Words from the (investment) wise for the week that was (September 1 – 7, 2008)
Investors not only returned to a shortened trading week after the Labor Day holiday on Monday, but also to a bruising on stock markets, at least for those with long equity positions.
Concerns about the global economic outlook and continued financial duress spooked bourses around the world, with a number of other factors also adding to investors’ nervousness. In particular, Pimco’s Bill Gross, the manager of the world’s largest bond fund, said the US needed to step up and buy assets to avoid a “financial tsunami” (Bill is renowned for talking his book on occasion!), Dwight Anderson’s big Ospraie commodity hedge fund closed after suffering large losses, and Russia was selling foreign currency reserves to prop up the rouble after foreign capital fled the country following Russia’s invasion of Georgia.
Stock markets and commodities ended the first week of a traditionally bad September deeply in the red, but government bonds and the greenback benefited from the deleveraging and a flight to perceived safety.
An announcement by the US Treasury Department regarding the bailing out and recapitalization of collapsing home mortgage giants Fannie Mae and Freddie Mac seems to be imminent. According to The Wall Street Journal, Congressman Barney Frank, chairman of the House Financial Services Committee, confirmed on Saturday that Treasury Secretary Henry Paulson was planning government intervention to back the troubled GSEs. The detail could be announced as early as today (Sunday), prior to the Asian markets reopening.
Source: Gary Varvel, Slate
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 expected, words such as “bank”, “prices”, “inflation” and “growth” featured prominently in my reading matter.
I have mentioned previously that the mid-July stock market lows need to be sustained in order for the summer rally and the market’s base building to still be in effect. These levels – 10,963 for the Dow Jones Industrial Index and 1,215 for the S&P 500 Index – approached with unnerving speed last week.
Commenting on the current market weakness, Brett Steenbarger (TraderFeed) remarked as follows: “A number of sectors, such as consumer discretionary and even many of the financial shares, remain well above their July lows. It is not at all clear to me that this will be a fresh bear market leg down. I’m open to the idea that this may be an ultimately successful test of the July lows and part of a larger – and quite significant – bottoming process. Participation to the downside will tell the story.”
From across the pond, David Fuller (Fullermoney) added: “… investors have little incentive to channel the large capital pools accumulating in money-market funds back into stock markets. Resistance near the August highs for share indices has checked the rallies. Moreover, many have broken beneath their August lows this week. We have also seen some new lows for the year, reaffirming overall downward trends. Unless stock markets can push back above their August highs, the bear will remain in charge for a while longer.”
The last word goes to Richard Russell (Dow Theory Letters): “Yesterday’s [Thursday’s] stock market action, according to Lowry’s, was a classic 90% downside day. Normally, such days are followed by 2 to 7 days of rally (bounce), and then a continuation of the downtrend. 90% downside days often come in a series of one or more, and after each 90% downside day we look (hope for) a 90% up-day. And that’s where we are now.”
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.
In the US, the September Beige Book report from the 12 Federal Reserve districts indicated slow and weak conditions across nearly all districts. Price pressures for energy and commodities continued to be a factor during July and August across nearly all districts, although pass-through to wages appeared to be minimal, giving the Fed some breathing space in terms of monetary policy for now.
The most important economic data released in the US during the past week concerned the employment situation. Non-farm payroll employment fell by 84,000 in August and the unemployment rate rose to 6.1% from 5.7% in July. Revisions to June and July job numbers tacked on another 58,000 lost jobs. In the first eight months of 2008, on average 76,000 jobs have been lost each month. The decline in payrolls and the rise in the unemployment rate were both larger than expected by consensus forecasts, fueling concerns about the pace of consumer spending in the months ahead.
Summarizing the outlook for US interest rates, Asha Bangalore (Northern Trust) said: “The question is how long before it is widely acceptable to use the ‘R’ word. The recent rally of the dollar and reduction in energy prices have allowed the Fed to watch and wait. That said, the Federal funds rate at 2.0% may have to be reconsidered in the near term if a turnaround is not visible. The September 16 FOMC meeting will most likely end with the Federal funds rate left unchanged at 2.0%.”
Hat tip: Phil’s Stock World
Data releases from the UK, continental Europe and Japan underlined rapidly worsening economies bordering on recession.
The European Central Bank (ECB) kept its main refinance rate on hold at 4.25% at its September monetary policy meeting. Interest rates are at a seven-year high as central bankers are unwilling to relax monetary policy before inflation comes down closer to the bank’s 2% target.
In line with market expectations, the Bank of England (BoE) decided to keep its key repo rate steady at 5% at its September monetary policy meeting. September marks the fifth consecutive month with no change in the monetary policy rate.
Week’s economic reports
Source: Yahoo Finance, September 5, 2008.
Next week’s US economic highlights, courtesy of Northern Trust, include the following:
1. International Trade (September 11): The trade deficit is predicted to have widened to $58.5 billion in July from $56.8 billion in June, partly accounting for higher imported oil prices. Consensus: $59.5billion.
2. Retail Sales (September 12): Auto sales rose to 13.7 million units in August from 12.55 million in July. Gasoline prices are likely fell in August. The headline may show a small gain (+0.2%) to reflect the jump in car sales. Excluding autos, retail sales should be soft. Consensus: 0.3% versus -0.1% in July; non-auto retail sales: -0.2% versus 0.4% in July.
