Words from the (investment) wise for the week that was (September 15 – 21, 2008)
These are the quick market stats for the past week: the MSCI World Index up by 0.3%, the S&P 500 Index up by 0.3%, the Reuters/Jeffries CRB Index down by 0.1%, the US Dollar Index down by 1.6% and the ten-year US Treasury Note yield up by 4 basis points.
An uneventful week? Not if you consider the monumental swings that characterized trading from hour to hour and resulted in the most turbulent week in financial markets since 1987.
Credit markets virtually seized up during the first three days of last week as a modern-day bank run occurred with investors withdrawing money from brokerage, money-market and bank accounts, sending the three-month US Treasury Bill, a beacon of safety, to nearly 0% – its lowest level in more than 60 years. Actions by the US government on Thursday and Friday, however, saved the day, resulting in the yield on short-term Treasuries spiking to just more than 1% by the end of the fateful week.
Thomas Meyer, chief economist of Deutsche Bank in London, summed up the situation most appropriately: “If a body dehydrates, it falls over and if it gets worse it can die. Likewise the financial system is starved of liquidity right now so the central banks will have to keep providing it.”
Triggering a reversal in fortunes on Thursday and Friday was a tidal wave of announcements regarding US government proposals to return stability to the financial system, including the promise of a comprehensive solution, in Resolution Trust Corporation “dumpster” style, to fix the root of the financial problems by removing illiquid and toxic housing and mortgage-related assets from the balance sheets of financial companies (click here for text of proposal); a pledge to provide a guarantee program for troubled money-market funds; and the banning by the SEC of short selling of 799 financial stocks until October 2 (and similar action by the UK regulators).
Also, Lehman Brothers filed for Chapter 11 bankruptcy, a bank consortium, including three banks in the US and seven in the EU, revealed plans to create a $70 billion fund to provide emergency liquidity, the Fed announced several initiatives to provide additional support to financial markets, which include broader collateral eligibility at the Primary Dealer Credit Facility (PDCF) and Term Securities Lending Facility (TSLF), Bank of America (BAC) agreed to buy Merrill Lynch (MER) for $50 billion, and AIG (AIG) became nationalized by means of a $85 billion secured loan from the US government. (Any guess who replaced AIG as Man United’s principal sponsor? Click here for the sad truth.)
According to Bespoke, one can tell that a story is really important when the The Wall Street Journal runs the lead headline across the entire front page. During the past week the headline ran the entire front page on five occasions!
And for good measure, here is the front page of the Brooklyn Daily Eagle newspaper on the day of the initial Wall Street Crash in 1929 (Hat tip: Charlestone Voice).
Next, a tag cloud of the text of all the dozens of articles I have read during the past week. This is a way of visualizing word frequencies at a glance. Not too many surprises here, especially not seeing “banks” featuring prominently.
Commenting on the outlook for equities, David Fuller (Fullermoney) remarked as follows: “… central banks are now in a position to switch their policy emphasis from fighting inflation to stimulating GDP growth. They may remain crisis oriented, but at least we are beginning to see the coordinated intervention that I have been discussing and expecting.
“I will certainly not be selling during what I expect is the beginning of the end of this bear market. However, as conditions improve I am likely to shift some of my ‘just in case’ cash holding into equities over the next few months.”
Following an analysis of bear market troughs, Goldman Sachs concluded: “Using returns and valuation in prior bear markets as a template to assess the current situation implies the S&P 500 would bottom at 1070. … profit cycle … suggests the market bottoms four months before corporate profits trough, which we anticipate will occur in 1Q 2009. This pattern suggests the S&P 500 will trough in 4Q 2008.”
Next week is likely to be pivotal to stock markets’ recovery, but I am still of the opinion that markets are bottoming out. I would not be surprised if a year-end rally has in fact already commenced.
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.
The Federal Open Market Committee held the Fed funds target rate steady at 2% on Wednesday for the third straight meeting. The accompanying statement cited the recent turmoil in financial markets and the ongoing slowing in economic growth, but said that growth should soon pick up. The statement noted recent high inflation, but said this should ease, although it did say that “the inflation outlook remains highly uncertain”. The FOMC cited both downside risks to growth and upside risks to inflation that were of “significant concern”. There was no indication of a bias towards lower rates. The decision to hold the Fed funds target rate steady was unanimous.
Putting the US economic situation and the proposed Treasury action in perspective, Asha Bangalore (Northern Trust) said: “The optimism surrounding the Treasury plan is justified but it should be noted that economic recovery is several quarters ahead. The credit crunch and household balance sheet position will both play a critical role in how soon the economy gathers steam. Lest we forget, occupants are necessary for the huge number of unsold homes, which will occur only with significant gains in employment.”
For the rest, economic fundamentals took a back seat as investors reflected on the effects of the bail-out mania.
Week’s economic reports
Source: Yahoo Finance, September 19, 2008.
In addition to Fed Chairman Ben Bernanke testifying at Congress’s Joint Economic Committee on Wednesday, September 24, next week’s US economic highlights, courtesy of Northern Trust, include the following:
1. Existing Sales (September 24): Sales of existing homes are predicted to have declined in August to an annual rate of 4.92 million from 5.00 million in July.
2. Durable Goods Orders (September 25): A 1.8% decline in orders of durable goods orders is the most likely forecast for August. Consensus: -1.6% versus 1.3 in July.
3. New Home Sales (September 25): The consensus forecast is a 510,000 annualized sales pace of new homes in August, down from 515,000 in July.
4. Real GDP (September 26): The 3.3% preliminary estimate of real GDP growth in the second quarter is expected to be unchanged. Consensus: 3.3%.
