Words from the (investment) wise for the week that was (Sept 29 – Oct 5, 2008)
Whew – what a wild week! Global stock markets and commodities tumbled, whereas government bonds and the US dollar surged amid mounting fears that the ongoing turmoil in financial markets was foreshadowing a hard landing for the US and Europe.
The first-ever trillion-dollar loss (as measured by the Dow Jones Willshire 5000 Index) on Wall Street came on Monday in the wake of the US House of Representatives failing to gather enough votes to pass the $700 billion bank rescue package. Globally, more than $1.7 trillion got wiped off the MSCI World Index.
Considering the entire history of the Dow Jones Industrial Average since 1896, Monday’s decline of 777 points ranked as the largest points decline in history (see post “Fear Grips Global Markets”). However, and let’s be thankful for small mercies, the percentage decrease of 6.98% was still significantly less than 1987’s 22.61% decline.
Although the Senate’s passing of the bailout plan on Wednesday brought temporary relief, the reversal on Friday of the House’s earlier decision brought more volatility. In classic “buy on the rumor, sell on the news” fashion, the Dow Jones Industrial Index rallied by 3.0% leading up to the vote, but then sold off by a massive 486 points (4.5%) to end 1.5% down on the day and 7.3% lower on the week.
Now that the bailout deed has been done, attention is shifting to whether the plan will work and break the logjam in the credit markets (see post “Global Liquidity Crisis: What Now?).
“Our fear is that policymakers, including many central banks, still do not fully grasp the challenges facing the financial system. Governments must effectively guarantee the banking system on both the asset and liability side, and provide more relief to homeowners. Coordinated rate cuts are also necessary to stem the economic damage already evident in the latest purchasing managers’ surveys in the US and Europe,” said BCA Research.
Asha Bangalore (Northern Trust) view the modified Paulson plan as a first step to stabilize global financial markets, saying: “It will take time to accomplish this task with a combination of private sector deals and government programs. Warren Buffet type rescue measures such as the Goldman Sachs deal, FDIC intervention in the case of Washington Mutual, and Wachovia sale to Wells Fargo (that is under way) are examples of how a restructuring of the banking system would work.”
Summarizing investors’ concerns, Nouriel Roubini, professor at New York University and chairman of Roubini Global Economics, said: “It’s plain that the current financial crisis is worsening in spite of – or perhaps because of – the Treasury rescue plan.”
Do you think the US government’s relief plan will work? Cast your vote here.
The financial landscape is going through a period of upheaval and the number of casualties is growing by the day as graphically illustrated by the BBC.
Next, a tag cloud of the text of 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 seeing “banks” featuring so prominently.
Commenting on the outlook for equities, Marc Faber, author of the Gloom, Boom & Doom Report, remarked as follows: “A stock rally in the event that a package is approved will be temporary and should be used as ‘an opportunity’ to sell.”
David Fuller (Fullermoney) added: “… I doubt that the US stock market can commence a year-end, mean reversion rally towards its declining 200-day moving average until the Ted spread (i.e. three-month dollar Libor less three-month Treasury Bills) breaks its uptrend and falls sharply. The eventual downside reversal may be rapid, but until it occurs and Wall Street steadies, most other stock markets will also remain under pressure.”
To add a ray of hope to the otherwise gloomy situation, Jeffrey Hirsch of Stock Trader’s Almanac, said: “In this time of turmoil let us also remind you that although September is now the worst month of the year, October is a ‘bear killer’ and turned the tide in 11 post-WWII bear markets. We may find bottom in September, but October could ring in a new bull. However, it still can be dangerous; 2007 is a case in point. Expiration week can be tricky, but the last 15 days of the month are loaded with bullish days.”
According to Citywire, Anthony Bolton, the legendary ex-Fidelity fund manager, said he was spending his own money to buy shares again. “I think the real lesson in times like this is not to be shaken out when the environment is very uncertain because those are the conditions that make the lows in stock markets,” he told BBC Today.
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.
Source: Moody’s Economy.com, September 29, 2008.
Economic reports released in the US during the past week were mostly negative and the following compounded the market’s concerns:
• The Institute for Supply Management’s manufacturing index fell by 6.4 points to 43.5 for September. The larger than expected decline put the ISM index at its lowest level since 2001. Overall, the September ISM index showed a contraction in manufacturing and moderating inflationary pressures. Therefore the report gives the US Federal Reserve plenty of flexibility to cut interest rates to address the downside risks to growth.
• Payroll employment fell by 159,000, more than had been expected, with losses spread across industries. This marks the ninth consecutive month of employment losses and there is little doubt that the nation is in a recession, which could deepen in coming months as the financial crisis casts a pall on economic activity. The unemployment rate, calculated from a separate survey, was unchanged at 6.1%.
Summarizing the US economic situation, Asha Bangalore (Northern Trust) said: “The September employment report points to significant weakness in hiring and there is little doubt about the economy being in the throes of a recession. Will the Fed lower the Federal funds rate on October 29? It is not clear if there is any necessity to formally fix the Federal funds rate at a lower level because the effective Federal funds rate has held below 2.0% for nine out of the last ten days. The Fed is providing funds through multiple programs. The primary objective is to get the credit machine working again for which capital infusion is necessary in addition to liquidity.”
The depth of investors’ worries was reflected in the Fed funds futures market, which priced in an 80% probability of a 50 basis point rate cut at, or before, the October 29 FOMC meeting. The balance of odds was placed on a 75 basis point rate cut.
Elsewhere in the world, economic data also started to show an acceleration in the weakening of activity. Having just returned from a visit to the UK and continental Europe, the economic woes are almost tangible. Ireland, which I also visited last week, has now officially become the first Eurozone economy to have entered into a recession.
Source: Yahoo Finance, September 19, 2008.
