Words from the (investment) wise for the week that was (November 3 – 9, 2008)
Welcome to Wall Street, Barack Obama. His victory signaled a change in US political direction, but the biggest election day rally ever – a surge of 4.1% in the S&P 500 Index on Tuesday – was quickly overshadowed by the grim realities of the worsening economic and earnings picture, resulting on Wednesday and Thursday in the S&P 500’s biggest two-day loss (-10.0%) since 1987.
Mr Obama gave his first press conference as President-elect on Friday afternoon, summarizing a discussion he had had with his economic advisory team. He pledged to confront the US’s economic crisis “head on” and said he wanted to see “a rescue plan for the middle class” that would include a new fiscal stimulus package. The week closed on a positive note as a late rush of buying on Friday left the stock market indices higher for the day, although still in the red for the week.
BCA Research said: “While Obama has a laundry list of policy objectives, fixing the economy will be his top priority and will dominate the legislative agenda in 2009. A fiscal stimulus package to support consumers is already being drawn up in Congress, and Obama is likely to propose additional infrastructure spending programs shortly after taking office. But fiscal policy will be hamstrung – the budget deficit is already large, while aggressive tax increases would be inappropriate in the current economic climate and there is little scope for significant spending cuts in other areas.”
“I don’t know how successful Obama will be in bringing back prosperity to the US, but his amazing victory in rising to the US Presidency has inspired billions of people around the world. It has also lifted America in the eyes of the world …,” commented Richard Russell (Dow Theory Letters). The newspaper headlines tell the story …
Underscoring economists’ concerns about the depth of the global economic slowdown was a warning from the International Monetary Fund (IMF) that developed economies as a whole would shrink by 0.3% next year. It would mark the first overall contraction in developed economies since World War II. Aggressive interest rate cuts by a number of major central banks only partly assuaged investors’ fears.
Nouriel Roubini (RGE Monitor) said: “Deterioration in the health of the financial sector and related severe strains in funding markets have increased the tail risk of deflation for the real economy.”
Although the banking system remains in the grips of a massive deleveraging process, there are early signs that the various central bank liquidity facilities and capital injections are beginning to have the desired effect. Restoring confidence will take a significant amount of time, but the narrowing of financial sector spreads such as the TED spread (i.e. three-month dollar Libor less three-month Treasury Bills) shows that the healing process is under way.
Next, a tag cloud of the text of the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. The key words include the usual suspects.
Relying on his 50 years’ market experience, Richard Russell questioned whether we were perhaps dealing with another fake-out advance. “One item that bothers me a bit is this – have we seen enough black pessimism to believe that this bear market has bottomed? My guess is that we will see more pessimism next year as unemployment climbs and as it becomes almost impossible to find a good job.”
However, John Bogle, founder of the Vanguard Group, said in an interview with Reuters on Tuesday that the fundamentals of the US stock market had “improved radically” and declines in valuations were overblown.
Across the pond, European equities received a boost from Morgan Stanley’s European strategist Teun Draaisma saying that stocks were now flashing a “full house” buy signal after these markets have priced in an earnings recession, and retail investors, purchasing managers and sell-side analysts have all capitulated. Draaisma’s prior calls were on the money.
Albert Edwards of Société Générale is less sure. “It has been a house of cards waiting to fall,” Edwards said according to the Financial Times. “The market has to slide much further down the slope of hope into Dante’s inferno.” He believes markets are currently in the eighth of Dante’s nine circles of hell.
The stock market is likely to see a lot of back-and-forth churning as it tries to map out a bottom. A 90% down-day is normally followed by a rally of two to seven days. In this instance we are dealing with two consecutive 90% down-days that occurred last week. For a year-end rally to materialize, it is essential that the recent lows (8,176 on the Dow Jones Industrial Index and 849 on the S&P 500 Index) not be taken out and that credit spreads continue to contract. But for confidence to return, sustained moves above 10,000 for the Dow and 1,000 for the S&P 500 are required.
Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.
Economic reports released in the US during the past week confirmed the dire economic conditions and included the following:
• Payroll employment fell by 240,000 – the 10th consecutive decline – and there was a net downward revision of 179,000 jobs to the previous two months. The unemployment rate increased by 0.4 of a percentage point to 6.5%, a figure above the peak reached in the last cyclical downturn. The economy has lost 1.2 million jobs this year, with about half the decline coming in the last three months as businesses respond to shrinking demand and tighter credit by cutting costs.