5. Other reports: Consumer Sentiment Index (September 26).
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 21, 2008.
The table below, courtesy of Bespoke, highlights the percentage changes that global equity markets experienced from their Thursday lows until Friday’s close. Russia led the way with an increase of 20.2%, followed by Hong Kong (+18.7%), China (+15.1%), Singapore (+10.9%) and the UK (+10.0%). Forming the rear guard, Japan (+5.5%) and Australia (+6.1%) registered the most “muted” gains.
With the exception of the Dow Jones Industrial Index (-0.3%; YTD -14.1%), the US stock markets all edged higher over the week as shown by the major index movements: S&P 500 Index -3.2% (YTD -15.4%), Nasdaq Composite Index (+0.6%; YTD -14.3%) and Russell 2000 Index +4.6% (YTD 1.6%). Friday’s session, which also happened to be a quarterly options expiration day, saw the highest volume (2.98 billion shares) ever traded on the NYSE, including significant short squeezes.
The outperformance of small caps is noteworthy as they have a history of often turning up before large caps at market bottoms. A breakout through the 760 level should be positive for the broader market.
The Russell 2000 Index has already managed to break through both its 50- and 200-day moving averages, whereas the Dow Jones Industrial Index and S&P 500 Index are still flirting with their 50-day lines. On the other hand, the Nasdaq Composite Index still has some work to do in order to catch up with its moving averages.
The table below, prepared by Bespoke, shows the performance of the ten S&P 500 sectors for the past week. Only two sectors, Energy and Financials, managed gains. Defensive sectors such as Utilities, Telecom, Consumer Staples and Health Care had the largest declines.
Bespoke also provided the best- and worst-performing stocks in the S&P 500 for the week. As shown, Merrill Lynch (MER) (+73.0%) was the best performer, while AIG (AIG) (-68.3%) was down the most. Investor interest in financials stocks was sparked by governmental bail-out efforts, including a temporary ban by the SEC on short selling of 799 financial stocks and reports that the Treasury Department was working on a plan designed to help banks dispose of troubled assets. The extreme spread of the gains/falls summarizes the tumultuous nature of the trading.
The ten-year US Treasury Note rose by 4 basis points to 3.76%, the UK ten-year Gilt yield was unchanged at 4.60% and the German ten-year Bund increased by 5 basis points to 4.23%. Emerging-market bonds tumbled as investors shunned risky securities.
US mortgage rates also increased, with the 15-year fixed rate rising by 13 basis points to 5.70% and the 5-year ARM 18 basis points higher at 5.97%.
Interbank lending markets were in crisis during the first part of last week as demand for cash sent yields on the three-month US Treasury Bill, a beacon of safety, to nearly 0% – its lowest level since 1941. Actions by the US government on Thursday and Friday thwarted the run on brokerage, money-market, savings, and even checking accounts, resulting in the yield on short-term Treasuries spiking higher to 1.01% by the end of the week.
The TED spread (i.e. 3-month dollar Libor less 3-month Treasury Bills), a measure of risk aversion and illiquid repo conditions, widened to 313 basis points on Thursday before easing back to 221 basis points by Friday afternoon.
Over the week the US dollar declined against the euro (-1.8%), the British pound (-2.2%), the Swiss franc (-2.3%), the Japanese yen (-0.5%), the Australian dollar (-1.4%), the New Zealand dollar (-3.3%) and the Canadian dollar (-1.3%).
Gold bullion scored its biggest daily gain since 1980 on Wednesday, rising by 9.0% on the back of safe-haven buying and hitting an intraday high of $902.60. The entire precious metals complex – gold (+13.1%), platinum (+5.1%) and silver (+15.6%) – recorded strong gains for the week.
“In a total disaster, where there is a run from paper currency, you’ll get your biggest bang for your buck in gold,” said legendary Peter Bernstein. “You don’t have to buy much gold to have an effective hedge,” he added, noting that “if everything hits the fan, gold should be worth several thousands dollars an ounce”.
West Texas Intermediate recovered from a low of $91.02 a barrel on Tuesday to close the week at $102.75 on the back of violence in Nigeria, hurricane disruptions to oil production and refining activity in the Gulf of Mexico area, and US gasoline stocks sinking to their lowest levels in 39 years.
Commenting on the outlook for oil prices, BCA Research said: “The growth slump has spread across the developed world and is threatening many emerging markets, causing investors to scale back expectations for energy demand and allowing prices to plunge lower. Implied option volatility has been high and rising for many commodities, which is typical capitulation selling. While these phases do not typically last long, we advise against buying into weakness at this time.”
The following chart shows 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 in optimally managing our wealth. And also remember what Elroy Dimson from the London Business School said: “Risk means more things can happen than will happen.”
Jon Stewart (The Daily Show): The economy & you – Wall Street collapse
Source: Jon Stewart, The Daily Show, September 18, 2008.
John Authers (Financial Times): Wall Street’s wild week
Source: John Authers, Financial Times, September 19, 2008.
Francesco Guerrera (Financial Times): Wall Street’s rescue
Source: Francesco Guerrera, Financial Times, September 19, 2008.
Asha Bangalore (Northern Trust): Proposed Treasury action reassures markets
“But the coast is not clear on the money market front. The spread between the 3-month Libor and 3-month Treasury bill rate was 224 bps as of this writing, down from 297 bps yesterday compared with a spread of 111 bps on September 8.