In addition to a speech by Fed Chairman Ben Bernanke, the release of the FOMC minutes of September 16, the Bank of Japan monetary policy announcement (no change expected) on Tuesday, October 7, and the Bank of England interest rate decision (25 basis points cut expected) on Thursday, October 9, next week’s US economic highlights, courtesy of Northern Trust, include the following:
1. International Trade (October 10): The trade deficit is predicted to have narrowed slightly to $59.5 billion in August from $62.2 in July.
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, October 3, 2008.
The table below, courtesy of Bespoke (using data just before Friday’s Congressional vote), highlights the one-day, one-week, and one-month performance of ETFs that represent various asset classes. Globally, Brazil, India and Russia have been hit the hardest, while commodities with the exception of gold have all been in the red as well. As far as market cap goes, mid-caps have performed badly over most of the last week and month. From a sector perspective, Industrials, Materials and Telecoms have fallen the most, while Consumer Staples and Financials have held up the best over the last month. The only two safe havens in recent weeks have been US Treasuries and the US dollar.
Please click the table for a larger image.
Also click here for my customary performance round-up of various markets over a range of measurement periods, including movements since the respective markets’ highs.
The US stock markets all plunged over the week as shown by the major index movements: Dow Jones Industrial Index -7.3% (YTD -22.2%), S&P 500 Index -9.4% (YTD -25.1%), Nasdaq Composite Index -10.8% (YTD -26.6%) and Russell 2000 Index -12.1% (YTD 19.1%).
The two-year US Treasury Note declined by 42 basis points to 1.65%, the UK two-year Gilt yield dropped by 20 basis points to 3.92% and the German two-year Schatz fell by 35 basis points to 3.32%. On the other hand, emerging-market bonds suffered as investors shunned risky assets.
US mortgage rates declined somewhat, with the 30-year fixed rate falling by 5 basis points to 6.04% and the 5-year ARM by 1 basis point to 5.98%.
The Ted spread (i.e. three-month dollar Libor less three-month Treasury Bills), a measure of risk aversion and illiquid repo conditions, widened to a record level of 382 basis points.
The Bespoke Bank and Broker CDS Index, measuring default risk in the finance industry, declined on Friday, but remained at elevated levels.
The European Central Bank shifted its bias towards easing for the first time in five years, with President Trichet pointing to clear evidence of a weakening Eurozone economy and also conceded that inflation risks had decreased.
Over the week the US dollar gained against the euro (+5.7%), the British pound (+3.7%), the Swiss franc (+3.5%), the Canadian dollar (+4.3%), the Australian dollar (+6.9%) and the New Zealand dollar (+3.2).
The greenback also advanced strongly against emerging-market currencies as global recession risks increased and commodities came under renewed pressure. Examples include the Brazilian real (+8.4%), the Korean won (+5.6%) and the South African rand (+4.8%).
The Japanese yen was the only major currency to improve against the US dollar, rising by 0.9%.
According to the Financial Times, Citigroup estimated that total positions in commodity markets have shrunk by about $100 billion since July and said the net long position had collapsed from $58 billion in March to $8 billion as a result of the dollar’s strength and derisking by investors.
The following chart shows the past week’s severe declines for various commodities:
Now for a few news items and some words and charts from the investment wise that will hopefully assist in guiding our investment portfolios through these troubled times. And remember the old adage telling us to hope for the best while preparing for the worst.
Financial Times: Fall in markets as bail-out is approved
“The 263-171 vote in the House of Representatives, which rejected an earlier proposal only four days before, came after $149 billion in tax breaks was added to the bill to help sway reluctant legislators to back the plan.
“President George W. Bush immediately signed the legislation, which he has lobbied for vigorously in recent days.
“But in comments after the vote, the president sounded a sombre note about the crisis, which has coincided with a rise in opinion polls for Barack Obama, the Democratic presidential nominee.
“He told Americans they should expect the legislation to take some time to make its full impact on the economy. ‘Exercising the authorities in this bill in a responsible way will require careful analysis and deliberation. This will be done as expeditiously as possible, but it cannot be accomplished overnight.’
“The US House overwhelmingly passed the $700 billion bank rescue plan, after rejecting an earlier version. Will the bail-out help resolve the financial crisis?
“Reaction on Wall Street turned increasingly negative after the vote. The S&P 500 – which rose as much as 3.6% ahead of the decision – fell 1.4%, closing below its level on Monday after the House voted against the bill. It was the worst week for US stocks since markets re-opened after the September 11 2001 terrorists attacks.
“The decision in Washington came as Europe’s central banks took unprecedented emergency measures. Mervyn King, Bank of England governor, blamed ‘extraordinary conditions’ for a second £40 billion injection of three-month money into British banks on Monday. The European Central Bank said it would widen its quick tenders of cash from the normal 130 banks to all of the 1,700 banks it deals with.”
Source: Financial Times, October 3, 2008.
John Authers (Financial Times): A difficult week on Wall Street
Source: John Authers, Financial Times, October 3, 2008.
Reuters: Pimco’s Gross says bailout plan will help Main Street
“‘Importantly this is a bill that will benefit Main Street and the US economy,’ Bill Gross, chief investment officer of Pimco, told Reuters.
“‘The $700 billion-dollar program will help to unclog the hundreds of billions of subprime mortgages within the banking system, allowing for future lending to take place in housing, credit cards, car loans, student loans, and a host of other categories,’ Gross said.
“‘In addition, the ability of the Treasury to make a profit will be enhanced by the issuance of warrants as well as oversight of the purchase price of these assets via reverse auction,’ he said.
“‘Last, and critically, once these loans are purchased by the Treasury they will have the ability to reduce interest rates and modify the terms on all of the mortgages,’ Gross said. ‘Main Street, the US economy and the financial markets in turn will all benefit in this triple-win program.’”
