need to develop a framework for resolving future financial failures before they occur. That is essential for rebuilding confidence in the system.

“Millions of Americans are already suffering. And we fear millions more will be hurt before this crisis ends. They cannot wait until after the election for help.”

Source: The New York Times, August 19, 2008.

The Insititutional Risk Analyst: US bank derivative exposure


Source: The Insitutional Risk Analyst, August 21, 2008.

Bloomberg: CDO default events accelerate with new ‘wave’, JPMorgan says
“Collateralized debt obligations experienced so-called events of defaults at a faster pace in early August, with a commercial-mortgage CDO joining the list, according to JPMorgan.

“Seven mortgage-linked CDOs experienced default events, indicating even the senior-most classes may not be repaid in full, up from 14 for June and July, JPMorgan said in a report yesterday. Monthly additions to the $229 billion of defaults since mid-2007 peaked with 47 in February, the report said.

“‘Unwind fears’, including concern that CDOs will dump their holdings, have pushed asset prices lower, the report said. Typical yields on AAA rated slices of collateralized loan obligations over the London interbank offered rate are at a record 2.25 percentage points, up 1.30 percentage point this year, the report said. Default events, which may lead to liquidations, can be triggered by downgrades on the collateral.”

Source: Jody Shenn, Bloomberg, August 19, 2008.

Bespoke: Credit default risk still elevated
“Below we highlight a one-year chart of the CDX North American Investment Grade Credit Index that measures credit default swap prices for a number of US companies. During the Bear Stearns collapse in mid-March, the default risk index spiked sharply, as investors were forced to pay more to insure debt since uncertainty abounded. After the Bear buyout, default risk declined significantly (although it remained elevated) through early June, and then began rising again as equity markets fell to their lows in mid-July. As the market has rallied off of its July lows, default risk is down, but just slightly.

“The failure for default risk to come in like it did after the March market lows has investors worried that credit markets are still showing negative signs that the market has ignored due to oil’s recent declines and the dollar’s rally.”


Source: Bespoke, August 19, 2008.

Times Online: Credit crunch may take out large US bank warns former IMF chief
“The deepening toll from the global financial crisis could trigger the failure of a large US bank within months, a respected former chief economist of the International Monetary Fund claimed today, fuelling another battering for banking shares.

“Professor Kenneth Rogoff, a leading academic economist, said there was yet worse news to come from the worldwide credit crunch and financial turmoil, particularly in the United States, and that a high-profile casualty among American banks was highly likely.

“‘The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come,’ Prof Rogoff said at a conference in Singapore.

“In an ominous warning, he added: ‘We’re not just going to see mid-sized banks go under in the next few months, we’re going to see a whopper, we’re going to see a big one – one of the big investment banks or big banks,’ he said.

“Rising anxieties over ‘worse to come’ in the credit crisis sent shares tumbling in Europe and Asia.

“Professor Rogoff, who was chief economist at the IMF from 2001 to 2004, predicted that the crisis would foster a new wave of consolidation in the US financial sector before it was over, with mergers between large institutions.

“He also suggested that Fannie Mae and Freddie Mac, the struggling US secondary mortgage lending giants, were likely to cease to exist in their present form within a few years.”

Source: Gary Duncan, Times Online, August 19, 2008.

Financial Times: Libor on the rise amid banking stress
“The key rate at which banks lend to each other in dollars hit its highest level in two months on Monday, suggesting there could be more turbulence ahead for the financial system.

“The three-month dollar London interbank offered rate reached 2.81%, a level not seen since mid-June. Libor remains particularly elevated when compared with the official overnight rate – the Federal funds rate – of 2%. The difference of 81 basis points between Libor and the Fed funds rate compares with an average spread of about 12 basis points that prevailed before the onset of the credit squeeze last year.

“‘There is still stress in the system,” said George Goncalves, strategist at Morgan Stanley. ‘Libor is creeping up, and banks are still restructuring their balance sheets.’