“Equity market rallies have been impressive on both September 18 and 19. The self-off in the Treasury market at the long-end signals market fears about the implications of the debt that is piling the balance sheet of the US economy. The 10-year Treasury note yield was around 3.77% today, up from 3.41% on September 17.
“The optimism surrounding the Treasury plan is justified but it should be noted that economic recovery is several quarters ahead. The credit crunch and household balance sheet position will both play a critical role in how soon the economy gathers steam. Lest we forget, occupants are necessary for the huge number of unsold homes, which will occur only with significant gains in employment.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, September 19, 2008.
Financial Times: Push for crisis breakthrough
“The US Treasury said the meeting discussed a ‘comprehensive approach to address the illiquid assets on bank balance sheets that are at the underlying source of the current stresses in our financial institutions and financial markets.’
“The Treasury added that Mr Paulson and Mr Bernanke were ‘exploring all options, legislative and administrative, and expect to work through the weekend with Congressional leaders to finalise a way forward’.
“Democratic leader Harry Reid said the administration had not yet presented a detailed proposal but congressional leaders looked forward to receiving one ‘in a matter of hours not days’.”
Source: Krishna Guha, Michael Mackenzie, Ralph Atkins and Paul Davies, Financial Times, September 18, 2008.
BCA Research: Unwinding Armageddon
“The announcement that US Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are developing a plan to remove troubled assets from the balance sheets of financial companies is extremely encouraging for equity markets. We have published several times over the past year a checklist of events that need to ease banking sector stress and restore confidence in financial markets. While the details of the plan have not yet been decided, let alone released, on the surface this appears to be the ‘open ended’ commitment that we have been waiting for to put a floor under risky assets.
“That said, not all is rosy heading forward: the U.S. economic outlook remains bleak and financial sector deleveraging will likely persist, providing a tough earnings environment. Correspondingly, it will be critical that investors refocus on fundamentals and be selective once fears of Armageddon have been unwound. Stay tuned.”
Source: BCA Research, September 19, 2008.
Jim Sinclair (MineSet): Potential infinite bailouts to explode money supply
Source: Jim Sinclair, MineSet, September 19, 2008.
BBC News: Soros – bank problems to worsen
Source: BBC News, September 16, 2008.
ABC News: Greenspan’s take on weakening economy
Source: ABC News, September 15, 2008.
Financial Times: Panic grips credit markets
“Barometers of financial stress hit record peaks across the world. Yields on short-term US Treasuries hit their lowest level since the London Blitz, while gold had its biggest one-day gain ever in dollar terms. Lending between banks, in effect, stopped.
“Speculation mounted that the Federal Reserve, which refused to cut rates on Tuesday, could be forced into an embarrassing U-turn or might further expand its market liquidity operations.
“The $85 billion emergency Fed loan for the troubled insurance group AIG, announced on Tuesday night, failed to curb the surge in risk aversion. Instead, markets were hit by a fresh wave of anxiety.
“One cause for fear came when shares in a supposedly safe money market mutual fund fell below par value – or ‘broke the buck’ – owing to losses on debt in Lehman Brothers, which filed for bankruptcy protection on Monday.
“This raised the risk that retail investors in other such funds could panic and pull out their money.
“All thought of profit was abandoned as traders piled in to the safety of short-term Treasuries, with the yield on three-month bills falling as low as 0.02% – rates that characterised the ‘lost decade’ in Japan. The last time US Treasuries were this low was January 1941.
“Shares in the two largest independent US investment banks left standing – Morgan Stanley and Goldman Sachs – fell 24% and 14%, respectively, as the cost of insuring their debt soared, threatening their ability to finance themselves .
“Morgan Stanley was holding preliminary merger talks with Wachovia, a troubled regional lender, and could approach other banks and look at other options in the coming days, people familiar with the situation said. Washington Mutual, another regional lender, has hired Goldman Sachs to contact potential buyers.
“HBOS, a leading UK mortgage lender pressed into sales talks by the government after its share price halved this week, agreed to a £12bn takeover by Lloyds TSB.
“A key measure of fear in the fixed-income markets – the so-called Ted spread, which tracks the difference between three-month Libor and Treasury bill rates – moved above 3%, higher than the record close after the Black Monday stock market crash of 1987.
“US authorities fired back with the Treasury announcing it was borrowing $40bn to give to the Fed to use for its emergency lending – in essence removing balance sheet constraints on the size of this assistance.
“The Securities and Exchange Commission announced new curbs on short selling.”
Source: Krishna Guha, Michael Mackenzie, Gillian Tett, Financial Times, September 18, 2008.
Asha Bangalore (Northern Trust): Markets recover after distrust and anxiety
“Thomas Meyer, chief economist of Deutsche Bank in London, sums up the situation most appropriately: ‘If a body dehydrates it falls over and if it gets worse it can die. Likewise the financial system is starved of liquidity right now so the central banks will have to keep providing it.’ The extent of risk aversion and fear is reflected in the spread between the 3-month Libor and 3-month Treasury bill rate. It shot up to 303 basis points yesterday. Today this spread widened further to 313 bps. This is 76 bps higher than the peak spread (237 bps) posted on August 20, 2007, the month when the ongoing crisis commenced.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, September 18, 2008.
MarketWatch: Fed acts to help money market funds
Source: Robert Schoeder, MarketWatch, September 19, 2008.
Bespoke: Fed to accept lower quality assets as collateral
“‘In an obscure but highly important announcement late Sunday evening, the Fed said it would let Wall Street firms post as collateral much riskier assets – including equities, junk bonds, subprime mortgage-backed securities and even whole mortgages – in exchange for emergency loans through the Primary Dealer Credit Facility.’