Source: Reuters, September 28, 2008.
BCA Research: Bailout – necessary, but still not sufficient
“Senate passage of the US TARP (Troubled Asset Relief Program), after some larding, should smooth the way for House approval (if not…). Passage should provide a lift to markets, but this may prove temporary if not followed up with other measures needed to restore order to global credit markets, including suspension of mark-to-market accounting.
“Our fear is that policymakers, including many central banks, still do not fully grasp the challenges facing the financial system. Governments must effectively guarantee the banking system on both the asset and liability side, and provide more relief to homeowners. Coordinated rate cuts are also necessary to stem the economic damage already evident in the latest purchasing managers’ surveys in the US and Europe.
“In the end, policymakers will do what is needed; the unknown is whether even more market rioting is first needed. Bottom line: Passing the US TARP is a big positive, but may not be sufficient to break the logjam in global credit markets.”
Source: BCA Research, October 3, 2008.
Business Intelligence: Marc Faber says US bailout won’t stop recession, buy gold
“A stock rally in the event that a package is approved will be temporary and should be used as ‘an opportunity’ to sell, said Faber.
“‘The rejection of the package is good because it shows that some people in the US are still sane,’ Faber said in a phone interview with Bloomberg. “A bailout will not buy the US a way out. The government is less powerful than markets in fixing this mess.”
“‘Most of the investment community are focusing on the financial crisis,” Faber told TV newswire last night.
“‘But what they should be focusing on is that earnings will continue to disappoint for a long time, and that global growth is going to go down substantially. Most economies already today are in recession.”
“Noting that the US dollar should continue to find support as investors rush to try and re-pay their debts ‘I think gold will be a relatively good investment under any kind of scenario until the US government bans the ownership of Gold in the United States.
“‘They are very good at changing the rules of the game – now banning short sales [of financial and other US equities].
“‘So yes – physical gold, you should own. Not derivatives with Citigroup, JP Morgan, UBS and investment banks, but physical and outside the US.’
“Any rebound in equities triggered by an eventual rescue package for the US financial system will not lead to ‘new highs’ for stock markets.
“‘We live in very uncertain times and nobody knows the extent of the damage from the slowdown of credit growth,’ he said. ‘It will be good to diversify.’
“The economy probably shrank in the third quarter. A further contraction is likely in the next two quarters, some economists predicted, making the recession the longest since 1981-82.”
Source: Business Intelligence, September 30, 2008.
Investorazzi: Even with bailout, Jim Rogers still sees major economic pain
“‘I’m pessimistic because America is in recession and that’s having an effect on Europe and Asia,’ he says, adding that the recession will last longer than most and be deeper than most because the US government keeps making mistakes by bailing out one entity after another.
“‘The 29-year-olds on Wall Street and Bay Street have been driving Maseratis,’ Rogers says. ‘That’s about to change. All these guys are going to have to learn to drive taxis.’
“The former partner of George Soros in the Quantum Fund believes there will be quite a few brokers-turned-cabbies due to changes taking place on the financial landscape. Hanley wrote:
“‘The new financial centre could be in Shanghai or maybe in Singapore,’ Rogers says. ‘I really don’t know where, but it’s shifting from New York and London toward Asia.’
“Rogers shared his investment strategy with the Financial Post reporter. From the piece:
“He continues to own the commodities themselves, not commodities stocks, because the current drop in natural-resource prices is just a correction that could last a quarter, a half or even a year …
“He has been buying shares in some airlines, ‘a disaster area that’s close to a bottom,’ and some beaten-up Chinese stocks … Meanwhile, he is monitoring auto stocks, which may become the next disaster area over the coming years …
“Rogers is holding on to the Canadian dollars – “one of the soundest fundamental currencies” – he began buying years ago when he saw the commodities boom unfolding against a much-improved Canadian fiscal backdrop. ‘And I will be buying more along the line.’ But recently he has been buying Swiss francs and yen.
“He has been shorting the US long bond in the belief that the growing mountain of US debt and the necessity to print money to finance it means bonds have made a long-term top. ‘Bonds will be a terrible place to be for many years to come.’
“And for years to come, Rogers says, water treatment, agriculture and Chinese tourism will be good places to be. China and India, especially, have huge water problems, food inventories are falling even as farmland is taken out of production and 1.3 billion Chinese are now able to travel freely in the world.
“Those are the next big things. The best thing to do now in these clamorous markets, Rogers tells a reporter, might be to do nothing unless you have to. ‘You might just want to head to the beach.’”
Source: Investorazzi, October 3, 2008.
YouTube: Ron Paul – “You’re going to destroy a worldwide economy”!
Source: YouTube, September 29, 2008.
Charlie Rose: An exclusive conversation with Warren Buffett
Source: Charlie Rose, October 1, 2008.
Richard Russell (Dow Theory Letters): It looks like a very hard, cold winter coming up
“Along with copper, the Baltic Dry Index (courtesy of Investment Tools) has collapsed, this is the price of the cost of shipping, and it’s considered a barometer of world trade.
“From everything I see, it looks like a very hard, cold winter coming up. The picture looks increasingly like a coming global recession or worse. Move into cash and gold bullion as far as you can.”
Source: Richard Russell, Dow Theory Letters, October 1, 2008.
Bloomberg: IMF says US faces “sharp downturn” as market crisis worsens
“‘The financial turmoil that began in the summer of 2007 has mutated into a full-blown crisis,’ the fund said in a section of its semi-annual World Economic Outlook released in Washington today. There is ‘a substantial likelihood of a sharp downturn in the United States,’ the fund said.
“By contrast, the IMF in July projected the US would ‘contract moderately’ in the second half of 2008 before recovering in 2009. Officials also said in a July update of economic forecasts that the global growth outlook was more ‘balanced’.