• The ISM Non-manufacturing Survey plunged to 44.4 in October from 50.2 from the previous month. This indicator had been one of the few not to show recession-like behavior, but that quickly changed with this release.
• The Institute for Supply Management’s Manufacturing Index fell 4.6 points to 38.9 for October. The larger-than-expected decline puts the Index at its lowest level since the early 1980s – consistent with an economy in a severe recession.
• Credit conditions tightened during the third quarter across most of the major credit and loan categories reported in the Federal Reserve’s Senior Loan Officer Opinion Survey.
• US vehicle sales fell sharply in October to 10.5 million units on a seasonally adjusted annualized basis. This pace of sales was last seen in the early 1980s.
US interest rate futures are fully pricing in a 25 basis point cut by the Federal Reserve next month, and accord a 64% chance to a 50 basis point easing.
Commenting on the outlook for US interest rates, Asha Bangalore (Northern Trust) said: “At this point in the economic crisis, the severity of the malaise points to expectations of a lower Federal funds rate, which the Fed may deliver sooner rather than later. We need to step back and ponder about the benefit of additional easing of monetary policy.
“There are strong expectations that a significant stimulus program will be implemented shortly. A fiscal stimulus program may be more effective in stimulating demand and bringing about a recovery than additional easing of monetary policy. Also, the recapitalization of banks that is under way should eventually erase the credit crunch and revitalize lending to the private sector, which is the key to a full-fledged economic recovery.”
Elsewhere in the world, major central banks were following up the October 8 coordinated interest rate reductions with cuts of their own, often larger than expected.
The European Central Bank eased monetary policy and cut its key monetary policy rate by 50 basis points to 3.25%. With inflationary pressures easing, it seems the Bank has shifted its bias towards monetary loosening to support the rapidly deteriorating Eurozone economy.
The Bank of England has stunned markets and cut its main policy rate by 150 basis points as the UK’s recession is deepening. The rate is now 3% versus 5.5% at the start of the year and a cyclical peak of 5.75% a year ago.
Central banks in Switzerland, Denmark, Australia and India have also slashed benchmark interest rates.
The November 15 G20 meeting in Washington will be the next of a series of summits to assess global responses to the financial crisis. Discussion will likely focus on assessing short-term stabilization efforts, specific regulatory and capital market reforms, and institutional structures (including the role of the IMF).
Source: Yahoo Finance, November 7, 2008.
Next week’s US economic highlights, courtesy of Northern Trust, include the following:
1. International Trade (November 13): The trade deficit is predicted to have narrowed to $57.0 billion in September from $59.1 billion in August.
2. Retail Sales (November 14): Auto sales fell sharply in October (10.6 million units versus 12.5 million units in September). Non-auto retail sales surveys show significant weakness. Based on this information, retail sales probably declined by about 2.0% in September. Consensus: -1.9%% versus -1.2% in September; non-auto retail sales: -1.0% versus -0.6% in September.
3. Other reports: Inventories, Import prices, Consumer Sentiment Index (November 14).
Click here for a summary of Wachovia’s weekly economic and financial commentary.
Source: Wall Street Journal Online, November 7, 2008.
Among developed markets, Italy (+2.4%), New Zealand (+0.7%), Australia (+0.6%), the UK (+0.3%) and Japan (+0.1%) recorded positive returns, whereas the US markets, Canada (-1.7%), Germany (-1.0%) and France ( 0.5%) were under the water.
As far as emerging markets are concerned, Singapore (+3.9%), Hong Kong (+2.0%), South Korea (+1.9%), India (+1.8%) and China (+1.1%) all registered gains. On the other hand, Turkey (-4.3%), Mexico (-3.1%), Taiwan (-2.6%), Russia (-1.7%) and Brazil (-1.6%) did not give investors much to smile about.
The table below by Finviz summarizes the past week’s performances (in US dollar terms, whereas all the gains/losses referred to elsewhere in this post are in local currency terms) for various stock markets. Click here or on the thumbnail for a large table.
For the week ended November 5 there were net inflows of $413 million into emerging-market stock funds, according to US Global Investors. This is a significant improvement from the previous week when there were net redemptions of $1.6 billion. For the year to date, the outflows are estimated at $45 billion, nearly 40% of the cumulative inflows from 2003 through 2007.