“The rise in the money-market benchmark for loans and derivatives is occurring even though expectations of a Federal Reserve interest-rate hike have been declining in the past two months.

“When Libor was previously set at 2.81%, investors were expecting the Fed would raise its overnight rate to nearly 3% by the end of the year. Now, investors expect a funds rate of about 2.10% by year-end.

“There has been a reassessment of Fed expectations and they are now seen keeping rates steady,” Mr Goncalves said. This indicates that credit tensions are weighing on money-market rates, say traders.

“Further evidence emerged last week that banks were scrambling to raise short-term funds. Concerns about banks’ health have made it harder and more expensive for them to access short-term funds.”

Source: Michael Mackenzie, Financial Times, August 18, 2008.

The Economist: Ticking time bomb
“Optimists, look away now. Prices in America’s housing market may have slumped, but the pain for a significant subset of homeowners has barely begun. Barclays Capital’s Nicholas Strand says that roughly 1.4 million households, most of them in California, hold a particularly nasty type of adjustable-rate mortgage called the ‘option ARM’. Although the overall value of option ARMs is lower than that of subprime loans – some $500 billion, according to Mr Strand, compared with about $1 trillion in subprime loans – their sting is more venomous.

“The option ARM allows borrowers to pay less interest than the formal rate for a limited period (the vast majority of customers choose this option). In return, the unpaid interest is added to the original loan, a process soothingly called ‘negative amortisation’. While house prices are rising, the product just about makes sense. If borrowers do get into trouble when they start paying off the loan in full, higher property values offer some wiggle-room. But when house prices are falling and refinancing is difficult, as is now the case, the option ARM is the financial equivalent of a bikini in winter. Homeowners end up owing more on a property that is worth less.

“Delinquencies are already rising fast. Write-offs for option ARMs at Washington Mutual, a stumbling thrift, have zoomed from 0.49% in the last quarter of 2007 to 3.91% in the second quarter. But the real crunch will come when the mortgages ‘recast’, forcing borrowers to start making full payments. The loans recast after a set period (typically some five years after origination) or when the principal hits a predetermined ceiling. The biggest wave of recasts is due to happen in 2010 and 2011. By some estimates, borrowers’ monthly payments will then surge by 60% to 80%, at a time when property values may still be at, or close to, their trough.”


Source: The Economist, August 14, 2008.

Ambrose Evans-Pritchard (Telegraph): Sharp US money supply contraction points to Wall Street crunch ahead
“The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.

“Data compiled by Lombard Street Research shows that the M3 ‘broad money’ aggregates fell by almost $50 billion in July, the biggest one-month fall since modern records began in 1959.

“‘Monthly data for July show that the broad money growth has almost collapsed,’ said Gabriel Stein, the group’s leading monetary economist.

“On a three-month basis, the M3 growth rate has fallen from almost 19% earlier this year to just 2.1% (annualized) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.

“‘It’s obviously worrying. People either can’t borrow, or don’t want to borrow even if they can,’ said Mr Stein.

“Monetarists say it is the sharpness of the drop that is most disturbing, rather than the absolute level. Moves of this speed are extremely rare.”


Source: Ambrose Evans-Pritchard, Telegraph, August 19, 2008.

Asha Bangalore (Northern Trust): Leading Indicators indicates continued weak economic conditions
“The Conference Board’s Index of Leading Economic Indicators (LEI) fell 0.7% in July, following a steady reading in June. The July decline is partly exaggerated because of a large drop in building permits related to the change in building code in New York and higher initial jobless claims due to an extension of unemployment benefits. To reduce the influence of these distortions, the June-July average of the LEI is the preferred route. This average is down 0.3% from the May reading. Following the same reasoning, the June-July average fell 2.6% from the average LEI during June-July 2007. This is the largest year-to-year decline since April 2001 when the economy was in a recession.

“The report noted that ‘risks of further weakening remain elevated’. As they say, the chart is worth many words.”