“‘Strong actions by policy makers to deal with the stress and support the restoration of financial system capital seem particularly important,’ the lender said today. Next week, the IMF will release updated projections for gross domestic product for the US and other economies.
“The warning came as the US Congress worked to pass a $700 billion bank rescue package to reassure financial markets. The Senate passed the legislation late yesterday, and the House of Representatives may vote tomorrow after rejecting a different version three days ago.”
Source: Christopher Swann, Bloomberg, October 2, 2008.
Bloomberg: Will the US financial crisis tip over to the rest of the world?
Click here for the full report.
Source: Michael Rosenberg, Bloomberg, September 18, 2008.
Asha Bangalore (Northern Trust): The ripple effects of frozen money markets
“The reach of this frozen money market is far and wide because it affects everyday activities of the economy. The cost of inter bank borrowing for the short-term has risen by over 200bps versus the target federal funds rate instead of a few basis points above the target rate. Firms are charged a spread above the Libor rate for their credit lines depending on the risk involved in their business. Anecdotal evidence of a sharp increase in borrowing costs and reduced credit lines for firms with sound credit history has already appeared in main stream media. If firms continue to face tight credit conditions, payrolls may not be met, payments to suppliers may suffer, and job losses will follow. The Senior Loan Officer’s Survey of the Fed has ample evidence of tightening of credit conditions which runs counter to the fact that the Fed has eased monetary policy.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, October 2, 2008.
Nouriel Roubini: Next – the mother of all bank runs?
“The strains in financial markets are becoming more, rather than less, severe in spite of the nuclear option of a $700 billion package: Interbank spreads are widening and are at a level never seen before; credit spreads are widening to new peaks; short-term Treasury yields are going back to near-zero levels as there is flight to safety; credit default swap (CDS) spreads for financial institutions are rising to extreme levels as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package.
“Financial institutions in the US and in advanced economies are going bust. So, this is not just a US financial crisis. It is a global crisis hitting institutions in the UK, the Euro-zone and other advanced economies (Iceland, Australia, New Zealand, Canada, etc.).
“The strains in financial markets – especially short-term interbank markets – are becoming more severe in spite of the Fed and other central banks having injected $300 billion of liquidity in the financial system last week alone …
“In a solvency and credit crisis that goes well beyond illiquidity, no one is lending to counter-parties as no one trusts any counter-party (even the safest ones), and everyone is hoarding the liquidity that is injected by central banks. And since this liquidity goes only to banks and major broker-dealers, the rest of the shadow banking system has no access to this liquidity as the credit transmission mechanisms are blocked.
“When investors don’t trust even venerable institutions like Morgan Stanley and Goldman Sachs, you know that the financial crisis is as severe as ever. When a nuclear option of a monster $700 billion rescue plan is not even able to rally stock markets, you know this is a global crisis of confidence in the financial system.
“The next step of this panic could be the mother of all bank runs, i.e. a run on the trillion dollar-plus of the cross-border short-term interbank liabilities of the US banking and financial system, as foreign banks start to worry about the safety of their liquid exposures to US financial institutions. A silent cross-border bank run has already started, as foreign banks are worried about the solvency of US banks and are starting to reduce their exposure. And if this run accelerates – as it may now – a total meltdown of the US financial system could occur.”
Source; Nouriel Roubini, Forbes, October 2, 2008.
Asha Bangalore (Northern Trust): Factory sector recession is confirmed
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, October 1, 2008.
Asha Bangalore (Northern Trust): Q3 consumer spending should post first quarterly decline since 1991
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, September 29, 2008.
Bloomberg: Bank of America’s levy sees “anemic” economic conditions
Source: Bloomberg, September 26, 2008.
Richard Russell (Dow Theory Letters): US government to increase spending
“If the economy is going to improve, it will be up to the government to do the spending. Governments all over the world will have to run up big deficits and increase their spending. After all, what got the US out of the Great Depression of the 1930s? It was the massive spending of World War II that finally turned the US economy to the upside. The giant war effort and related government spending put everybody to work, including millions of America’s women. Jobs were plentiful.
“And now Obama and McCain are competing in promises to CUT government spending! Forget it. To get out of this recession, the US government will have to spend as it never has spent before, along with running trillion dollar deficits. The government will have to embark on a giant ‘rebuild America program’. Our streets and freeways are shot, our bridges are tattered, the US government will have to engineer a massive ‘make work’ program to rebuild America. Unfortunately, as I see it, Washington will be tempting to start another war.”
Source: Richard Russell, Dow Theory Letters, September 29, 2008.
Zillow Blog: Survey – Obama expected to better address housing market issues than McCain
“The perception of who is better equipped to address the housing market is heavily influenced by whether respondents own a home. For example, the spread between the two major candidates is much wider among those who have yet to become homeowners: 67% of non-homeowners think Obama will better address the housing market than McCain (33%). Among current homeowners, there is far less of a difference: 52% of homeowners think Obama will better address the market versus the 48% who think McCain will.
“The survey also showed housing market issues are among the top three most important issues affecting the United States that the new president should be prepared to address after taking office. The most important issues are:
• Energy/gas prices (82%)
Source: Katie Curnutte, Zillow Blog, September 26, 2008.
Standard & Poor’s: S&P/Case-Shiller home price indices showing record declines
“The chart above depicts the annual returns of the 10-City Composite and the 20-City Composite Home Price Indices. The indices reached new record annual declines of 17.5% and 16.3%, respectively.”
Source: Standard & Poor’s, September 20, 2008.
The Wall Street Journal: Office space is emptying out
“Nationwide, rents on office properties – including landlord concessions and discounts – were flat in the third quarter, the worst result for office-property owners since late 2004 – when commercial real estate began to emerge from a prolonged slump, according to Reis Inc., a New York real-estate research firm.