The US stock markets all declined over the week as shown by the major index movements: Dow Jones Industrial Index -4.1 (YTD -32.6%), S&P 500 Index -3.9% (YTD -36.6%), Nasdaq Composite Index -4.3% (YTD -37.9%) and Russell 2000 Index -5.9% (YTD 34.0%).
The Dow needs to increase by 12.2% to reach its 50-day moving average and 29.9% to get to the key 200-day line.
Click here or on the thumbnail below for a market map, obtained from Finviz.com, providing a quick overview of the performance of the various segments of the S&P 500 Index over the week.
The automobile group (-14%) was among the underperformers for the week. On Friday both General Motors (GM) and Ford (F) reported losses and substantial cash burns during the third quarter – Ford used $7.7 billion cash and General Motors $6.9 billion. Both firms are seeking financial assistance from Government.
The 10-year US Treasury Note declined by 18 basis points to 3.78%, the UK ten-year Gilt dropped by 34 basis points to 4.19% and the German ten-year Bund fell by 24 basis points to 3.67%. Emerging-market bonds fared even better as the risk premium eased from elevated levels.
A number of commentators are of the opinion that government bonds are topping out. “… further deflation and economic decay will induce more inflation-stoking nationalization, socialism and monetary promiscuity – so sell bonds. Cascading global bond markets would be the next big crisis,” said Bill King (The King Report).
US mortgage rates also declined, with the 30-year fixed rate falling by 42 basis points to 6.14% and the 5-year ARM by 7 basis points to 5.92%.
The cost of buying credit insurance for US and European companies eased as shown by the narrower spreads for both the CDX (North American, investment grade) Index (down from 200 to 188) and the Markit iTraxx Europe Crossover Index (down from 765 to 762).
Money-market rates declined as a result of easier monetary policy and the ongoing provision of liquidity. The three-month dollar Libor rate declined by 74 basis points to 2.29% during the week – 103 basis points above the Fed’s target rate of 1.0%. The spread was 43 basis points at the start of the year.
Bespoke provided an interesting table of the credit default swap prices for individual countries. These prices represent the cost per year to insure $10,000 of debt for five years. Argentina is in the most trouble, with a cost of $4,453 per year to insure just $10,000 of debt, followed by Venezuela, Lebanon, Egypt and Indonesia. Of the G8 countries, Russia has by far the highest default risk with a CDS price of $523. Japan, France, the US and Germany have the lowest default risk of the group of countries, but they have all spiked more than 200% this year.
Over the week the US dollar gained against the euro (+0.2%), the British pound (+2.7%) and the Swiss Franc (+1.8%), but lost ground against the Japanese yen (-0.3%), the Canadian dollar (-1.8%), the Australian dollar ( 1.2%) and the New Zealand dollar (-0.7%).
Precious metals bucked the trend and edged higher, with gold, silver and platinum all up by more than 2%. Platinum benefited from the closure of a South African smelter by Anglo Platinum, reducing global supply by 3%. The charts (gold shown below) seem to indicate that a rally could be in store for precious metals.
The following graph 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 keeping our portfolios afloat in the treacherous waters characterizing the investment landscape. Also remember what Elroy Dimson of the London Business School said: “Risk means more things can happen than will happen.”
That’s the way it looks from Cape Town.
Source: Chicago Tribune
Financial Times: Obama and Biden take the stage
Source: Financial Times, November 6, 2008.
Charlie Rose: A conversation with Floyd Norris (The New York Times) about Obama and the economy
Source: Charlie Rose, November 6, 2008.
The New York Times: Obama seeks speedy action on economy
“‘I do not underestimate the enormity of the task that lies ahead,’ Mr. Obama said at his first news conference since his victory over Senator John McCain on Tuesday. He said he was certain that ‘some difficult choices’ will have to be made.
“‘It’s not going to be quick, and it’s not going to be easy to dig ourselves out of the hole that we’re in,’ Mr. Obama said, declaring that he wants to see ‘a rescue plan for the middle class’ and a further extension of unemployment-insurance benefits.
“The news conference here came immediately after Mr. Obama, Vice President-elect Joseph Biden and his newly named chief of staff, Representative Rahm Emanuel, met with the transition’s economic advisory board – and as a fresh wave of news from Wall Street and Washington deepened the gloom hanging over the country’s financial situation.
“The president-elect said he and his advisers would try to find ways to help the struggling automobile industry, and that he hoped to see enactment of an economic-stimulus package either before or soon after Inauguration Day.