“You think a Gregg Jefferies rookie card is worth anything in collateral? How about those old Beanie Babies? Or maybe old Cabbage Patch Kids dolls? Who knows what they’ll take at this point.”
Source: Bespoke, September 15, 2008.
Yahoo News: Banks roll out $70 billion loan program
“The ten banks, which include JPMorgan Chase and Goldman Sachs, said they were committing $7 billion each for the pool. The pool would act as a signal to the marketplace that banks, brokerages, and other financial companies can lean on the fund to take care of borrowing needs.
“The banks said the program will be available to participating banks which can get a cash infusion up to a maximum of one-third of the total size of the pool. The size of the loan program might increase as ‘other banks are permitted to join.’
“All participating banks intend to use this facility beginning this week, the statement said.
“The banks also include Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Merrill Lynch, Morgan Stanley and UBS.”
Source: Joe Bel Bruno, Yahoo News, September 15, 2008.
Charlie Rose: A discussion about the crisis on Wall Street
Source: Charlie Rose, September 15, 2008.
Charles Kirk (The Kirk Report): Bailouts are band-aids
“Yet, it seems, this lesson is lost among all who continue to work against the natural evolution of the market and free market economy. Right now, the government is pulling every string possible in an attempt to save the country from financial ruin. We’ve watched our leaders go from telling us that there is no problem to worry about to now taking billions of dollars out of our pockets (and those of future generations) to help the rich and powerful who’ve made poor choices over the past few years.
“I say enough is enough. The rich and powerful want us to pay for their problems and they threaten our financial futures if we don’t follow along. This is ransom, pure and simple, and we should not tolerate it any longer.
“Bailouts are band-aids. While they reduce the pain, they don’t cure the disease. We need to get back to a country that generates wealth because it is the smartest and most creative and that its businesses are the most productive, profitable, and competitive. Not a country that continues to lie to itself and creates one bubble after another in a desperate attempt to continue a standard of living that simply is no longer deserved.
“As Americans, we value money above all else, but we’ve lost a true understanding of how to create it. Instead, we try to look for short cuts that wreak utter havoc. And, even amid our darkest days, we continue to try to do the same instead of facing facts, owning up to our mistakes, and punishing those who deserve to be punished so we can move on.
“In sum, let Rome burn. What will result is a much better America and a stronger financial system. But, if we continue to let our government transfer wealth in the same manner we’ve seen all year, the road ahead will be much tougher than anyone currently wants to think about. It will only delay the inevitable and the quicker we face and own up to our mistakes, the better off we will be. It is time for the system to punish the stupid. Let’s make sure they do so we can move on, get on the right track, and prosper once again.”
Source: Charles Kirk, The Kirk Report, September 17, 2008.
YouTube: Peter Schiff – let the free market work it out!
Source: YouTube, September 18, 2008.
Peter Schiff (SafeHaven): Comrade Bernanke does it again
Source: Peter Schiff, SafeHaven, September 17, 2008.
David Fuller (Fullermoney): Impossible to know how and when all this will play out
“A good thing too, since every newspaper that I have seen today features – ‘Crisis’ – on the front page headline and stock markets are in turmoil.
“We are now seeing the beginning of a coordinated policy response from central banks … This is much more likely to cushion rather than draw a line under stock market declines because the west’s banking debacle is of unprecedented severity, at least in my lifetime. Inevitably it has global repercussions, as we are also seeing.
“It is impossible to know how and when all this will play out, because the final chapters have yet to be written by central banks and their respective treasuries. However, I assume that they have begun the process of shifting their main focus from fighting inflation to reviving growth.
“Central banks need to stimulate economic growth because the current trends are very disinflationary. They will want to ensure that welcome disinflation does not slip into a Japanese-style deflation of the 1990s, let alone a sustained global deflation which would be far worse.
“Meanwhile, the disinflation is certainly not all bad because property and other asset bubbles are inflationary, and will always burst at some point. However it is not easy to be philosophical about this process when one’s own asset bubbles, in terms of participation, happen to burst.
“Global deleveraging continues, which is why crude oil traded near $91 today, well down from its peak at $147.27 on July 11th. It is also a partial explanation for the strength of the US Dollar Index and yen, the latter shown here in terms of the euro’s fall against the Japanese currency.
“Is this Back to the Future, to use the title of Steven Spielberg’s film in another context? I believe so, in that we will be able to participate in a renewed bull cycle for Fullermoney themes which served us so well earlier in the decade – precious metals and other resources, Asian-led emerging markets and global infrastructure development – all of which should be among the leaders of the next up cycle. However we will have to be patient for a while longer, awaiting evidence that the down cycle has ended.”
Source: David Fuller, Fullermoney, September 16, 2008.
John Hempton (Bronte Capital): What comes around goes around
“The problem was that Herstatt received irrevocable payments of Deutsch Marks in the German time zone against a delivery of US Dollars in New York later the same day. Herstatt failed between acceptance and delivery.
“The German failure triggered losses around the world.
“Well what comes around goes around. It appears that KfW – a German government owned lender – transferred Euro 300 million to Lehman on the day of its bankruptcy.
“It was very kind of the German taxpayer to contribute so much for the benefit of Lehman creditors! Far more than the US taxpayer did … 34 years is a long time for pay-back. But pay-back came.”
Source: John Hempton, Bronte Capital, September 17, 2008.
Bloomberg: Roubini – US financial industry facing “disaster”
Source: Bloomberg, September 15, 2008.
CNBC: Meredith Whitney on Wall Street’s future
Source: CNBC, September 15, 2008.