3. Producer Price Index (September 12): The Producer Price Index for finished goods is expected to have dropped 0.6% in August, reflecting lower energy prices. The PPI was up 1.2% in July. The core PPI is most likely to have risen by 0.1% after a 0.7% increase in July. Consensus: +0.4%, core PPI +0.2%.
4. Other reports: NFIB survey, Pending Home Sales Index (September 9), Import Prices (September 11], Inventories, Consumer Sentiment Index (September 12).
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, the trend of the US dollar.
Source: Wall Street Journal Online, September 7, 2008.
Among mature markets, the worst losses were recorded by the UK FTSE 100 (-7.0%), the Canadian S&P/TSX Composite Index (-6.9%), the Japanese Nikkei 225 Average (-6.6%) and the French CAC 40 Index (-6.4%).
The carnage among emerging markets was even worse as illustrated by the declines in markets such as Russia (-10.8%), Taiwan (-10.5%), South Africa (-8.3%) and China ( 8.1%). Gains were few and far between, with Pakistan (+1.5%) and the Philippines (+1.4%) being two of the rare positive spots.
With the exception of the Nasdaq Composite Index (-4.7%; YTD -14.9%), the US stock markets fell by somewhat less than most other bourses as shown by the major index movements: Dow Jones -2.8%% (YTD -15.4%), S&P 500 Index -3.2% (YTD -15.4%) and Russell 2000 Index -2.8% (YTD 6.2%).
Factoring in the past week’s performance, an interesting picture regarding bear market declines emerged, as summarized by Bespoke: “After declining 4.25% on Wednesday, 3.94% yesterday, and 3.75% today, Russia’s RTS Index is now 41.19% below its 52-week high. These declines put it second to last behind China when looking at recent equity market returns for 22 major countries. As shown, China has fallen 64% from its 52-week high last October!
“The declines recently in global equity markets have really been astounding. Japan, Spain, Brazil, India, Italy, South Korea, Singapore, Sweden, Taiwan, and Hong Kong all join China and Russia with equity markets off at least 30% from their 52-week highs. North American countries rank 1, 2, 3 as countries holding up the best. International exposure has never hurt so bad.”
The past week’s sell-off has resulted in all the major US indices trading below their respective 50- and 200-day moving averages, with the exception of the Russell 2000 Index which is still marginally above the 200-day line. Some comfort for the bulls is that the key mid-July lows have not yet been breached by any of the indices.
The major trend in the market last week was a sell-off in many commodity-related groups – oil and gas, gold, aluminum, steel, coal and copper. The drivers of these declines were lower commodity prices and growing investor concern over a global economic slowdown. The diversified metals and mining group was the worst-performing group for the week, declining by 17%. Its single member, Freeport-McMoran (FCX), sold off as the prices of copper and gold declined.
The construction and engineering group (-16%) was the second-worst performer, negatively impacted by economic woes and the fact that many companies in this group have exposure to energy commodity prices.
The regional bank group (+7%) was the best-performing group for the week. As oil and other commodity-related groups declined, there was an apparent rotation into several financial groups, including regional banks.
The home improvement retail group also outperformed, rising by 5%. The group was led higher by its two largest members, Home Depot (HD) and Lowe’s Companies (LOW). An analyst report said that economic forces weighing on home improvement chains were nearing the end of their “trough-like levels” and the early stages of improvement could begin sometime next year.
The ten-year US Treasury Note declined by 18 basis points to 3.65%, the UK ten-year Gilt yield by 10 basis points to 4.38% and the German ten-year Bund yield by 14 basis points to 4.03%.
Bond yields are increasingly taking their cue from investors’ worries about a global economic recession, whereas the threat of inflation is subsiding as shown by the declining trend since March in the Lehman US Treasury Inflation Protected Securities ETF (TIP).
Emphasizing the importance of the direction of bonds, Richard Russell (Dow Theory Letters) said: “… I’m watching the bond action intently. If the bonds believe ‘things are getting better’, they’ll head down. If bond investors continue to be worried about the outlook, they’ll buy the currently low-yielding Treasuries, with 10-year notes now yielding only 3.66%.”
The past week saw the US dollar rising against the euro (+3.2% – an eleven-month high), the British pound (+3.6%), the Swiss franc (+1.7%), the Australian dollar (+1.2%) and the Canadian dollar (+0.5%).
However, the US currency declined by 1.9% against the Japanese yen as risk aversion triggered the unwinding of carry trade transactions funded by the low-yielding yen.
The currencies of commodities producers came under strong selling pressure as commodities slipped further. Examples include the Australian and New Zealand dollars that declined by 5.5% and 4.9% respectively against their US counterpart. The Aussie dollar was also weakened by the Reserve Bank of Australia lowering its key interest rate by 25 basis points to 7.0% – the first cut in seven years.
The histogram below shows the performance of a number of currencies since the beginning of 2008, indicating the US currency is now in positive territory after a gain of 3.0% YTD.