“Mr. Obama announced his selection on Thursday of Mr. Emanuel as his White House chief of staff, a choice he said he made because Mr. Emanuel had ‘deep insights into the challenging economic issues that will be front and center for our administration.’
“In a long list of forthcoming appointments, aides said, Mr. Obama is acting with the greatest urgency toward choosing a Treasury secretary and is said to be considering Lawrence Summers, who held the post during the Clinton administration, and Timothy Geithner, president of the New York Federal Reserve Bank.”
Source: Jeff Zeleny and Jackie Calmes, The New York Times, November 7, 2007.
Bloomberg: Steve Forbes likes Volcker as next Treasury Secretary
Source: Bloomberg, November 5, 2008.
The New York Times: A towering economic to-do list for Obama
“Few presidents have entered office with an economy in such turmoil. Reflecting worries that the worst may not be over, the stock market continues to languish, with a 5% decline on Wednesday, leaving it 35% below its peak last fall.
“The reasons are myriad: the financial system, though back from the brink, remains deeply troubled. Housing may no longer be in free fall, but plummeting values and rising defaults have impoverished many homeowners and burdened states with widening budget deficits. The once-mighty auto industry is on the verge of implosion.
“Consumers who piled up credit card debt are pulling back, a major concern because their spending helped power economic growth in recent years. And with unemployment widely expected to increase to 8% or higher, from 6.1%, consumers are likely to tighten their belts even more.
“Moreover, with upward of $1 trillion already pledged by the federal government to bail out the banking and housing industries, financing a growing deficit to address the problems could be difficult — and saddle the Treasury Department with high levels of debt for years to come.
“But even before President-elect Obama takes the oath of office, Democrats are likely to push his agenda with urgency, because the economy otherwise could worsen quickly — complicating the task ahead. ‘The cost of allowing an economy to flounder is very high in lost output and rising unemployment,’ said James Glassman, chief domestic economist at JPMorgan.
“Click here for some of the crucial issues that economists say will test the new administration, and how it might address them.”
Source: The New York Times, November 5, 2008.
Bloomberg: Obama may spend on roads, bridges to stimulate US economy
“‘He’s identified infrastructure as one of the ways to strengthen the American economy,’ Janet Kavinoky, transportation infrastructure director for the US Chamber of Commerce, said in an interview. ‘So we would expect it to be on his list of actions both for the stimulus and longer term.’
“Obama was elected yesterday amid a global credit crisis and with the US in or heading into a recession that may be the deepest in more than 20 years. He promised during his campaign he would use infrastructure spending to create jobs.
“‘We’ll create 2 million jobs by rebuilding our crumbling roads, schools and bridges,’ Obama said in an October 13 speech in Toledo, Ohio, where he outlined his plan for reviving the economy.
“Obama has urged Congress to pass an economic stimulus bill immediately after the election. House Speaker Nancy Pelosi, a California Democrat, has said she wants spending on highways and other transportation infrastructure included in the next stimulus package.”
Source: Angela Greiling Keane, Bloomberg, November 5, 2008.
Jim Sinclair (Mineset): The future of markets with Obama at the helm
“What we do know is:
1. Many of the evil money ruler geniuses are out of the lime light.
2.Even if Wall Street is still pulling strings, this Administration will not have Paulson who jiggled every market on the planet fairly well.
3. The PTT team, if it exists, will be made up of lesser lights because the past Administration ruled that.
4. All the problems are still out there as virulent cancers that have spread out of control in the financial market and are not operable. Thank you all you OTC derivatives that up to now have not been singled out to accept blame. This could change but do not count on it.
5. You can count on fiscal stimulation as it is a tenet of how the Democratic mind moves.
6. You can count on higher taxes for Daddy Warbucks and reductions for the ordinary man who carries the Federal Budget money-wise.
7. You can count on an interesting period in terms of geopolitical challenges to the USA from their many enemies in order to size up the new leadership.
8. You can count on meaningless dialog with all those about to test the new Administration geopolitically.
9. You can count on gold at $1,200 and then $1,650.
10. You can count on the US dollar trading at USD .72, .62 and .52.
11. You can count on the reestablishment of social and economic safety nets.
12. You can count on the now shredded Constitution remaining shredded. Once power comes into an Administration it stays their permanently.”
Source: Jim Sinclair, MineSet, November 5, 2008.