CNBC: Wilbur Ross – possibly a thousand banks will close
Click here for the full report.
Source: CNBC, September 15, 2008.
Financial Times: BofA to buy Merrill Lynch for $50 billion
“In a dramatic U-turn on Sunday, BofA entered discussions with Merrill after pulling out of the bidding for Lehman, partly prompted by the US government’s refusal to supply financial help for a Lehman takeover.
“BofA’s chief executive Ken Lewis has long coveted Merrill in the belief that a merger of the lender’s commercial banking operations and Merrill’s retail brokerage arm would be a formidable combination in the US financial services industry.
“However, a deal could saddle BofA with more troubled assets. The bank bought the stricken mortgage-lender Countrywide and a purchase of Merrill would force it to clean up the bank’s trading books, which have already cost Merrill some $52 billion in writedowns and credit losses.”
Source: Francesco Guerrera, Financial Times, September 14, 2008.
Barry Ritholtz (The Big Picture): Layman’s explanation of AIG vs Bear vs Lehman
“Here is what I said to them:
• Lehman Brothers was like the little kid pulling the tail of a dog. You know the kid is going to get hurt eventually, and so no one is surprised when the dog turns around and bites the kid. But the kid only hurts himself, so no one really cares that much.
• Bear Stearns is the little pyro – the kid who was always playing with matches. He could harm not only himself, but burns his own house down, and indeed, he could have burnt down the entire neighborhood. The Fed stepped in not to protect him, but the rest of the block.
• AIG is the kid who accidentally stumbled into a bio-tech warfare lab … finds all these unlabeled vials, and heads out to the playground with a handful of them jammed into his pockets.”
Source: Barry Ritholtz, The Big Picture, September 17, 2008.
Barry Ritholtz (The Big Picture): The lessons of Bear Stearns
Source: Barry Ritholtz, The Big Picture, September 17, 2008.
Financial Times: US Treasury raises Fed funding
“The move was intended to deal with fears that the US central bank’s balance sheet was overstretched following the AIG loan announced on Tuesday.
“The Treasury said it would sell bills at the Fed’s request as part of the process of helping it better manage its balance sheet.
“The Fed said on Tuesday it would lend AIG up to $85 billion in emergency funds in return for a government stake of 79.9% and effective control of the company – an extraordinary step meant to stave off a collapse of the giant insurer that plays a crucial role in the global financial system.
“The Fed said the loan was expected to be repaid by the proceeds of selling AIG operating companies. A senior Fed staffer said the most likely outcome was an orderly liquidation of AIG, though it was possible that the firm could survive as an ongoing business.
“The loan is at a punitive interest rate of three-month Libor plus 850 basis points, giving AIG a strong incentive to repay it as soon as possible. It will be secured on all AIG’s assets, including those of its subsidiary companies.
“The Fed said in a statement it was acting to prevent ‘a disorderly failure of AIG’ which would ‘add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance’.”
Source: Francesco Guerrera, Aline van Duyn and Krishna Guha, Financial Times, September 16, 2008.
Economagic: Borrowings sky-rocket
Source: Economagic, September 15, 2008.
Asha Bangalore (Northern Trust): FOMC holds Fed funds rate steady
“The policy statement shows a shift to a neutral intermeeting bias, with the risk of higher inflation and weaker economic growth placed on equal footing.
September 16, 2008
August 5, 2008:
“However, the language and tone of the first paragraph leans toward greater concern about growth in the inflation-growth debate. The statement duly noted that financial market stress ‘has increased significantly’ and ‘labor markets have weakened further’. The statement listed three factors – tight credit conditions, the ongoing housing contraction, and some slowing in export growth – that are likely to hold back economic activity. ‘Slowing export growth’ was included in this statement, which is consistent with the nature of economic reports from abroad.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, September 16, 2008.
Asha Bangalore (Northern Trust): Leading index points to continued weak economic conditions
“In August, orders of consumer durable goods, stock prices, interest rate spread, and consumer expectations made positive contributions. The recent sharp decline in equity prices implies that this component will make a negative contribution in September. The interest rate spread should make a smaller positive contribution compared with the August reading. Building permits, orders of durable capital goods, the manufacturing workweek, initial jobless claims, supplier deliveries, and real money supply made negative contributions.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, September 18, 2008.
Asha Bangalore (Northern Trust): Industrial Production plunges in August
“In sum, industrial production data suggest that the economy is in the midst of a recession.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, September 15, 2008.
Asha Bangalore (Northern Trust): Current account deficit widens in Q2
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, September 17, 2008.
Asha Bangalore (Northern Trust): Home building activity remains weak
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, September 17, 2008.
Asha Bangalore (Northern Trust): Consumer Price Index – August 2008
“Excluding food and energy, the core CPI rose 0.3% in August, translating to 2.54% year-to-year gain versus a 2.44% increase in 2007. In August, prices of clothes advanced 0.5%, car prices fell 0.6%, airfares increased 1.6%, while the shelter index moved up only 0.1%, and recreation costs rose 0.5%. The financial market crisis underway and a significantly weak economy point to a noticeable moderation of inflation in the months ahead.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, September 16, 2008.
Bill King (The King Report): Facing the consequences of Easy Al’s policies
“Bubbles do not occur by accident; they are the residue of design – a profligate money policy to paper over: diminishing living standards, a nation’s unwarranted consumption and ballooning external debt.
“Instead of the financial markets, particularly the stock market, acting as a gauge or beneficiary of economic activity, the financial markets became the most important generator of US economic activity. This was the ‘new economy’, AKA egregiously levered financial speculation and engineering.