“Rent stagnation and increasing vacancies put ‘strain on borrowers to make payments on mortgages,’ said Sam Chandan, Reis’s chief economist. ‘It hasn’t shown up yet in terms of delinquency rates, but this is clearly an issue we need to be very attentive to,’ he said. Almost every type of financial institution, from community banks to Wall Street, lends to office-building owners.
“The office market in suburban areas and smaller cities has been declining throughout the year. But now, with a recession looking inevitable, the pain is spreading to most large metropolitan areas. Previously immune cities such as San Francisco and Boston saw vacancy-rate increases in the third quarter. San Francisco’s vacancy rate rose 0.6 percentage point to 9.9% in the quarter. Boston’s rate rose 0.8 percentage point to 11.7%.”
Source: Alex Frangos, The Wall Street Journal, October 3, 2008.
John Authers (Financial Times): Hedge funds – terrible third quarter
“Hedge fund accidents have been remarkable for their absence throughout the crisis. While investment banks had acute difficulties, there has been no big hedge fund collapse. The industry as a whole got through the first half of the year with decent investment returns.
“But not any longer. In aggregate, hedge funds had a terrible third quarter. Many had relied on the ‘long energy, short banks’ trade and failed to get out when it suddenly reversed in July. And they had a bad September, as the credit crisis entered its acute phase.
“Hedge Fund Research’s HFRX index showed that ‘market directional’ hedge funds, which attempt to beat the market, lost 8.9% last month and were down 11% for the year.
“Their ‘long’ positions have performed terribly. Goldman Sachs’ basket of the 50 stocks most widely held by hedge funds underperformed the S&P 500 by 11% during the third quarter, down 19%.
“Regulators have taken away a crucial advantage by banning much short selling, the only way to make good money over the past few weeks. And funds’ investors were allowed to yank funds away from them at the end of the quarter.
“With funds losing cash and forced to pay down debts, the market bet is now that they must make a disorderly retreat from their favoured stocks.
“That contributed to sharp falls yesterday in tech, resources and transport stocks, all hedge fund favourites. Much now depends on Greenwich’s continuing ability to avoid a major hedge fund accident.”
Source: John Authers, Financial Times, October 2, 2008.
Bloomberg: Fortis gets 11.2 billion euros rescue from governments
“Belgium will buy 49% of Fortis’s Belgian banking unit for 4.7 billion euros, while the Netherlands will pay 4 billion euros for a similar stake in the Dutch banking business, the governments said in a statement late yesterday. Luxembourg will provide a 2.5 billion-euro loan convertible into 49% of Fortis’s banking division in that country.
“Fortis is the largest European firm to be bailed out in the global financial crisis that drove Lehman Brothers into bankruptcy two weeks ago and prompted US President George W. Bush to seek a $700 billion bank rescue package.”
Source: Martijn van der Starre and Meera Louis, Bloomberg, September 29, 2008.
Financial Times: UK nationalizes Bradford & Bingley
“The bank was taken into public ownership on Monday after B&B saw retail savers withdraw ‘tens of millions of pounds’ in recent days as uncertainty grew.
“In a statement, the Treasury said it had taken the decision in order ‘to maintain financial stability and protect depositors, while minimising the exposure to taxpayers. [The government] has worked over the weekend to bring about the part public, part private solution which best meets those objectives.’”
Source: Jane Croft and Kate Burgess in London and George Parker, Financial Times, September 26, 2008.
John Authers (Financial Times): Buffett’s bold investments in the face of the crisis
Source: John Authers, Financial Times, October 2, 2008.
Francesco Guerrera (Financial Times): Tug of war over Wachovia
Source: Francesco Guerrera, Financial Times, October 3, 2008.
Bespoke: High yield spreads at record highs: up, up, and away!
Source: Bespoke, October 2, 2008.
John Authers (Financial Times): Dow’s biggest one-day fall
Click here for the full article.
Source: John Authers, Financial Times, September 29, 2008.
Bespoke: Percentage of stocks above 50-day moving averages
Source: Bespoke, October 3, 2008.
Bespoke: Sector performance – not what you’d expect
“Looking at the relative strength of the Financial sector versus the S&P 500 so far in 2008 shows that while they have made up for lost ground over the last two months, the Financials are still underperforming the overall market by a significant margin. (In the charts below, rising lines indicate that the sector is outperforming the S&P 500, while a falling line indicates underperformance.)
“More specifically though, banks have been doing much better than the Financial sector. Even more surprising is that the KBW Bank Index (BKX) is actually performing inline with the S&P 500 so far in 2008. When stocks most associated with the problems aren’t the ones leading the market lower, investors should take notice.”
Source: Bespoke, September 29, 2008.
David Fuller (Fullermoney): Use Ted-spread as timing indicator
“One of the technical signals should be a break in the progression of higher reaction lows on the daily Ted-Spread chart above, followed by the establishment of a clear downward trend. Stock markets are likely to struggle until this occurs but rally thereafter. Consequently, if central banks are unable to stem this accelerating credit freeze crisis soon, most stock markets will lurch lower before finding support prior to a yearend rally.
“Looking across the valley – perhaps the crevasse into which stock markets have already descended a considerable way is a more apt image – events are moving rapidly in the direction of my recent Back to the Future theme.
“Stock market valuations are much improved; the Peak Oil problem has been pushed further into the future; with most commodities tumbling the runaway inflation threat is in rapid retreat as fire (inflation) over ice (deflation) has been replaced by ice over fire; this enables central banks to target economic growth once again; long-term government interest rates are low; the US dollar crisis has passed, at least for the medium term.