Regarding the outlook for crude oil, David Fuller (Fullermoney) said: “Today, I see no evidence that crude oil has bottomed in what I regard as a lengthy medium-term correction, meaning a minimum of several months and up to two or possibly even three years. … we could easily see a retest of $100 this year, with an outside chance of a temporary overshoot, taking us close to $80.”
The chart below shows the damage of the past week’s movements for various commodities:
Now for a few news items and some words and charts from the investment wise that will hopefully assist with navigating our portfolios through the treacherous investment waters. But always remember Earl Nightingale’s words: “Wherever there is danger, there lurks opportunity; whenever there is opportunity, there lurks danger. The two are inseparable. They go together.” (Hat tip: The Kirk Report.)
The New York Times: US rescue seen at hand for two mortgage giants
“The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.
“It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history.
“Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. Shareholders have already lost billions of dollars as the stocks have plunged more than 80 percent this year.
“A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets. It would allow for uninterrupted operation of the companies, crucial players in the diminished mortgage market, where they are now responsible for nearly 70 percent of new loans.
“The executives were told that the government had been planning to announce the decision as early as Sunday, before the Asian markets reopen, the officials said.”
Source: Stephen Labaton and Andrew Ross Sorkin, The New York Times, September 6, 2008.
Bloomberg: Volcker says finance system “broken”, losses may rise
“‘This bright new system, this practice in the United States, this practice in the United Kingdom and elsewhere, has broken down,’ Volcker said today at a banking conference in Calgary. ‘Growth in the economy in this decade will be the slowest of any decade since the Great Depression, right in the middle of all this financial innovation.’
“The former Fed chief projected ‘a lot’ more losses from the collapse in the mortgage-backed debt market, after the more than $500 billion tallied so far, should the US, European and Japanese economies fail to pick up. He urged changes in financial regulations, echoing calls among sitting officials and legislators.
“‘It is the most complicated financial crisis I have ever experienced, and I have experienced a few,’ said Volcker.
“‘Changes are going to have to be made’ to the global financial system, Volcker said. Banks three decades ago accounted for about 60% of US credit; that later declined to about 30% as securitization – where financial firms package assets into bonds and other instruments and sell them on to investors and other companies – spread.”
Source: Doug Alexander and Steve Matthews, Bloomberg, September 5, 2008.
Paul Kedrosky (Infectious Greed): RNC/DNC: Crisis? What crisis?
“To prove the point to my own satisfaction, I combined the Palin/McCain acceptance speeches in one block of text, and the Obama/Biden speeches in another. I then set up some keywords to compare across the text blocks. The following summary table shows keywords in the left column, and then respective keywords counts for each party’ slate in the appropriate DNC or RNC column. This isn’t the usual exercise in cute tag clouds, but an attempt to understand whether important language concerning the current financial crisis penetrated the political radar over the last few weeks.
“And it hasn’t – unless, of course, the repeated utterance of the word ‘God’ came in a context more like ‘Oh God, we’re screwed!’ than I think it did.”
Source: Paul Kedrosky, Infectious Greed, September 6, 2008.
Asha Bangalore (Northern Trust): Employment situation confirms recession is underway
“The jobless rate has risen 1.3 percentage points in a six-month span. Similar gains in a short time period last occurred in the 1982-82 recession. The recessions of 1990-91 and 2001 registered smaller increases in a six-month period. The question is how long before it is widely acceptable to use the ‘R’ word?
“At first blush, a sharp increase in the unemployment rate points to the possibility/necessity of a lower federal funds rate. However, the unemployment rate is a lagging indicator and historically a large part of easing of monetary policy is done prior to the establishment of a peak for the jobless rate, which the current FOMC has carried out between September 2007 and April 2008 by lowering the federal funds rate 375 bps. The complete lagged impact of this action will be evident by year-end.
“The recent rally of the dollar and reduction in energy prices have allowed the Fed to watch and wait. That said, the federal funds rate at 2.00% may have to be reconsidered in the near term if a turnaround is not visible. The September 16 FOMC meeting will most likely end with the federal funds rate left unchanged at 2.00%.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, September 5, 2008.
Asha Bangalore (Northern Trust): ISM non-manufacturing survey –export orders drop to cycle low
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, September 4, 2008.
Asha Bangalore (Northern Trust): ISM manufacturing index – factory sector in slump
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, September 2, 2008.
Bespoke: Mortgage rates show decline
Source: Bespoke: September 4, 2008.
GaveKal: Ten-year US bond yields too low
“1) The first possible explanation is that, with the US$ strengthening and commodities pulling back, the Fed will be under a lot less pressure to raise interest rates anytime soon. In turn, this probably gives US commercial banks more confidence to borrow at the short end to lend at the long end, making the most out of the steep US yield curve.
2) The second possible explanation is that we are of course in the midst of a financial panic with tremendous volatility across all asset classes (commodities, real estate, corporate bonds, equities and foreign exchange). At such times, the natural inclination of investors is to seek refuge in government bonds.
3) The third possible explanation is that most market participants are coming around to the view that inflation will not wreak as much havoc as some feared just a few months ago. Instead, the risk remains one of lackluster economic growth (though we have to wonder how high that risk is for the US given the steepness of the yield curve and the record low real rates).