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

Asha Bangalore (Northern Trust): Turning point in inflation
“ … where is the US economy at the moment? The NBER has yet to date the peak of the current business cycle. The four measures the agency uses to date business cycles have peaked. Our best guess is that the peak of the current cycle is December 2007/January 2008 or approximately around this time period. In other words, if history is a guide, the US economy is probably at the brink of a turning point in inflation.

“This is entirely conceivable given the projection of weak economic conditions in the near term. Inflation expectations (as measured by the difference in nominal 10-year U.S Treasury note yield and the 10-year TIP yield) as of August 19 stood at 2.15%, down from 2.57% on July 3.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 20, 2008.

Asha Bangalore (Northern Trust): PPI – sharp gain is troublesome
“The Producer Price Index (PPI) of Finished Goods moved up 1.2% in July after gains of 1.4% and 1.8% in May and June, respectively. Prices of both food and energy have moved up sharply during the last three months, but the 0.7% jump during July of the core PPI of finished goods, which excludes food and energy, was the surprise in the July wholesale price report. The recent drop in energy prices and other commodities should translate into a moderation of wholesale food and energy prices in August.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 19, 2008.

GaveKal: CRB Index points the way for US PPI


Source: GaveKal – Checking the Boxes, August 20, 2008.

Asha Bangalore (Northern Trust): No turnaround in construction of new single-family homes in 2008
“Construction of new homes fell 11.0% in July to an annual rate of 965,000 after a 10.4% increase in June. These large swings in housing starts during June and July reflect the impact of a building code change for multi-family units in New York. The count of single-family starts is not distorted by the change in code and should be used to assess the status of new home construction. Starts of single-family units declined 2.9% in July to an annual rate of 641,000 following a 3.2% drop in the prior month. Starts of single family homes are down 64.3% from the peak in January 2006.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 19, 2008.

Asha Bangalore (Northern Trust): Home builders survey sends gloomy message
“The Housing Market Index (HMI) of the National Association of Home Builders held steady at 16 in August, matching the record low set in July.

“The HMI advanced eight months has the strongest correlation (64%) with sales of single-family homes. Based on this relationship, sales of new homes are likely to remain in a slump for several months ahead, with a recovery likely only in the latter half of 2009.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 18, 2008.

Wachovia: Commercial construction to turn down
“Commercial construction was one of the economy’s bright spots during the first half of 2008 and is expected to remain positive in the current quarter. However, most of the recent strength reflects projects committed to prior to the credit crunch. The pipeline of commercial projects is rapidly winding down and we expect commercial construction to turn down late this year or early 2009. The volume of commercial construction is expected to decline by roughly 25% over the next year.”

Click here for the full report.

Source: Wachovia – Economic Commentary, August 19, 2008.

BCA Research: Maintain portfolio duration above benchmark
“Downside risks to economic growth and contracting corporate credit demand will overwhelm the upward pressure on yields from inflation and Treasury supply fears.

“Our model of the 5-year Treasury note suggests that the additional Treasury supply due to the increase in the budget deficit anticipated over the next year will have only a negligible effect on yields. In fact, demand for funds from the corporate sector tends to be a better indicator than the government sector of the direction of yields. Note that the relationship between corporate credit demand and the Treasury yield broke down during the subprime crisis of the past year: yields rallied despite relatively strong credit demand, reflecting the premium attached to Treasury securities during the flight to safety. However, total corporate borrowing has now rolled over and is trending lower according to our latest estimate.

“A slowing economy and more limited access to capital (via higher credit spreads and vastly tighter lending standards) should ensure this trend remains in place, thus adding to the downward pressure on bond yields.”


Source: BCA Research, August 21, 2008.

Bespoke: Country total returns since March 2003
“The MSCI World index, which measures global equity market performance, is now up just 68% (not total return) since its bottom on March 12, 2003. After analyzing the performance of various country indices since then, we found some interesting results.


“Since the 3/12/03 global market bottom, Brazil, India and Mexico all have total returns of more than 400%, with Brazil leading the way at 427%. Germany has been the best performing Western European country with a total return of 187%. At the bottom of the barrel is Japan, with a gain of 68%, but unfortunately the US ranks second to last at 77%.