“I maintain that we are well into the latter stages of this bear market and that a bottom of at least medium-term significance is within sight, with timing subject to an improvement in the Ted-Spread and equivalent measures of lending confidence. Anticipating some success from government efforts to alleviate the credit freeze, current and pending, I expect a technical rally to commence this month, which should carry into next year, helped by the current oversold condition, seasonal factors and the post-US election bounce.
“Looking further ahead, since the west’s banking solvency and lending crisis now accounts for most of the remaining serious economic problems, I expect Asian emerging markets to lead the eventual recovery. Some commodity related markets may take longer to recover, because they were among the last to fall, but they will certainly benefit from the next synchronised economic recovery. Meanwhile, there is every indication that global GDP growth will weaken further before it next improves. Stock markets will lead that recovery, as they always have in the past.”
Source: David Fuller, Fullermoney, October 2, 2008.
Citywire: Anthony Bolton – I’m buying shares once again
“‘I have bought shares in the last couple of weeks for the first time for some time,’ he told the BBC Today programme. ‘I see a lot of value in certain areas of the market.’
“‘I have been somebody who for quite a while has been cautious about the equity markets. In fact I started my caution about two years ago – I was a bit early. I have to say the events of the last few weeks for the first time have made me feel more optimistic that we are getting near the low in the markets.’
“On the financial crisis: ‘Well I have to say I haven’t seen anything quite like this and the credit crisis that led to the banking crisis has some similarities with the 1970s which I did experience but the fact that it’s global and the extent of it is quite different.’
“On whether it can get worse: ‘It can certainly get worse although I think a lot of the ingredients are now there to restore confidence – at the heart of banking is confidence
“On investing: ‘Investing in the stock market at first looks so easy – you buy when it’s low and sell when it’s high. But when you actually live though it it’s much more difficult. All the environment tries to make you do the opposite of what it should do – it sucks you in when markets are high and the world looks wonderful.
“‘I think the real lesson in times like this is not be shaken out when the environment is very uncertain because those are the conditions that make the lows in stock markets.
“‘I’ve found over the years that investing is about buying the fundamentals of companies as investments. But the stock market is also a place of fashions. It is a voting machine as much as a weighing machine. So when everyone votes one way to me that suggests risks and that’s not a good thing. On the other hand, at times like the moment when people are very negative, I want to be a contrarian and go against that.’”
Source: Richard Lander, Citywire, October 2, 2008.
Jeffrey Saut (Raymond James): Rollover?!
“We also stated that more conservative types should probably wait for a session that exhibited positive closing action on the assumption that would lead to a skein of better days ahead. A week ago today we said, ‘The lows are ‘in’ for the year’ (a statement that will be tested today); to which we now add, ‘Provided the pandering politicians pass the ‘buyout’ plan.’
“Accordingly, trading accounts should be ‘long’ half of their index positions, having sold the other half into September 19th’s 400-point Dow Wow on the premise the politicos don’t have a clue as to how to fix the problem. Still, as we enter the fourth quarter participants should keep in mind that since 1960 the S&P 500 has produced positive returns in the final quarter of the year 77% of the time; and, that Technology has tended to be the best performer.
“Also worth considering is that the only sector with positive net earnings estimate revisions during the past month has been Telecom Services. Additionally, we have ‘warmed’ to stuff-stocks again (particularly the oversold energy complex) now that the Olympics/Paralympics are over and China’s factories are back ‘on line’. Speaking to China, the Shanghai Composite Index’s plunge has left the average price/earnings ratio of listed Chinese firms at roughly 17 times historic earnings, making China again look interesting. Ditto a number of other international markets look attractive, but not so for Europe.
“Looking ahead to themes for the next 10 years, we continue to embrace agriculture (farming/forestry), water (water rights, water treatment, etc.), new technologies playing to energy conservation (including alternative energy and nuclear); as well as climate change, including environmental pollution and resource limitation.
“Meanwhile, our political leaders continue to pander to a mis/under-informed electorate while failing to address the nation’s real issues. For example, the top 1% of wage-earners pay nearly 29% of the nation’s total taxes, while the top 5% of wage-earners pay some 48% of the total tab. This fact seems lost amid the current political blustering; or as Oscar Wilde noted, ‘The public has an insatiable curiosity to know everything except what is worth knowing.’”
Source: Jeffrey Saut, Raymond James, September 29, 2008.
Clusterstock: Bernstein – Get ready for stock market plunge
• Stocks are still very expensive (25X trailing earnings)
“Merrill’s Richard Bernstein lays out this case in Barron’s.
What would make you turn more bullish on equities?
So earnings estimates are not going down as much as you expected?
We are also watching jobless claims, which have been rising. Employment is very, very critical to the future of the economy …
Could you talk a little more about stock valuations and your concerns there.
The market is just legitimately expensive, and we are so hesitant to use forward earnings, because analysts haven’t revised their estimates downward. So to say the market is selling at 13, 14, 15 times forward earnings is a meaningless statement.
What’s ahead for the economy, and how much more pain will there be?
Source: Henry Blodget, Clusterstock, September 27, 2008.
David Fuller (Fullermoney): Give US dollar’s uptrend benefit of doubt
“… I have many reservations about the long-term sustainability of this new trend. However, I have also maintained from the beginning of this move that maintained breakouts and clear trend changes on the charts are more important than theories as to why it should not be happening. The trend will always be the sole determinant of our investment and trading success in any market.
“Currently, it looks as if the US Dollar Index is consolidating initial gains above this year’s earlier trading range. We can all see some historic and extremely interesting psychological and lateral resistance above 80, but we should give the new uptrend the benefit of the doubt, provided it continues to hold above the recent reaction low near 76. Although I should also add that a move below that level would question rather than completely invalidate the USD’s recovery hypothesis.