4) Finally, the last possible explanation is that we are currently going through a sea-change in the investment environment. Instead of an environment of a continuously falling US$, which favors emerging markets, commodities and increasing leverage, we are now in an environment of a rising US$ and thus a lot of the trends that we have experienced in recent years are reversing. As this happens, and the outlook becomes more uncertain, investors are probably seeking refuge in the shelter of US Treasuries.
“Nevertheless, with yields at 3.7% it seems to us that US Treasuries are increasingly becoming a ‘limited upside and large possible downside’ asset class. As the new investment environment unfolds, and as investors realize that, outside of financials and materials/energy, the rest of the OECD equity markets are holding up decently, we would expect equities to once again start outperforming bonds, and this especially in the US and in Japan.”
Source: GaveKal – Checking the Boxes, September 4, 2008.
Bill King (The King Report): Albert Edwards – economic and equity market meltdown imminent
Source: Bill King, The King Report, September 5, 2008.
Bespoke: International revenues playing a role in the rally
“Below we highlight the average performance since July 15th of stocks with no international revenues and stocks with more than 50% international revenues. As shown, S&P 500 stocks with no overseas exposure (148 stocks) are up an average of 20%, while those with more than 50% (106 stocks) are up 2.84%. The S&P 500 as a whole is up 4.94%. If the dollar continues to rally, this trend should stay in place.”
Source: Bespoke, September 3, 2008.
John Authers (Financial Times): US summer rally to be put to test
Click here for the full article.
Source: John Authers, Financial Times, September 2, 2008.
Bill King (The King Report): Merrill’s Bernstein – valuations at historical extremes
“Inflation expectations are literally imploding, and that is good for equities. Unfortunately, earnings estimates have yet to react, and that is worrisome. Thus, unless one believes in an immense productivity miracle, the S&P 500’s PE multiple must substantially decrease because of rising inflation and nominal growth or earnings are likely to be very disappointing because of disinflation/deflation.”
Source: Bill King, The King Report, September 4, 2008.
Bloomberg: US stocks at 25.8 times profit means rally may end
“The Standard & Poor’s 500 Index, which had the worst first half since 2002, added 0.2% this quarter, the only gain among the world’s 10 biggest markets in dollar terms. Shares in the benchmark index for American equity climbed to an average 25.8 times reported profits, the highest valuation in five years. The last time that happened, the S&P 500 fell 38%.
“Money managers at Federated Investors, Russell Investments and Morgan Asset Management, which oversee a combined $600 billion, said the gains won’t last because corporate profits will fail to meet analysts’ estimates. Wall Street forecasters, who were too optimistic about earnings for the past four quarters, predict income at America’s biggest companies will grow by a record 62% in the final three months of 2008, according to data compiled by S&P.
“‘The market is pricing in the expectation of a good quarter, but we just don’t see it,’ said Philip Orlando, who helps manage $350 billion as chief equity market strategist at Federated in New York. ‘The fundamentals are going to be poor, earnings are going to be bad, and there are going to be more huge writedowns. We think stocks probably need to work 5% to 10% lower over the next month or two.’
“The index’s price-earnings ratio rose above 25 three times in the last five decades, data compiled by Bloomberg show. The last was in 2001, during the bear market that followed the bursting of the dot-com bubble. The increase in valuations preceded a plunge that helped erase about half the market value of US companies.
“The ratio is being propped up now by analyst forecasts that call for the end of four quarters of slumping profits, the longest streak in seven years.”
Source: Michael Tsang and Jeff Kearns, Bloomberg, September 2, 2008.
Bespoke: Most overbought US ETF’s
Source: Bespoke, September 3, 2008.
Doug Kass (TheStreet.com): This is what bottoms look like
“I have long said that relative to intermediate- and long-term interest rates, stocks are not expensive – nor have equities, in the main, ever been taken to speculative extremes, though the same can’t be said for residential real estate, commodities, derivatives or private equity deals.
“Several recent developments have conspired to elevate the chances of moving out of this summer’s trading range to the upside. Some of the more positive catalysts include:
• A sharp drop in the price of most commodities (especially of an energy kind) will serve as a tax cut to the consumer and even stem the tide of lower disposable incomes that has been so apparent over the last few years.
• The aforementioned reduction in cost pressures (if sustained) decreases the vulnerability of corporate profit margins. A compression in profitability had previously been the source of my concern over the last two years. Alleviating this concern is an important market tailwind.
• With raw costs dropping and wage inflation nonexistent, inflation has probably peaked in this economic cycle. Indeed, it may now have become the battle past.
• The insular, mainstream media may have underestimated Republican Vice Presidential candidate Sarah Palin and her potential impact on the McCain ticket in the November election. She hit a home run last night in a remarkably wise, poised, scorching and sassy speech.
• Regardless of the election’s outcome, given the gravitas of the economic downturn, both Presidential candidates will now likely reduce individual tax rates to the middle class and introduce an additional fiscal stimulus package.
• The housing markets, which are at the epicenter of our credit problems, show preliminary signs that the bottom in activity and price declines may be only six to nine months away, even though the magnitude of the recovery remains an ongoing issue. The same may be true for the automobile industry.