“So while much has been made of how well the US has held up during this downturn, it still lags behind pretty much everyone else when looking at the last bull and the current bear.

“The most surprising performance number comes from China. After its bubble and bust from 2005 to present, China’s performance is pretty much right inline with the US at 79%. With so much focus on China’s growth this decade, one would think its equity markets would be at the top of the performance ladder with other BRIC countries.”


Source: Bespoke, August 22, 2008.

Financial Times: Unconvincing rally


Click here for the full article.

Source: John Authers, Financial Times, August 20, 2008.

Jeffrey Saut (Raymond James): For trading, not investing!
“Regrettably, for most of this year it has been more of a trader’s market than an investor’s market. While we are a much better investor than trader, we have attempted to navigate the volatile environment using the trading side of the portfolio. Recall that we advise using 80% of your equity portfolio for investment ideas and 20% for trading. And when we say ‘trading’, we DON’T mean day trading! Rather, we try to wait for a trading ‘set up’ whereby the odds are tipped so far in our favor that if we are wrong we are going to get stopped-out quickly with hopefully small losses and live to play another day. And, that’s the way it is on session 24 since the July 15th ‘selling climax’ lows. Indeed, ‘for trading, not investing!’

Source: Jeffrey Saut, Raymond James, August 18, 2008.

Bespoke: Second quarter earnings “beat rates”
“We separated the more than 2,300 US stocks that have reported earnings since early July into their respective sectors and calculated the percentage that beat earnings estimates. As shown below, the Industrials sector takes the title for the second-quarter reporting period with a ‘beat rate’ of 70.1%. Industrials are trailed by Consumer Staples at 64.7% and Health Care at 63%. Overall, just under 60% of companies beat earnings estimates, which is inline with the prior two earnings seasons. Financials and Telecom were the only two sectors that had a ‘beat rate’ of less than 50%.”


Source: Bespoke, August 18, 2008.

Bloomberg: Emerging market retreat is “overdone”, Mobius says
“Emerging-market stocks have tumbled more than is justified because demand for raw materials continues to boost economic growth in those nations, Mark Mobius said.

“‘The correction seems to be overdone but not necessarily over because sentiment globally is very bad,’ Mobius, who oversees about $40 billion in emerging-market equities as executive chairman of Templeton Asset Management in Singapore, said in a Bloomberg Radio interview. ‘Demand for these commodities will continue at a pretty high level, simply because of the demand from China, India and these other countries.’

“The MSCI Emerging Markets Index has plunged 28% since reaching a record in October, as falling oil and metal prices prompted investors to pull money from commodity-producing nations. Brazil’s Bovespa index, which gets almost half its value from material makers, has slumped 26% from its May all- time high.

“‘It’s more a correction than a significant downturn in the commodities markets,’ the 71-year-old investor said.

“Developing nations will continue to grow at a ‘very rapid pace’, even as investors anticipate slowdowns in the US and Europe, Mobius said.

“Mobius said he’s buying as many consumer shares in emerging markets as he can. The investor cited ‘booming’ consumer spending in Russia and prospects that international corporations will increase spending in developing nations, spurring economic growth.

“Brazil is among the nations where Mobius has invested the most … Although he remains optimistic about the nation’s prospects, he said speculation that the government may keep some oil profits instead of channeling them through Petrobras is worrisome.

“‘Brazil is a very volatile country and you can often be surprised by policy changes,’ he said. ‘Until we see specific and definite changes in policies, we don’t change our view of the country.’”

Source: Fabio Alves and Charles Stein, Bloomberg, August 20, 2008.

David Fuller (Fullermoney): Chinese stock market near trough of cycle
“Only one share on the Shanghai A-Share market had a negative return today. 119 shares of the 812 in the Index rose by the daily 10% limit. The last time we saw a move of this magnitude was in April when the withholding tax on trades was cut and speculation was rife that a government intervention was imminent. On that occasion the surge was short lived and over the following months the medium-term downtrend was reaffirmed. However, the market is now 500 points lower and in the meantime we have had a number of statements in support of the market.