“Meanwhile, a firmer USD removes one of the main fears and risks for the global economy, as I have said before. Arguably, had the dollar collapsed in July rather than rallying up out of its trading range, this would have been an even bigger problem for the global economy than the west’s credit crisis. After all, the greenback is still the world’s main reserve currency.
“Consequently, if the current recovery is not only maintained but also extended, this would have many implications for other markets. For instance, it has already removed upward pressure on the euro, which had become the default reserve currency as people previously fled the dollar. This provides some welcome respite for Euroland’s exporters, and those of other countries which saw their currencies soar, albeit at the expense of US multinationals if the USD’s recovery trend is extended in the months head.
“Previously, a weak USD was a powerful tailwind behind commodity price rises, in addition to Fullermoney’s Supply Inelasticity Meets Rising Demand theme during the synchronised global economic expansion. Now that the economic expansion has stalled, and with the USD also rallying, inflationary pressures are clearly in retreat.
“This is good news for central banks because they can shift monetary policy away from fighting inflation and towards supporting economic growth. This process has already commenced in many countries. I expect Asian emerging markets to be among the main beneficiaries of ebbing inflation, not least because they were caught out buy expensive and economically unjustifiable subsidies. A stronger USD is also a clear headwind for gold.
“ … fear was the main driver behind gold’s recent rally from its September 11th low at $736.70. While favouring gold as an alternative long-term investment, I have repeatedly mentioned that it is best purchased following setbacks and that it was generally a good idea to take partial profits, or at least use trailing stops during accelerating advances.”
Source: David Fuller, Fullermoney, October 1, 2008.
Alistair Holloway (Fullermoney): Baltic Dry Index has biggest monthly, quarterly drop on record
“The index tracking transport costs on international trade routes fell 287 points, or 8.2%, to 3,217 points, according to the Baltic Exchange in London. That’s a 66% drop for the quarter, a 53% monthly slide and the lowest since July 24, 2006.
“‘It’s definitely been the effect of lower activity during the Olympics and the holidays now,’ Rikard Vabo, an analyst with Oslo shipbroker Fearnley Fonds ASA, said in an interview today. Chinese steel demand is weakening as property prices fall and builders’ focus shifts away from luxury housing that is more steel-intensive, he said.
“Property prices climbed at the slowest pace in 18 months during August, the National Development and Reform Commission said September 16. Some steel mills, forced to shut for the Beijing Olympics and Paralympics, have not reopened. China’s financial markets are shut through October 5 for National Day holidays.”
Source: Alistair Holloway, Fullermoney, October 1, 2008.
Mineweb: GFMS’ Walker looking for $1,000 gold soon
“‘In terms of core trading range for us, I have to say that gold going up towards the $1,000-level is not an impossibility at all,’ Paul Walker, CEO of GFMS, told Reuters in an interview.
“‘I would be surprised given the scale of the economic crisis if gold doesn’t scale above $1,000,’ he said ahead of the London Bullion Market Association annual conference in the ancient Japanese capital of Kyoto.
“GFMS predicted on September 17 that prices would soar well above $900 an ounce in the fourth quarter as the US dollar weakened and investors scrutinised the US government’s creditworthiness.
“Later that same day prices staged their biggest ever one-day rally in real terms, soaring from around $775 to end just shy of $863 an ounce. They jumped again on September 18, briefly topping $900 before falling amid unprecedented volatility.
“Walker said gold will be averaging above $900 in the next 12 months, but in a trading range, it could rise beyond $1,000, testing its record $1,030.80 an ounce peak from March 17.
“‘I think the depth of this crisis suggest to me gold prices will be at elevated levels for probably for another 12 months or 18 months,’ Walker said.”
Source: Chikafumi Hodo, Mineweb, September 28, 2008.
Financial Times: Wealthy investors hoard bullion
“Industry executives and bankers at the London Bullion Market Association annual meeting said the extent of the move into physical gold was unseen and driven by the very rich.
“‘There is an enormous pick-up in investment demand. I have never seen a market like this in my 33-year career,’ said Jeremy Charles, chairman of the LBMA. ‘The gold refineries cannot produce enough bars.’
“The move comes as fears grow among investors over the losses at investment vehicles previously considered almost risk-free, such as money funds.
“Philip Clewes-Garner, associate director of precious metals at HSBC, added that investors were not flying into gold simply because they saw it as a haven amid Wall Street’s woes. ‘It is a flight into gold because it is a physical asset,’ he said.
Source: Javier Blas, Financial Times, September 30, 2008.
Financial Times: European central banks cut sales of gold
“Institutions bound by the Central Bank Gold Agreement – the banks of the eurozone plus Sweden and Switzerland – sold about 343 tonnes of gold in the year that expired on Friday, the lowest amount since the first CBGA was signed in 1999.
“This compares with 475.8 tonnes in the year to the end of September 2007. Under the agreement, the banks are allowed to sell up to 500 tonnes of gold each year.
“The European trend is part of a global movement of reduced central bank selling and increased investor buying that is helping to underpin high prices at a time of turmoil in financial markets.
“GFMS, the precious metals consultancy, estimates global central banks will sell 269 tonnes of bullion in 2008, the lowest since 1995.
“Much of the selling by European banks took place between October and December last year.”
Source: Javier Blas, Financial Times, September 28, 2008.
Victoria Marklew (Northern Trust): ECB shifts to easing bias
“The focus of the Council statement was on the negative impact of the ongoing financial market turmoil. Trichet also pointed to clear evidence of a weakening Euro-zone economy as domestic demand contracts and financing conditions tighten. He stated that lower oil prices and ongoing growth in emerging economies ‘might support a gradual recovery in the course of 2009’ – which is a distinctly more pessimistic assessment than he was making in early September.
“Trichet’s inflation forecast also shifted somewhat this month, from seeing the annual rate fall back to the 2.0% target ‘in the course of 2010’ to anticipating price stability ‘at the beginning of 2010’.