• A continuing high (and increasing) level of investor pessimism is reflected in the multiyear lows in the net long positions of the hedge fund community.
“Importantly, I have long written this summer that, given the complexity of today’s investment issues, I will let the market tell me its story, and Mr. Market is telling a clear disinflationary tale based on the classic relative strength and revival of early cycle sectors (homebuilding, finance and retailing).
“This is what market bottoms look like.”
Source: Doug Kass, The Street.com, September 4, 2008.
John Authers (Financial Times): Emerging markets – bargains ahead
“If you want to buy emerging markets stocks, you no longer need to pay a premium.
“For several months last year, the MSCI emerging markets index traded at a higher multiple of earnings than its world index of developed world stocks.
“But this gap began to narrow after the world index peaked in October. Now, emerging markets are trading once more at a significant discount.
“There are some good reasons for this. The turmoil in states bordering Russia suggests a rise in political risk. For example, stocks in the Ukraine doubled in barely 18 months, but since January they have halved.
“This year, the extra spreads payable on emerging market bonds have widened, according to JPMorgan. But bond markets suggest risk is lower than in March this year, while emerging market stock valuations have eroded sharply since then.
“Another ‘good’ reason to sell emerging markets stocks is inflation, a serious problem for several big emerging economies.
“But above all, valuations seem to be driven by the developed world. A graph of the emerging p/e relative to the world p/e over time looks identical to a graph of the world index itself. The better world stocks are doing, the more of a premium emerging markets command. When developed world prices fall, the more of a discount traders require to buy emerging market stocks.
“Under the once-popular ‘decoupling’ argument – that emerging markets could grow independent of the developed world – the emerging market premium should rise when there are problems for the US and Europe, not fall.
“Swings of fear and greed in the developed world will work against emerging markets for a while. But in the longer term, decoupling has a kernel of truth. When developed markets hit bottom, emerging markets are likely to trade at a big discount – and be a bargain.”
Source: John Authers, Financial Times, September 3, 2008.
David Fuller (Fullermoney): China – a buyer’s market
“Inevitably, China’s export sector was going to suffer as the economies of OECD countries skirted close to recession, but the PRC is in an enviable position to boost growth as required. My guess is that China’s economy has continued to slow in the current quarter, in line with the global trend and also due to its own additional lull during the Olympics.
“Interestingly, China’s stock market has not yet responded to talk of economic stimulus, beyond the occasional one-off upward dynamic as last seen on 20th August, but these rebounds have not been maintained.
“This may be because officials have yet to implement tax cuts, reductions in bank reserve requirements or other confidence boosting measures mentioned in recent weeks. Therefore inflating fighting policies remain largely in place. Also, China’s stock market did not perform in the last cycle, until it was actively targeted by the government in 2005. The current drift may actually suit China’s SWFs, should they wish to invest at home.
“Meanwhile, subscribers with investments in China may have to be patient for a while longer. Those contemplating investing in China are dealing with a ‘buyer’s market’ in which they can either wait more evidence of a bottom or nibble incrementally on weakness. Taking the long view, we can probably expect last year’s high to be exceeded on the next bull trend, possibly by a significant margin.”
Source: David Fuller, Fullermoney, September 1, 2008.
GaveKal: Thailand – buy when the cannons are sounding
“… while we acknowledge that the situation in Thailand is currently very touch-and-go, we think the current sell-off warrants a reminder about some of the country’s positives:
• The market is cheap. The SET is trading at 9.6x earnings with a 4.6% dividend. Moreover, many small caps are trading at dirt cheap PEs with even better yields. In the property sector, for example, some companies are trading on nearly double-digit yields, even though the coming year’s earnings are already locked in through pre-sales (and default rates are very low in Thailand).
• Strong balance sheets. Leverage has been very low in Thailand since the Asian crisis. More crucially, there has not been a US$ debt binge, contrary to many other Asian countries (which are now getting squeezed as the US$ carry trade reverses).
• The currency is cheap. The Baht remains dramatically undervalued on a PPP basis.
• Economic growth rate of 4.8% to 5.8%. Thailand’s manufacturing base has been expanding, with double-digit industrial output growth rates for much of the past two years. Exports have been sizzling – they rose 44% YoY in July, to a record US$17.8bn (one caveat here: agricultural products was one of the drivers, and commodities have obviously corrected some since July). Consumer and business confidence is much stronger in Thailand than in some other Asian nations (Vietnam, India, Philippines).
“No doubt, these positives are set against a number of negatives – liquidity in Thai stocks can be spotty; the trade balance is negative; Thai leading indicators have been falling for several months … But there is a price for everything … and sometimes you get a better price if you buy when the cannons are sounding.”
Source: GaveKal – Checking the Boxes, September 1, 2008.
CNBC: Merrill’s Bernstein on the strong US dollar
Source: CNBC, September 5, 2008.
Bespoke: US dollar’s golden cross
Source: Bespoke, September 3, 2008.
Ulrich Leuchtmann (Commerzbank): Russian rouble depreciating swiftly
“He notes the CBR failed to stabilise the rouble this week when it fell past the level at which it intervened at the height of the Georgia conflict last month, even though data show the bank’s reserves are still at a comfortably high level.