“The health of the stock market is drawing increasing attention from the government and measures to support it, which have yet to gain traction, are increasing. Today’s upward dynamic puts at least a short-term floor under the market and significant follow through would further bolster this view bringing the Index back towards the psychological 3000 level. A sustained move above that area remains a prerequisite to break the progression of lower highs. Once this has been achieved any subsequent reaction needs to find support above the lows to form the basis for any new uptrend.”

Source: David Fuller, Fullermoney, August 20, 2008.

GaveKal: Reiterating bullish US dollar call
“… the US$’s rally this month can largely be attributed to bad news coming from Europe. Investors are lessening their exposure to the euro amid increased signs of economic slowdown, fears of which are aggravated every time Jean-Claude Trichet makes some vacuous remark (which unfortunately happens almost every time he speaks!). However, imagine the movement we may see on the US$ if we actually got some good news out of the US. Most investors are not holding their breath on this front, but we note that we have already seen a fair number of positive developments:

1) The market is shrugging off bad news on Fannie and Freddie.
2) US exports are on an upswing.
3) It is an election year – yet protectionism has not reared its ugly head.
4) Sentiment is improving.
5) The tax rebates have not been spent.

“Looking at the above, we feel confident in reiterating our bullish US$ call. Indeed, as the short-US$ trade unwinds, many foreign borrowers will scramble to repay their US$ dollar debt; and if there is “good news” from the US, panic dollar-buying could ensue …”

Source: GaveKal – Checking the Boxes, August 21, 2008.

Stephen Hull (Lehman Brothers): Capital flows aiding dollar
“Global capital flows are looking increasingly supportive of the dollar, believes Stephen Hull, currency strategist at Lehman Brothers.

“He notes that there has been a significant improvement in the US trade deficit recently, with the gap between import and export volume growth now at its highest level since 1994.

“Related to this are several major issues that are key to foreign exchange markets.

“Mr Hull believes the US current account deficit will shrink sharply. As this happens, surpluses overseas will shrink, resulting in weaker demand for foreign currencies and typically higher demand for the dollar.

“As the dollar starts to rise, there will be less need for foreign central banks to build up reserves to prevent their own currencies from strengthening, he says.

“‘Many exchange rates in countries with current account surpluses have been managed to prevent domestic currency appreciation; if the dollar rallies on its own, reserve accumulation will slow.

“‘Central banks have also been diversifying their foreign exchange reserves in recent years, with International Monetary Fund data indicating increased amounts of FX reserves in euros.

“‘However, if reserves stop rising, some central banks might already have more than sufficient non-dollar currencies in their reserves and the vicious circle that has driven the euro to such heights might be broken.’”

Source: Stephen Hull, Lehman Brothers (via Financial Times), August 19, 2008.

Bill King (The King Report): Gold – fundamentals re-emerging
“Gold surged on Tuesday after an early decline on the release of the PPI. For the past few weeks, conventional wisdom, AKA sophistry, held that higher inflation data meant the Fed might hike rates, which would boost the dollar, which is bad for gold.

“As we have asserted over the past week, once the levered dollar plays – dollar vs. forex, dollar vs. gold, dollar vs. commodity – were liquidated, fundamentals would re-emerge. This occurred yesterday with gold.

“By the way, the dollar and gold can rally together – it’s called a global gold bull market. Most of gold’s rally this decade has been on dollar flight. When a global bull market for gold appears, gold rallies in most, if not all, major currencies.”

Source: Bill King, The King Report, August 20, 2008.

Bill King (The King Report): The eagle has been grounded
“WSJ: As gold prices tumbled from their highest level ever, investors and collectors loaded up on one ounce “American eagle” gold bullion coins. The buying spree came to an abrupt halt this week after the US Mint stopped selling the coins for the first time since production began 20 years ago.