“Long-time readers know that one of our postulations is that 20th Century big government – communism, socialism, fascism, ‘the third way’ and crony capitalism – are imploding with the weakest going first.
“The bankruptcy of the communist world in the ‘90s plus Japan’s pricking of its bubble created an insatiable global demand for dollars. Easy Al exploited this phenomenon by creating bubbling amounts of credit. Then Easy Al ran interference for Street speculators at Congress. Al brayed that any interference, regulation or scrutiny of the Street’s massive levering, unfathomable risk tolerance and rank speculation would impair the US economy because foreign competitors would eagerly adopt The Street’s self-immolating schemes and practices. The consequences are now occurring.”
Source: Bill King, The King Report, September 19, 2008.
Infowars: Ron Paul blasts “secret government” running economy
Click here for the full article.
Source: Steve Watson, Infowars, September 18, 2008.
Bespoke: 3-Month Treasuries Will Now Get You $89 on $10,000 p.a.
“A $10,000 investment in 3-Month Treasuries will now get you $89 per year. That’s much better than the $4 we of earlier in the week.”
Source: Bespoke, September 19, 2008.
Bloomberg: Emerging-market bonds tumble as credit crisis deepens
“Emerging-market bond losses deepened on speculation the Federal Reserve’s takeover of American International Group will fail to restore confidence.
“‘The outlook remains negative,’ said David Spegel, head of emerging-market strategy at ING Financial Bank NV in New York. ‘Access to funding is going to be severely curtailed.’”
Source: Lester Pimentel, Bloomberg, September 17, 2008.
David Fuller (Fullermoney): Bond yields reflect crunching global recession
“This certainly challenges the lengthy bottoming out hypothesis for government bond yields (topping out for bond prices) that I have advocated. Quite simply, the game has changed and some people think US 10-Year Yields will fall to 2%.
“I doubt this because I do not expect the crunching global recession that it would imply. I think government bond yields will start to rise as the stock market begins to anticipate the next economic recovery.”
Source: David Fuller, Fullermoney, September 16, 2008.
Bespoke: Sector performance since July 15th
Source: Bespoke, September 19, 2008.
Bespoke: VIX spikes to 35
Source: Bespoke, September 18, 2008.
CNBC: Will markets get worse?
Source: CNBC, September 18, 2008.
David Fuller (Fullermoney): The beginning of the end of bear market
“However we also know that the world does not end, at least not for manmade financial reasons. Bear markets are temporary because there are limits to deleveraging and asset liquidation. Recent action represents the fifth wave of capitulation selling that we have seen. Cash is an appealing haven in times of crisis, but it is also a wasting asset over the long term.
“With bank shares still reeling, we obviously cannot say that the problems are over. Consequently the risk of additional selling remains. Stock market indices are in downtrends. Financial sector problems inevitably weigh on the broader economy, although the latter will remain in better overall shape.
“The really good news – inflation is now a rapidly waning problem, although it will take longer for official statistics to reflect this. If the appropriate analogy is to think in terms of inflationary fire and deflationary ice, we have gone from ice over fire at the beginning of this decade, to fire over ice as central banks stoked up money supply, to ice over fire once again, in response to higher rates and asset price disinflation.
“Consequently central banks are now in a position to switch their policy emphasis from fighting inflation to stimulating GDP growth. They may remain crisis oriented, but at least we are beginning to see the coordinated intervention that I have been discussing and expecting.
“I will certainly not be selling during what I expect is the beginning of the end of this bear market. However, as conditions improve I am likely to shift some of my ‘just in case’ cash holding into equities over the next few months. This will almost certainly be in Fullermoney themes, but I will also broaden the portfolio’s coverage. Meanwhile, I’m just watching the charts, reading the articles and reports, and commenting.”
Source: David Fuller, Fullermoney, September 18, 2008.
The Wall Street Journal: Jeremy Grantham beginning to see value
“Stocks that even Jeremy Grantham likes come pretty well recommended even in a financial crisis. His top ‘high quality’ picks are Microsoft, Johnson & Johnson, Pfizer, Wal-Mart, Exxon Mobil, Coca-Cola, PepsiCo, Chevron, UnitedHealth Group, Procter & Gamble, QUALCOMM, Oracle, Merck, Home Depot, and Cisco Systems. (It sort of looks like a typical ‘Large Cap’ fund without the financial stocks.) If you are really nervous, maybe you should just sell your other shares and buy these.”
Source: Brett Arends, The Wall Street Journal, September 18, 2008.
Goldman Sachs: Bear market troughs – a history of 10 cycles
“The path to the trough varies in each cycle. It may be a sharp 3-month correction (1957, 1987, & 1990) or a decline lasting over 18 months (1968, 1973, 1980, & 2000). Bear markets over the past 50 years have declined on average 32%, with 10% occurring in the final month. Rebounds are sharp, averaging 15% in the following three months.
“Using returns and valuation in prior bear markets as a template to assess the current situation implies the S&P 500 would bottom at 1070.
“Our profit cycle trilogy suggests the market bottoms 4 months before corporate profits trough, which we anticipate will occur in 1Q 2009. This pattern suggests the S&P 500 will trough in 4Q 2008. Consistent with history, a sharp rally would lift the market towards our 1400 target.”
Source: Goldman Sachs, September 18, 2008.
Richard Russell (Dow Theory Letters): Nineteen 90% down-days
[Editor: Friday was a 90% up-day.]
Source: Richard Russell, Dow Theory Letters, September 18, 2008.