“‘The CBR’s motivation to refrain from more effective interventions might be that they do not want to waste reserves but expect the market to normalise soon,’ Mr Leuchtmann says. ‘Such a gamble could fail.’
“He says the arguments to sell the rouble stretch far beyond the Georgia crisis and therefore might persist for some time. ‘Falling oil prices have triggered speculation about the future path of Russia’s current account. The bulk of Russia’s exports are commodity-related, and its oil-production costs are among the highest in the world. That means any fall in the oil price hits Russia’s export margin and therefore the current account.’
“He says it is also possible that the CBR finds some degree of rouble weakness welcome, given the risk factors that stem from falling oil prices and the new scepticism of foreign investors. ‘This strategy is also risky. The recent swift depreciation has opened a Pandora’s box which might be difficult, and costly, to close at a future point when the CBR decides the depreciation is sufficient.’”
Source: Ulrich Leuchtmann, Commerzbank (via Financial Times), September 4, 2008.
CNBC: Templeton’s Mobius – bullish on commodities, China
Source: CNBC, September 2, 2008.
US Global Investors: Commodities supercycle has many years to go
Source: US Global Investors – Weekly Investor Alert, September 5, 2008.
David Fuller (Fullermoney): CRB trend has peaked
“Also, individual commodities will experience some sharp rallies on supply concerns from time to time. However I would not expect too many new highs, especially where we have seen big upward accelerations. In this new environment, short positions following rallies are likely to outperform buys following dips, at least until the next big asset reflation commences.
“Commodity shares may perform somewhat differently, depending on valuations and earlier performance. Where they accelerated higher, we can expect sharp reactions. Due to stock market headwinds, some very profitable commodity shares lagged on the upside. They will probably fall less and outperform the actual commodities to which they are related, particularly as a broad stock market recover occurs. I would hold the best but be wary of the more speculative small-cap commodity stocks.
“Lastly, the good thing about significant shakeouts in secular themes is that if we keep a portion of our powder dry, we get to play the game all over again from a lower level.”
Source: David Fuller, Fullermoney, September 3, 2008.
Bespoke: Look for bottom in TIP before committing to commodities rally
“Interestingly, the TIP ETF has led the CRB index in their most recent rallies and declines. The TIP made a short-term bottom last June and rallied sharply through this March. The CRB index didn’t really begin its spike until last August, and it didn’t top out until early July. Both are currently declining, which means inflation concerns are subsiding. Based on recent trading patterns in the two, it may be worthwhile to look for a bottom in TIP before looking for a rally in commodities.”
Source: Bespoke, September 3, 2008.
Richard Russell (Dow Theory Letters): Has gold bottomed?
“The following are words from the latest edition of my friends at Growth Fund Guide out of Rapid City, SD – ‘We should also point out that in the middle area of the previous precious metals super bull market (it eventually peaked in 1980) a high point was reached in December 1974, from which gold declined 47% into August 1976, and then rose an additional 721% to its 1980 peak. The recent decline amounted to about 22%, so if the recent decline were to continue and end up closer to the large decline in the middle of the previous super bull market, gold and gold funds could decline quite a bit further. Our guess is that there is a better than even chance the lows for gold funds were witnessed on August 11th and 15th. But only time will tell.’ Wise words – Russell.”
Source: Richard Russell, Dow Theory Letters, September 4, 2008.
US Global Investors: Physical demand for gold has never been stronger
Source: US Global Investors – Weekly Investor Alert, September 5, 2008.
MarketWatch: Big jump in gold sales spurs manipulation talk
“Three unidentified US banks held 86,398 short positions, or bets that gold prices will fall, in the COMEX gold market as of August 5 – 10 times more short positions than a month earlier, a government report showed.
“The report by the Commodity Futures Trading Commission, which regulates US futures markets, also showed short positions held by three US banks in silver futures had increased more than four times during the same period.
“‘The data in the bank participation report is so clear and compelling that it is hard to conclude anything but manipulation,’ said Theodore Butler, a precious metals analyst, in a note.
“The sudden jump in short positions coincided with a slide in silver and gold prices, which fell $12.30 an ounce in July and another $89.20 in August, their biggest monthly loss since at least 1984, according to Factset. Silver has slumped more than $4 an ounce in August, also the biggest since 1984.
“‘Congress is already investigating allegations of manipulation in the oil market, and it seems likely that it is only a matter of time before a similar investigation will be required in the precious metal markets,’ said Mark O’Byrne, executive director at Gold and Silver Investment.
“The CFTC, in a report published in May on its Web site addressing the allegation that the silver market was manipulated, said ‘there is no evidence of manipulation in the silver futures market.’”
Source: Moming Zhou, MarketWatch, August 29, 2008.
David Fuller (Fullermoney): Gold faced with period of support building
“I like gold for the long term, but as with many markets, we may be in this defensive period of uncertainty for a while longer before asset appreciation commences once again.”
Source: David Fuller, Fullermoney, September 1, 2008.
Bloomberg: Pickens – oil to return to record by end of 2008
Source: Bloomberg, September 3, 2008.
Bloomberg: Ospraie to close Flagship Hedge Fund after 38% loss
“The New York-based Ospraie Fund fell 26.7% in August after a ‘substantial sell-off’ in energy, mining and resource equity investments, Anderson said in a letter to investors yesterday.