“‘Due to the unprecedented demand … our inventories have been depleted,’ the Mint – part of the US Treasury Department – told its dealers Friday. ‘We are therefore temporarily suspending all sales of these coins.’ ‘This whole thing started about the time the Ruskies made their move,’ a collector noted in an Internet chat room called goldismoney.info. ‘It may very well be that the US Government is preparing for the real financial meltdown by hoarding all remaining gold flows.’”

Source: Bill King, The King Report, August 22, 2008.

The Adens: Special alert on bullion
“After reviewing all of the technical, economic and fundamental factors over the weekend, following are our latest thoughts on what’s currently happening.

“On Friday, gold broke clearly below its 65-week moving average, which is at $819. As you know, this average has been very reliable, identifying the major gold trends since the late 60s. If gold now stays below $819, it will signal that the major trend has turned down and gold is going lower.

“But equally important, gold is extremely oversold. This means it’s fallen too far, too fast and it’s poised to rise in the weeks and months ahead. The same is true of silver, and gold and silver shares. Gold’s D decline is also near maturity based on timing and gold’s percentage decline. In other words, gold is at an extreme and the downside is limited. That being the case, we recommend the following

“Stay put for the time being and keep your metals related positions. It’s still too soon to know if this is just a temporary, extreme break, which seems the most likely, or if this marks the start of a new bear market decline. We need to see more.

“Since gold is so oversold, the extent of its rebound rise is now going to be very important. If gold, for instance, rises back above $819 during the rebound, then the break below the moving average would’ve been a temporary aberration rather than a major trend change. In that case, we’ll continue holding our metals related investments.

“On the other hand, if gold stays below $819 during the rebound rise, it’ll mean that an important trend change is taking place and we’ll either sell or lighten up on our holdings at a better price during the rebound. We’ll then plan to buy gold again once it turns technically bullish.

“As we’ve always said, we’ll let the markets tell us what to do. And for now, they’re telling us to sit tight. It’s still too soon to act and today’s $15 upmove may well be the start of the rebound we’re referring to.”

Source: The Adens, August 18, 2008.

Leon Esterhuizen (RBC Capital Markets): Platinum price decline overdone
“Recent negativity surrounding the outlook for the platinum price might have been overdone, argues Leon Esterhuizen, analyst at RBC Capital Markets.

“‘While the world economy is slowing – leading to lower auto and jewellery sales – and metal supply projected to expand, we believe this need not ultimately be bad for platinum group metals.’

“Mr Esterhuizen believes demand will continue to grow. He notes that the diesel share of the Asian car market is expanding and sees sales of European diesel-electric hybrid car sales kicking in from 2009.

“He acknowledges that a real risk lies with jewellery demand but says the recent drop in the platinum price should offer some support. He also does not expect to see the huge oversupply forecast by some observers.

“‘Supply dynamics are essentially a function of two things: restricted capacity of the majors to expand due to electricity shortages that will not be resolved anytime soon; and junior production being delayed.

“‘This exacerbates the capacity to find funding, compounding the potential for much lower actual supply than currently forecast. It also pushes larger producers to take out smaller but lower-cost rivals in order to swap high cost production for lower cost – not necessarily adding new production in the process.

“‘This leads us to cut our short-term outlook, but we increase our longer-term metal price forecasts in line with what we see as the absolute minimum required to get new production on line.’”

Source: Leon Esterhuizen, Financial Times, August 20, 2008.

James Pressler (Northern Trust): Is there hope for the Euro-zone?
“Our latest insight into Europe’s economic future comes from the little country of Belgium. The confidence surveys from the Banque Nationale de Belgique (BNB), intended to check the local economic pulse, also suggest how the greater Euro-zone is doing (Belgium is a major transit location for goods entering the ‘zone, so as goes Belgium, so goes Europe).