Richard Russell (Dow Theory Letters): Bearish trends feed on themselves
“In this atmosphere, the big money, as I see it, will be made by wealthy speculators who will buy up foreclosed housings at bargain prices, often below the cost of replacement. Everything now depends on people being able to finance what they own, and this takes income and cash. The two rarest items around will be just that – cash and income.
“The great danger as I look ahead is that the bearish trends will feed on themselves. Frightened people dump their stocks for cash, the result is a sinking stock market. A sinking stock market further frightens people and pushes them to sell (‘get me out at any cost’). When I tell people that the correct posture now should be cash and gold coins, they look at me as though I was crazy. That reaction makes me worry.”
Source: Richard Russell, Dow Theory Letters, September 16, 2008.
Reuters: Earnings Outlook – Q3 forecast for S&P 500 drops on financials
“At this time, the estimated growth rate for the third quarter of 2008 stands at -1.6%. On July 1, the estimated growth rate was 12.6%.
“If the final growth rate for the third quarter is -1.6%, it will mark the first time the S&P 500 has recorded five consecutive quarters of negative earnings growth since the first quarter 2001 to second quarter 2002.
“Next week, twelve S&P 500 companies are expected to announce. For the second quarter of 2008, S&P 500 earnings growth rate was -22.1%.
“The decline in the third quarter growth rate during the past week can be attributed to downward estimate revisions to a number of companies in the Financials sector including Lehman Brothers.”
Source: John Butters, Reuters, September 12, 2008.
MarketWatch: China to purchase stocks, “backstop” market
“Central Huijin Investment Co, a unit of the $200 billion China Investment Corp. sovereign wealth fund, will purchase additional shares in the three lenders: Industrial & Commercial Bank of China, China Construction Bank and Bank of China, Xinhua reported.
“Authorities did not indicate how much they planned to spend on the purchases, but said operations had begun Thursday.
“The report said the purpose was ‘to shore up their share prices amid stock market slumps’.
“Analysts said the move appears specifically designed to backstop further declines in the Shanghai benchmark, which has slumped 64% so far this year.
“‘This announcement represents a significant policy initiative aimed at supporting China’s leading financial institutions against the backdrop of turmoil in global markets,’ J.P. Morgan’s China equities chief Jing Ulrich said in a research note.”
Source: Chris Oliver, MarketWatch, September 18, 2008.
David Fuller (Fullermoney): Chinese rate cuts positive for stock market
Source: David Fuller, Fullermoney, September 15, 2008.
Financial Times: Russian stocks rally as bourses reopen
“The index of the less liquid RTS exchange opened 2.6% higher, with traders and analysts predicting a major recovery on Friday from more than 20% in losses seen earlier in the week.
“Russia’s state controlled oil company Rosneft jumped 25% with state gas export monopoly Gazprom rising 17% and VTB , one of Russias largest banks, soaring 40%.
“President Dmitry Medvedev of Russia pledged $20 billion on Thursday to shore up the nation’s stock markets after the worst declines since the August 1998 crash.
“Mr Medvedev’s pledge came as the finance ministry rolled out a crisis plan aimed at boosting liquidity in the banking system, which would double the amount of budget funds placed in short-term deposits at the three main state-controlled banks to a total of $59.1 billion.”
Source: Catherine Belton and Charles Clover, Financial Times, September 17, 2008.
Richard Russell (Dow Theory Letters): Doubts about stability of dollar?
Source: Richard Russell, Dow Theory Letters, September 19, 2008.
Casey’s Charts: Foreigners pull plug on dollar recycling program
“The stability of US credit markets relies on foreigners recycling their trade surpluses back into the US economy by purchasing dollar-denominated IOUs. As large financial institutions continue to tumble, and the Fed turns on the printing press in an attempt to limit the damage, the flight to safety will mean a flight from the dollar and further trouble for US markets.”
Source: Casey’s Charts, September 17, 2008.
Richard Russell (Dow Theory Letters): Bernstein – hold some gold
“Bernstein also recommends holding some gold as a hedge against a collapse in the value of the dollar if China or other nations decide that they no longer want to invest as much in US Treasuries. ‘In a total disaster, where there is a run from paper currency, you’ll get your biggest bang for your buck in gold,’ he says. You don’t have to buy much gold to have an effective hedge, he adds, noting that ‘if everything hits the fan, gold should be worth several thousands dollars an ounce.’ ‘Above all, don’t let your defensive attitude waver, Bernstein counsels.’”
Source: Richard Russell, Dow Theory Letters, September 15, 2008.
MoneyWeb: Jeffrey Christian, CPM Group, on gold price jump
JEFFREY CHRISTIAN: Well, there’s a mistake that people regularly make about gold when you see a financial crisis like we are seeing this week. People are always expecting gold to skyrocket immediately. And usually if you look at it – you know, October 1987, August 2007, this week – typically what often happens is that gold prices fall initially and then they rise. And the reason for that is one of the functions gold serves for investors is it’s a source of liquidity in a time of crisis. That’s why people want gold, because if things get really nasty in the financial markets: ‘I’ve got gold, I can sell to raise cash.’ We saw on Monday and Tuesday some of that liquidity rush, in the rush to cash, the rush to convert you money into US dollars, and buy US Treasury-guaranteed investments with it. And that pushed gold and silver down. I think what you’re seeing now is that that liquidity rush is over. Meanwhile you have this tremendous demand for gold and silver in physical form around the world. People are paying record high premiums for gold and silver; in India there are reports of tightness in an investment for silver and gold by North America and Europe. So I think what you are seeing – the paper market can swamp the physical market for a time, but the physical market ultimately trumps the paper market – and that’s what you are seeing.