“Losses at Ospraie, once the largest commodity hedge fund firm, underscore how the sudden swing in commodities caught even experienced managers off-guard. The Morgan Stanley Commodity Related Index of 20 mining, energy and agricultural companies declined 13% in July and August as the slowing global economy cut demand for raw materials.
“‘Commodities have been the story du jour, what with China’s 1.2 billion population industrializing,’ said Peter Rup, chief investment officer at New York-based Orion Capital Management, which invests in hedge funds. ‘It’s easy to find a trend and ride the train. The problem is, managers don’t know when to get off it.’”
Source: Katherine Burton, Saijel Kishan and Christine Harper, Bloomberg, September 3, 2008.
BCA Research: ECB – still hawkish
“For the last year the central bank has talked and acted tough on monetary policy. Yesterday’s rate decision and the announcement that it would apply a 12% ‘haircut’ to collateral offered from next February continues this trend, unnerving investors. However, the next move will be towards more accommodative monetary policy, beginning early next year.
“Headline inflation is peaking and price pressures will ease further in the months ahead as the economy weakens. Indeed, external demand is slowing and this week’s retail sales and PMI services releases painted a very bleak picture.
“Still, policymakers will be slow to shift their rhetoric. As we highlighted in the past, the ECB remained concerned about inflation risks even as it eased policy in 2001. Bottom line: Rates will fall 100 basis points next year. Stay overweight 10-year bunds versus Treasurys and use any relative weakness from yesterday’s announcement to add to positions.”
Source: BCA Research, September 5, 2008.
Victoria Marklew (Northern Trust): ECB’s economic projections
Source: Victoria Marklew, Northern Trust – Daily Global Commentary, September 4, 2008.
Edmund Conway (Telegraph): ONS called to account as doubts over figures start to stack up
“Then came the retail sales controversy. The ONS reported a record rise in May, a record fall in June, then an entirely unexpected rise in July. The British Retail Consortium, the Confederation of British Industry, the Bank and many economists were sceptical.
“The final embarrassment came earlier this month when, on the advice of the ONS, the Department for Communities and Local Government withdrew three years’ worth of housing data after discovering ‘inconsistencies’.”
Source: Edmund Conway, Telegraph, September 4, 2008.
Bloomberg: Spanish retail sales fall for eighth month as “crisis” deepens
“Sales fell 6% from the year-earlier month, after adjusting for the number of days worked, the second-biggest decline since the series began in 2005, the National Statistics Institute said on its Web site today. That decline followed a 7.9% slump in June. Adjusted sales fell 0.4 percent on the month.
“‘Spain has a crisis,’ Nick Hayek, chief executive officer of Swatch Group AG, the world’s largest watchmaker, said. ‘Without any doubt that’s the country in Europe that really gives us a headache.’
“Spain’s economy has been battered by surging gasoline prices and the fastest inflation in 10 years just as the global credit shortage undermines the housing market. House prices fell for the first time in a decade in the second quarter as the European Central Bank pushed interest rates to a seven-year high in its bid to control price gains.”
Source: Ben Sills, Bloomberg, August 29, 2008.
Financial Times: Fukuda quits as Japanese PM
“Mr Fukuda, the second prime minister to quit in a year, said he had resigned in the hope that a new leader could break the political deadlock that had plagued his term in office.
“The deadlock arose from a hung parliament in which the opposition Democratic Party of Japan blocked legislation needed to bolster Japan’s flagging economy and realise its global diplomatic and security ambitions.
“Explaining his resignation to a hastily convened press conference on Monday night, Mr Fukuda said: ‘In order to put priority on the people’s livelihood, a political vacuum must be avoided and there should be no lapse in policies. We need a new team.’
“The 72-year-old leader, drafted in last September to take over a party reeling from the equally sudden resignation of Shinzo Abe, Japan’s youngest post-war leader, added: ‘I feel that it would be best to hand over the reins of power to a new leader.’
“The uncertainty comes just as Japan has slipped into an economic slowdown, triggered by falling exports and high food, energy and commodity prices. A recent contraction in gross domestic product ended more than six years of continuous growth, the longest, if not fastest period of expansion in post-war Japan. This prompted the government last week to launch an Y11,500bn ($106 billion) emergency fiscal stimulus package.”
Source: Michiyo Nakamoto and David Pilling, Financial Times, September 1, 2008.
Bloomberg: China’s manufacturing contracts for second month
“The Purchasing Managers’ Index was a seasonally adjusted 48.4, unchanged from July, the China Federation of Logistics and Purchasing said today in an e-mailed statement.
“Since July, Chinese policy makers have put extra emphasis on sustaining the economy’s expansion rather than cooling inflation. Growth has slowed for four quarters and Vice Commerce Minister Gao Hucheng said last week that weakness in global demand will weigh on China’s exports for the rest of the year.
“‘This suggests economic growth will continue to slow,’ said Sun Mingchun, an economist at Lehman Brothers in Hong Kong.”
Source: Nipa Piboontanasawat, Bloomberg, September 1, 2008.