“Strictly using the BNB business survey as a guide, the Euro-zone economy should not exactly be heading for recession. Over the past 13 years the index has spent a few months below -7.5 without strong negative GDP growth. At its lowest point, a drop to -21.5 in June 2003, the ‘zone economy contracted by a barely perceptible 0.01% on the quarter. The current reading would at best suggest a growth slowdown – but obviously that is not the case.

“With the three major Euro-zone economies already posting negative growth in Q2 and Ireland all but formally in recession, we are led to believe that this apparent misalignment of two usually related indicators is due to optimism within Belgium (which, incidentally, is not showing signs of economic contraction). The German Ifo confidence index is due out on August 25, and it will more than likely defy the BNB as well and confirm that things are not looking up in Europe.”


Source: James Pressler, Northern Trust – Daily Global Commentary, August 22, 2008.

MarketWatch: JPMorgan – Beijing weighs $58 billion stimulus plan
“China is considering a post-Olympics stimulus package of as much as $58 billion, in addition to other monetary easing measures, according to a research report by JPMorgan.

“The measures could include tax cuts and other moves to shore up the capital markets and support the housing market, according to a research note by the brokers’ head of China Research, Frank Gong.

“‘The top leadership is carefully considering an economic stimulus package of at least 200 billion yuan to 400 billion yuan,’ Gong wrote Tuesday.

“Gong added that slumping inflows of hot money, the shrinking trade surplus and cooling inflation are providing a backdrop conducive to monetary easing, setting the stage for a possible easing of bank’s reserve ratio requirements and lower interest rates later this year.”

Source: Chris Oliver, MarketWatch, August 20, 2008.

Jing Ulrich (JPMorgan): No Olympic fatigue
“The notion that China will experience a post-Olympics slowdown has generated much discussion among investors, says Jing Ulrich, chairman, China Equities at JPMorgan.

“But she believes that China’s problems have little to do with the Olympics and more with slowing global demand, rising input costs and domestic imbalances.

“‘Beijing’s investment of some $40 billion in infrastructure to host the games may be unsurpassed – but this figure amounts to a tiny fraction of China’s fixed asset investment,’ she says. ‘With the government planning to spend Rmb3,800 billion ($554 billion) on transportation infrastructure and Rmb1,000 billion on power grid projects during the current five-year plan (2006-2010), China’s infrastructure spending could even accelerate after the Games.’

“Ms Ulrich says that as the economy moderates, official priorities are tilting towards maintaining growth and employment.

“‘Authorities recently raised the export tax rebate for textiles and clothing companies, and increased the annual loan quota for banks. We expect China to pursue a more proactive fiscal policy in the second half, with greater support for the country’s export and SME sectors.

“‘China’s economy is indeed slowing, but the timing is largely coincidental. Buoyant domestic demand and an infrastructure boom suggest that the slowdown will be less severe than Olympics pessimists predict.’”

Source: Jing Ulrich, JP Morgan (via Financial Times), August 18, 2008.

Financial Times: China ousts US as top Japanese market
“Mainland China overtook the US as Japan’s largest export destination for the first time last month, underlining the growing importance of Chinese demand to the world’s second-largest economy.

“Exports to China, which have risen in each of the last 38 months, expanded by 16.8% in July to their highest level since the Japanese government began compiling statistics in 1950.

“At the same time, exports to the US declined by 11.5%, marking the 11th consecutive monthly drop. Overall, shipments rose by 8.1% by value, after falling in June for the first time since 2003, the finance ministry said.

“Japanese companies such as Toyota, Honda Motor and Komatsu have recently identified an increasing reliance on China and other emerging markets for sales growth as the US economy slows. Honda last month announced double-digit increases in the volume of China sales in the three months to June, compared with a 5% fall in the US.

“However, the export growth will provide little cheer to policymakers, faced with rising input costs and an uncertain outlook in the economies of Japan’s main trading partners.”

Source: Michiyo Nakamoto, Financial Times, August 21, 2008.

GaveKal: Japan exports


Source: GaveKal – Checking the Boxes, August 22, 2008.