ALEC HOGG: Jeff, is gold then acting like a canary in a financial services coal mine?
JEFFREY CHRISTIAN: I don’t know if that’s the right metaphor. Gold is more acting like the fire extinguisher in a burning building. It’s what you grab when you really want to make it to the door. A canary in a gold mine dies in an emergency. Gold thrives in an emergency.
ALEC HOGG: And how much of an emergency is this? We’ve seen the Federal Reserve in the United States bailing out AIG, the biggest insurance company in the world. Next on the chopping block seems to be Washington Mutual, and big questions marks about who might come thereafter. This seems to be an ideal environment for gold to flourish?
JEFFREY CHRISTIAN: I think I said it when I was in your studio in August – we are having troubles at CPM Group coming up with scenarios in which the gold price falls in the next several quarters significantly, and in which the gold bull market ends. This is in fact probably the ideal time – financial market conditions are more unruly than ever – at least since World War II, and maybe the Great Depression and the panic of 1907. This is a worse financial market than we had in ’79/’80. Things are very bad, we are not out of the woods. I think that we are – Churchill’s famous statement – at the end of the beginning of the financial market unrest, and I think there’s a lot more to come, and a lot more will come that is going to keep gold in the hearts and minds of investors for at least another six or eight months.
ALEC HOGG: Perhaps we could close off with Mike Myers’ statement again: “I love go-o-o-old!” It was a great movie, Goldmember.
Source: Alec Hogg, MoneyWeb, September 17, 2008.
Charleston Voice: Gold – the greatest government lie ever told
“Even worse, this gold has been jettisoned off by lease, swaps, or loaned. In all of the instances our gold will never be returned. It’s gone, and the American people are the poorer, and must rebuild their lives and their country from scratch.
“The bankers have moved on to more fertile ground for they are international bankers with allegiance to no sovereign.
“For a patriotic, moral, and gracious people I can think of no greater lie ever being told.”
Source: Charleston Voice, September 18, 2008.
BCA Research: Crude oil prices melt!
“At a time when the global economy is in desperate need of liquidity, hesitant central banks and a broadening in the financial sector crisis continue to undermine growth expectations. Lower energy and food prices will help to bring down inflation in the coming months, eventually opening the door to policy easing that will sow the seeds of the next economic upturn. Still, until then, crude prices are likely to face downside risks.”
Source: BCA Research, September 16, 2008.
Victoria Marklew (Northern Trust): UK – increasingly gloomy outlook increases odds of a Q4 rate cut
“In sum, while the MPC is minded to keep rates on hold for now, the members, and the Governor, have been at pains to emphasize that they will ‘examine the latest developments, including those in financial markets, to assess how the balance of risks is evolving at its next and subsequent meetings’. With unemployment rising sharply, export orders sliding, and the ongoing woes in the financial sector (particularly worrisome for the UK given London’s prominence in the global financial system), our best guess is that the odds now favor a rate cut in Q4 2008 – but those odds could change again by tomorrow.”
Source: Victoria Marklew, Northern Trust – Daily Global Commentary, September 17, 2008.
Bloomberg: China may cut rates again, boost spending for growth
“‘Policy makers will consider further interest-rate cuts in the coming month, in conjunction with a more proactive fiscal policy,’ said Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. in Hong Kong. The central bank yesterday reduced the one-year lending rate and lowered the proportion of deposits that the nation’s smaller banks must set aside.
“The slowest inflation in 14 months gave China room to lower borrowing costs and protect jobs as the outlook for exports dims and the credit crisis deepens.
“‘A gradual easing cycle has probably begun,’ said Alec Young, an international equity strategist at Standard & Poor’s in New York. ‘The focus is no longer on inflation and is more on China’s growth. The rest of the world is flirting with a recession and China’s growth is slowing too.’
“The People’s Bank of China reduced the one-year lending rate to 7.20% from 7.47%, effective today. It lowered the reserve-requirement ratio for smaller banks to 16.5% from 17.5%.”
Source: Li Yanping and Kevin Hamlin, Bloomberg, September 16, 2008.
Financial Times: Zimbabwe rivals agree on power-sharing
“Completing a nine-year march to office that has seen him routinely harassed and occasionally beaten by state forces, Morgan Tsvangirai, leader of the Movement for Democratic Change, called on Zimbabweans to consign divisions to the past.
“‘This agreement sees the return of hope to all our lives. It is this hope that provides the foundation of this agreement that we sign today, that will provide us with the belief that we can achieve a new Zimbabwe,’ said Mr Tsvangirai, who becomes prime minister in the new administration.
“International reaction to the deal remained cautious. Power and ministerial positions will now be divided up roughly evenly between President Robert Mugabe and his opposition rival, with a small breakaway faction of the MDC holding the balance with three positions in the cabinet. However, if all goes to plan, Mr Tsvangirai will lead day-to-day running of government and gain control of the budget.
“The agreement recognises that there will be nothing to spend, however, unless western countries put an end to Zimbabwe’s economic isolation and allow it access to credit from international financial institutions.
“European Union foreign ministers meeting in Brussels issued a statement saying: “The EU stands ready to adopt a set of economic support measures and measures to support a transitional government …”
“Mr Tsvangirai promised ‘a new way of governing where we serve the needs of the people’.
“He pledged also to ‘restore the value of the currency’, battered by inflation that some estimate has now reached 40 million per cent.”
Source: Tony Hawkins, Financial Times, September 14, 2008.
3 comments to Words from the (investment) wise for the week that was (September 15 – 21, 2008)
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