Financial Times: Asian inflation pressures set to ease
“Tim Condon, head of Asia research at ING, said: ‘The tightening cycle is over across Asia. A lot of this is an oil call, and if oil spikes again we will see upward inflationary pressures.’
“Although China has been reporting slowing price growth since May, inflation continued to rise in much of the rest of the region. Last week Japan reported that its core inflation rate hit a decade high of 2.3% in July from the same month in 2007, while Vietnam said consumer prices rose 28.3% in August, up from 27% in July.
“Falling commodity prices and a resultant slowing of food price inflation was a key factor in Monday’s data reports. Robert Prior-Wandesforde, a senior Asia economist for HSBC, said: ‘In Asia, food explains 60% of the overall inflation rate in the last year, with energy accounting for 15%.’
“The extent to which inflation drops across Asia will be limited by food commodity prices remaining relatively high, wage increases, exchange rates weakening against the dollar and monetary authorities’ reluctance to tighten further.”
Source: John Aglionby and Song Jung-a, Financial Times, September 1, 2008.
Bloomberg: Brazil’s industrial output rises 8.5% versus year ago
“Output rose 8.5% from a year ago, more than the revised 6.4% increase in June and more than the 8% median forecast in a Bloomberg survey of 32 economists. After stripping out seasonal factors, output rose 1% from June, the statistics agency said in a statement in Rio de Janeiro.
“Today’s report highlights the sustained domestic demand that is powering growth and consumer price increases in Latin America’s largest economy. Policy makers next week will probably vote to raise Brazil’s benchmark lending rate by three-quarters of a percentage point for a second time in as many meetings to slow inflation from a three-year high, Alexandre Lintz, chief strategist with BNP Paribas in Sao Paulo, said.
“‘We see no room for the central bank to change its current tightening stance, given economic activity remains robust,’ Lintz said. ‘The bank needs to keep raising rates by 0.75 percentage point until there are clear signs that growth is slowing.’
“Inflation, running above the midpoint of the central bank’s target range of 2.5% to 6.5% since January, fell in July for a second month, led by food. Consumer prices rose 6.37% in the 12 months to the end of July.”
Source: Joshua Goodman, Bloomberg, September 2, 2008.
BCA Research: RBA cuts and adopts easing bias
“The decision to cut interest rates by a quarter percentage point (to 7%) was designed to offset ‘tight’ financial conditions. Mortgage holders have seen interest burdens increase markedly, causing housing affordability to drop to a 22-year low and approvals to fall to the lowest level since 2006.
“Meanwhile, retail sales have slowed dramatically, the unemployment rate is rising and business and consumer confidence has plunged. In turn, household spending is expected to slow further. That said, labor scarcity is an ongoing issue for the commodity intensive parts of the economy and core inflation has not peaked.
“Furthermore, the country has booked its first trade surplus in six years, highlighting the hefty stimulus accrued by the positive terms-of-trade shock. Regardless, the central bank has adopted an easing bias, saying ‘… it is looking more likely that … overall economic growth [will] slow over the period ahead.’
“Bottom line: Despite lingering price pressures, the RBA will be forced to ease policy further to avert a more serious domestic slowdown. Still, significant easing is already discounted by the market. Thus, we maintain a neutral weighting to government bonds within a globally hedged fixed income portfolio and are flat the Aussie dollar.”
Source: BCA Research, September 3, 2008.
Financial Times: Russia announces “spheres of interest”
“The announcement, in the wake of the recent conflict in Georgia, is likely to raise the political temperature in neighbouring states, especially those with significant Russian minorities, as they try to gauge Russia’s appetite for future conflicts in the region.
“He said that Russia would defend ‘the life and dignity’ of Russian citizens ‘no matter where they are located’. He was referring to Russia’s intervention in Georgia with the declared aim of defending Russian citizens in South Ossetia against Georgian forces.
“Mr Medvedev announced that Russia would provide aid – including military help – to the enclaves of South Ossetian and Abkhazia.
“In the announcing his five-point foreign policy, he emphasised Russia’s wish to avoid confrontation or international isolation as the result of the recent conflict, which has been widely criticised in the west. ‘Russia does not intend to isolate itself. We will develop, as much as possible, our friendly relations with Europe and the United States, and other nations of the world.’
“He also focused on a commitment to international law, and again expressed Moscow’s now familiar antipathy to a ‘unipolar’ world dominated by Washington, saying ‘this type of world is unstable and threatens conflict’.
“Mr Medvedev’s announcement that Russia has ‘regions of priviledged interest’ is likely to be greeted with concern in the west, where it might be interpreted as the announcement that Moscow has imperial ambitions in the former Soviet Union. It is also likely to resonate in Crimea, the province of Ukraine that is dominated by ethnic Russians, ethnically Russian northern Kazakhstan, and Baltic states with large Russian minorities.
“‘Russia, like other countries in the world, has regions in which it has privileged interests’ said Mr Medvedev. ‘In these regions are located countries which have friendly relations … Russia will work attentively in these regions’ he said, adding these ‘privileged’ regions included states bordering Russia, but not only those.”
Source: Charles Clover, Financial Times, August 31, 2008.
3 comments to Words from the (investment) wise for the week that was (September 1 – 7, 2008)
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