“… the overall tone of his press conference was decidedly dovish. The euro promptly fell against the US$ on expectations of a 25bps cut to the refi rate at the November 6 policy meeting. Interestingly, the Council and President also appeared to set the stage today for participation in a coordinated action with other central banks before then. With money market tensions still worsening despite massive central bank liquidity injections, rates at ECB auctions pushed to record highs, and Euro-zone economic data increasingly gloomy, the refi rate will very likely be 4.00% before the end of this year, and head still lower through the first half of 2009.”
Source: Victoria Marklew, Northern Trust – Daily Global Commentary, October 2, 2008.
Bloomberg: Brown, Merkel may be pushed into Paulson-type bailout
“A week after lambasting the US for allowing its banks to run out of money and after resisting calls to set up their own rescue mechanisms, leaders across Europe yesterday bailed out banks from Belgium, Germany and the UK. Dexia SA today received aid from France and Belgium, while Ireland’s government said it would guarantee bank deposits and debt for two years.
“German Chancellor Angela Merkel and UK Prime Minister Gordon Brown may be forced to advocate a comprehensive approach of the kind US Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke are urging Congress to pass.
“‘The gods of the markets are punishing those who showed hubris,’ said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. ‘Europe has been bashing the US, but it’s realizing now it has its own problems.’”
Source: Simon Kennedy, Bloomberg, September 30, 2008.
Nationwide: UK House prices still falling
“Casting back one year there have been some astonishing and unpredictable developments in the housing and financial markets. In September 2007 the credit crunch had just begun, house prices were rising at an annual rate of 9.0%, the number of house purchase approvals per month was averaging at around its long term trend, almost 40% of first-time buyers were borrowing over 90% and the Bank Rate was at 5.75%, but with many expecting it to increase to 6%. The situation in September 2008 could hardly be more different. House prices are falling, activity has contracted sharply, fewer than 20% of first-time buyers are borrowing above 90%, and the Bank Rate has fallen to 5% and is expected to fall to 3.5% by the end of 2009.
“The higher cost and lower availability of finance resulting from the credit crunch were clearly important factors in triggering the slowdown and bringing us to where we are now. Current unrest threatens to increase funding costs further, but the big question is how far will prices correct and how long before they begin to recover.”
Source: Nationwide, October 7, 2008.
Financial Times: Brown attacks Irish banks over guarantee
“Mr Brown wants Dublin to stamp out at once aggressive marketing campaigns by Irish banks and take measures to cap the market share of institutions now among the safest in Europe.
“Ireland’s decision to prop up its six biggest lenders by guaranteeing all their debts and deposits was passed into law on Thursday, in the face of anger across Europe about the impact that it would have on the EU’s single market.
“British bankers said there were already signs that some Irish lenders were approaching corporate and private banking customers in the United Kingdom and encouraging them to move their money.
“Companies and wealthy individuals are seen as prime targets because they are more likely to have cash balances in excess of the £35,000 at which the UK government guarantees deposits.
“Mr Brown raised his concerns with Brian Cowen, Irish prime minister. Downing Street wants to avoid a public row but officials say Mr Brown is determined ‘to restrict the inflows into these Irish institutions’.”
Source: George Parker and Peter Thal Larsen, Financial Times, October 2, 2008.
James Pressler (Northern Trust): Japan – weakening economic outlook
“First, the figures even disappointed those with weak forecasts, and second, the surveys used to create the Tankan report were submitted before the news hit the wire about the Lehman Brothers collapse and the failures that followed. If people were this pessimistic before this financial crisis exploded, the post-collapse mindset must have been downright depressing.
“At this point, we do not feel a pressing need to downgrade our economic forecast for the end of the year – a Q4 reading of ‘abysmal’ still seems appropriate. We also feel that the Bank of Japan will remain on the sidelines after its two-day meeting ending October 7, but it will recognize that the pending recession might have a little more depth than expected while the inflation outlook remains unchanged.”
Source: James Pressler, Northern Trust – Daily Global Commentary, October 1, 2008.
Financial Times: Stephen Roach on whether China can save the world
Source: Financial Times, September 29, 2008.
Business Day: Motlanthe firm on ANC growth, jobs policies
“Newly elected President Kgalema Motlanthe moved quickly yesterday to reassure SA and the world there would be no changes in policy by his new administration.
“He insisted that implementation of African National Congress (ANC) policy would continue unchanged.
“Shortly after being sworn in by Chief Justice Pius Langa, Motlanthe moved to help repair the damage done earlier in the week with the pro-forma resignation of a third of the cabinet, including Finance Minister Trevor Manuel.
“Motlanthe said in the National Assembly the new government had been given the task of implementing ANC policies.
“‘These policies, which government will continue to implement unchanged, are the product of an extensive consultation and decision-making process. These policies are the property of a collective. They do not belong to any one individual. And it is not for any one individual to change them.’
“‘Mine is not the desire to deviate from what is working. It is not for me to reinvent policy. Nor do I intend to reshape either cabinet or the public service,’ Motlanthe said.
“Motlanthe, after the dismissal of former president Thabo Mbeki, held out an olive branch to Mbeki supporters still in government and Parliament by praising Mbeki and his achievements in almost 10 years at the helm.
“‘We remain on course to host in 2010 the best Fifa World Cup ever – an African World Cup. We fully expect to meet every commitment our nation has made to the football world. In a turbulent global economy, we will remain true to the policies that have kept SA steady, and that have ensured sustained growth.
“‘We will intensify the all-round effort to accelerate the rate of growth and job creation,’ Motlanthe said.
“Motlanthe’s election caused not a ripple in the markets.”
Source: Wyndham Hartley, Business Day, September 26, 2008.
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