Bloomberg: BOJ’s Shirakawa sees slim chance of major economic slump
“Bank of Japan governor Masaaki Shirakawa speaks at a news conference in Tokyo after the bank left interest rates unchanged at 0.5%, the lowest level among industrial nations. The world’s second-largest economy shrank at an annual 2.4% pace in the second quarter, as decade-high inflation deterred spending and a global slowdown dented exports.”


Source: Bloomberg, August 19, 2008.

Reuters: UK house prices fall 4.8%
“House prices fell 4.8% year-on-year in August, a survey by property Web site Rightmove showed on Monday, the fastest fall since the series began six years ago.

“Rightmove said property prices fell by 2.3%, or ₤5,403 on the month in August, bringing the average asking price down to ₤229,816.

“For July, Rightmove reported a 2% year-on-year drop in house prices.

“Figures are not seasonally adjusted, but add to overwhelming evidence of a severe downturn in the British housing market as buyers find it harder to get a mortgage as banks tighten lending conditions and the economy cools.

“London saw the sharpest fall among regions last month, with average prices sliding by 5.3% after a 0.3% rise the previous month. Prices in the capital were 3.8% down on a year ago.”

Source: Reuters, August 18, 2008.

BCA Research: New Zealand – consumer slowdown to continue
“The outlook for the New Zealand economy remains bleak.

“Last week’s release showed that second quarter retail sales (adjusted for inflation) in New Zealand fell 1.5% (following a 1.2% drop in Q1). The MoM figure was less downbeat, suggesting nominal sales excluding autos were flat in June (they were expected to fall) following a rise in May.

“Regardless, consumer spending is likely to deteriorate further in the months ahead as the housing bust continues and the job market weakens. In short, monetary policy remains restrictive and the Reserve Bank of New Zealand (RBNZ) will need to ease significantly to stabilize the economy and help boost business and consumer sentiment.

“Bottom line: The RBNZ will lower rates again next month to limit the extent of the impending recession. Remain strategically overweight New Zealand bonds within a global hedged fixed income portfolio and short the currency.”


Source: BCA Research, August 18, 2008.

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5 comments to Words from the (investment) wise for the week that was (August 18 – 24, 2008)

  • eber teradstein

    Does Mr. Richard Russell ever goes to a supermarket, buy groceries, fill the gas tank of his car ?
    I think he is suffering from a severe case of reality denial.

  • Eber: You are right on groceries, but also keep in mind the massive deflation in assets such real estate and stocks.

  • gorgongogol

    1) The market is shrugging off bad news on Fannie and Freddie.
    2) US exports are on an upswing.
    3) It is an election year – yet protectionism has not reared its ugly head.
    4) Sentiment is improving.
    5) The tax rebates have not been spent.

    Huh? This is why they’re dollar bullish? I like Gavekal, but sometimes you have to wonder …

  • Ian Nunn

    Also on Mr. Russell’s quote, in particular the statement “as income buys less and less”. I understand the opposite. Deflation is marked by falling prices so a fixed income buys more. What am I missing?

    The inflation we see see today is due in part to the expansion of money supplies in emerging markets. The West and particularly the US, has not been printing more than it usually does.

    The larger source of inflationary liquidity has been the massive credit creation by what the boys at PIMCO call the “shadow banking system”. This credit is currently imploding with continuing severe impact on our financial systems and is a long way from being finished according to the smart people I read.

    As an example, nobody got too excited when the ARS market locked up earlier this year, so the very recent writedown of $50 B on ARS by some of the big banks comes as the latest ‘surprise’. The whole market for commercial loans, is by some, a ticking bomb.

    In any case, I fail to see how this continued destruction of credit (up to $2 Trillion before we’re finished according to Nouriel Roubini) can not have deflationary effects.

  • On the inflation/deflation debate, also read the folowing article by Barron’s Randall Forsyth: http://online.barrons.com/article/SB121918799272554883.html?mod=9_0002_b_online_exclusives_weekday_r1

    PS: Try and buy anything in Europe (where I am traveling at the moment) with South African rand to understand what seriously expensive is.

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