BBC News: Billion-dollar bail-outs
Source: BBC News, November 3, 2008.
Chicago Tribune: Programs taking shape to aid those facing foreclosure
“At the end of the third quarter, one in every 500 homes in Illinois was in some stage of the foreclosure process, according to RealtyTrac. The number of homes in foreclosure was almost 50% higher than in the same period last year.
“That pattern is playing out nationally, creating a sense of urgency because foreclosures not only affect troubled borrowers but also their neighbors, whose home values are reduced by distress sales.
“However, the complicated structure of mortgage financing, the fragile state of the lending industry, the voluntary participation by lenders in most programs and the fact some can’t afford their homes regardless of the terms has delayed implementation of a rescue plan.
“For the past two weeks, the Federal Deposit Insurance Corp., Treasury Department and White House have discussed various programs but said little publicly.
“One proposal floated by the FDIC would assist 3 million homeowners in danger of foreclosure by offering up to $50 billion in government guarantees to lenders who modify mortgages. A plan was expected last week, but none was announced.”
Source: Chicago Tribune, November 5, 2008.
The Wall Street Journal: US weighs purchasing stakes in more firms
“In focus are companies that provide financing to the broad economy, including bond insurers and specialty finance firms such as General Electric’s, CIT Group and others, these people said.
“The possible expansion shows how much Treasury’s rescue plan has morphed since it was first proposed in September. Treasury Secretary Henry Paulson originally unveiled a complex plan to buy up financial institutions’ hard-to-sell assets such as mortgage-backed securities.
“That proposal has yet to get up and running, stymied by operational delays and beset by criticism. People familiar with the matter say Treasury may scrap part of that early plan – purchasing assets through an auction process – and instead purchase some of these distressed assets directly.
“Of the original $700 billion made available to Treasury, officials set aside $250 billion for equity investments. It has already invested $163 billion in a range of banks including some of the nation’s largest, such as Goldman Sachs and Bank of America. That number will likely expand at the expense of the asset-purchase plan, but by exactly how much is unknown.
“‘We are looking at many ideas for strengthening the financial system and for restoring lending,’ said Jennifer Zuccarelli, a Treasury spokeswoman. ‘We are weighing ideas and have made no decisions.’”
Source: Deborah Solomon, The Wall Street Journal, November 4, 2008.
Green Light Advisor: Hugh Hendry – don’t bank on the bailout
Click here or on the image below for Part 1 of the video.
Click here for Part 2 of the video.
Click here for Part 3 of the video.
Source: Green Light Advisor, November 2, 2008.
Financial Times: Europe sets deadline to draw up reforms
“Meeting at an informal summit in Brussels in preparation for next weekend’s meeting of the G20 group of advanced industrial and emerging countries in Washington, they also set a 100-day deadline to draw up ambitious reforms to the financial system.
“These, they agreed, should be built around five principles: one of which would be that ‘no market segment, no territory and no financial institution should escape proportionate and adequate regulation, or at least oversight’.
“Gordon Brown, the British prime minister, used the summit to press other EU leaders to back fiscal stimulus measures to support recent interest rate cuts by the European Central Bank, the Bank of England and other central banks.
“France’s president Nicholas Sarkozy, hosting the Brussels meeting, insisted afterwards European countries were united in advance of the G20 summit on how to reform the global financial system. ‘We will be defending a common position, a vision … for reforming our financial system,’ he said.”
Source: Nikki Tait and George Parker, Financial Times, November 7, 2008.
BBC News: IMF cuts economic growth forecast
“It is predicting that developed economies as a whole will shrink by 0.3% next year, having predicted growth of 0.5% less than a month ago. It would be the first time there has been an overall contraction in developed economies since World War II.
“Worst hit will be the UK, shrinking 1.3%, followed by Germany at 0.8% and the US and Spain contracting by 0.7%.
“Emerging economies have also been downgraded, with the forecast of Chinese growth down from 9.3% to 8.5%, India down from 6.9% to 6.3% and Russia down from 5.5% to 3.5% growth.
“The IMF is still expecting the overall global economy to grow in 2009, but it has cut its growth forecast to 2.2% from the previous estimate of 3%.
“‘Prospects for global growth have deteriorated over the past month, as financial sector deleveraging has continued and producer and consumer confidence have fallen,’ the IMF said in its report.”
Source: BBC News, November 6, 2008.
John Authers (Financial Times): Interest rate cuts all around
Click here for the full article.
Source: John Authers, Financial Times, November 6, 2008.
ABC: Shiller – “more tough times ahead for US”
Source: ABC, November 4, 2008.
Bloomberg: Fed’s Fisher says US economy may slump through 2009
Source: Bloomberg, November 3, 2008.
Bill King (The King Report): Fed’s balance sheet
“Adjusted monetary base growth is Weimar-like, 785.7% annualized for two maintenance periods (four weeks).”
Source: Research Division, Federal Reserve Bank of St. Louis
Source: Bill King, The King Report, November 7, 2008.
Paul Kedrosky (Infectious Greed): Treasury has huge capital needs
Source: Paul Kedrosky, Infectious Greed, November 4, 2008.
Richard Russell (Dow Theory Letters): First deflation – then inflation
“But here in the US the Fed and the Treasury are having nightmares – they’re wondering – ‘Are we following in Japan’s foot steps?’ Bernanke and Paulson are well aware of the danger of deflation, and they are spending hundreds of billions of dollars in an attempt to ward off deflation. The Fed knows it can halt inflation, simply by raising interest rates. But deflation is another story, and it’s very difficult to halt deflation once it becomes imbedded in an economy. In fact, the last thing Ben Bernanke, an expert on the long Japanese recession and the Great Depression, wants to do is to battle the forces of deflation. Stop it before it happens is his philosophy, and if that kicks the national debt up a few trillion dollars – well, so be it.
“The trillions being spent today won’t show up in the economy immediately. Neither will the current low Fed Funds rate of 1.5%. It may take a year or two before today’s massive injection of dollars into the banking and business system shows up in the economy. But when it does surface, it will reveal itself as raging inflation.
“Before inflation resumes, the US dollar is going to get the chills. The Fed has covered the world with a blanket of Federal Reserve Notes. These dollars are needed now, but in the period ahead these dollars will set off a wave of inflation. When there’s too much of any item, that item loses value. When the supply of anything, stocks, champagne, cars, becomes excessive, the value of those items declines. Yes, it can even happen to a currency. Too many dollars are now being created. Somewhere ahead, the dollar is going to lose its value against other currencies. Our overseas creditors won’t accept a trillion more dollars, and that’s what gold is now beginning to take into account. The intrinsic value of gold does not fluctuate in terms of dollars. The number of dollars required at any given time to purchase an ounce of gold fluctuates.”
Source: Richard Russell, Dow Theory Letters, November 5, 2008.
Asha Bangalore (Northern Trust): Employment report – deep economic woes will take long to fade
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 7, 2008.
Bloomberg: Jan Hatzius – a unemployment at 8% by end of 2009
Source: Bloomberg, November 7, 2008.
Asha Bangalore (Northern Trust): ISM Manufacturing Survey – significant decline
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 3, 2008.
Asha Bangalore (Northern Trust): ISM Non-Manufacturing Survey showing weakness
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 5, 2008.
Asha Bangalore (Northern Trust): Senior loan officer survey – credit conditions remain strongly unfavorable
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 3, 2008.
Charlie Rose: A conversation with Ted Forstmann
Source: Charlie Rose, October 29, 2008.
Jan Loeys (JP Morgan): How deep a crisis?
“The financial crisis is in no doubt the worst since the second world war. The depth of the economic crisis is harder to gauge. It is clear that the global recession will be worse than the recession in the early nineties.
“Where are we in these crises? The worst of the financial crisis has past, but we have not seen the worst of the economic crisis.
“An avalanche of public measures to inject capital and liquidity brought some life to money and credit markets. More importantly, public authorities are becoming the largest financial intermediaries, taking in flight-to-quality money and lending it directly to industry.
“Where does this leave us in the cycle of cutting leverage? Banks have come a long way. Other companies will likely turn more cautious on spending.
“Households have started to cut debt, but are not halfway through yet. Pension funds are just starting to cut their risk appetite.
“That leaves hedge funds. They have reduced their reliance on leverage, but their real threat comes from redemptions that will increase significantly next year. Over time we expect the hedge funds involved in less liquid assets to gravitate to a private equity platform.”
Source: Jan Loeys, JP Morgan (via Financial Times), November 3, 2008.
BCA Research: US credit markets – tentative signs of improvement
“The banking system remains mired in a massive deleveraging process as it sheds risk and braces for recession. Nevertheless, there are early signs, in the US at least, that the various central bank liquidity facilities and capital injections are beginning to have the desired effect: forward libor/OIS spreads have rolled over; financial sector spreads have narrowed sharply from their October wides; and commercial paper (CP) issuance is beginning to shift back to longer maturities. Bottom line: Restoring confidence in the financial system will take much time, but the healing process appears to finally be underway.”
Source: BCA Research, November 6, 2008.
Bespoke: One-month treasuries still indicate fear
Source: Bespoke, November 5, 2008.
Bespoke: Default risk for key financials
Source: Bespoke, November 6, 2008.
City Wire: Man Group sees assets hit by market volatility
“The company – the largest publicly traded hedge fund manager – said that its funds under management had shrunk by 9% in total in the last six months, standing at $67.6 billion at end of September.
“Crucially, this was also lower than the estimate of $70.3 billion in the pre-close trading update, with the group citing ‘extreme moves in markets and foreign exchanges in the last week of September’ for the downward revision.
“It also warned that its Man Global Strategies (MGS) division had implemented a further reduction in investment exposure to cut back on risk because of ongoing volatility, which it said would result in further falls in assets of around $7.5 billion in the next two months.
“In reaction, brokers were downbeat, with Evolution calling the update a ‘shocking statement’. It said the main problem was that poor performance and market volatility had led Man to reduce the gearing in its structured products.
“Meanwhile redemptions came in at $6 billion, with traders noting the figure appeared to be lower than peers.”
Source: City Wire, November 6, 2008.
Eoin Treacy (Fullermoney): Government bond yields pulling back
“The highs posted for these yields coincide with lows for a number of the respective currencies against the US dollar and Japanese yen. Stock markets have rallied reasonably well over the same time frame but the moves in the currency and bond markets are providing a clearer signal that investors are willing to tolerate some risk when the potential return is so appetising.”
Source: Eoin Treacy, Fullermoney, November 4, 2008.
Bloomberg: Jim Rogers says markets may go “a lot further down”
Source: Bloomberg, November 3, 2008.
Bespoke: Worst two-day decline since the 1987 crash
Source: Bespoke, November 6, 2008.
Reuters: John Bogle – US market has “improved radically”
“Bogle’s comments, coming as US stocks rose in their biggest Election Day rally, underlines an emerging streak of optimism on Wall Street over corporate earnings and the prospect of more measures to prevent the financial crisis from turning into a global recession.
“‘It seems to me that people have lost sight of the fact that the fundamentals have improved radically,’ said Bogle, who launched the colossal $97 billion Vanguard 500 Index in the mid-1970s as a low-cost investment strategy.
“The hard-charging, 79-year-old founder of the nation’s second-largest largest mutual fund company said he expected the earnings of companies in the Standard & Poor’s 500 Index to grow at a rate of about 7% annually over the next decade. That should pave the way for returns on US stocks of around 10%, according to his calculations that combine a projected earnings growth rate with a 3% dividend yield generated by stocks in the S&P 500 Index.
“‘The value of the US stock market was $18 trillion a year ago. And now it’s about $9.5 trillion or let’s call it $10 trillion with today’s rally. Anyone who believes that American business is worth $8 trillion less than it was a year ago I think is a fool,’ he told Reuters in a telephone interview.”
Source: Reuters, November 4, 2008.
Bespoke: Q3 earnings growth not all that bad
Source: Bespoke, November 3, 2008.
Richard Russell (Dow Theory Letters): Is this a false rally?
“Could we now be dealing with another fake-out advance? The thought has occurred to me, so we will have to monitor any advance from here with intense eagle eyes.
“One item that bothers me a bit is this – have we seen enough black pessimism to believe that this bear market has bottomed? My guess is that we will see more pessimism next year as unemployment climbs and as it becomes almost impossible to find a good job.
“Also, it’s been exactly one year since the Dow Theory bear signal. The bull market started in 1980 – so we saw a 28-year bull market. Bear markets in duration usually run one-quarter to one-third as long as the previous bull market. Therefore, one year seems an awfully short time for a 28-year bull market to be corrected. I would normally expect the following bear market to run seven to nine years. However, the severity of the decline may take the place of duration.”
Source: Richard Russell, Dow Theory Letters, November 3, 2008.
Bespoke: Recommended equity allocation continues to tick lower
“This bear market has been different, however, as analysts have continued to lower their recommended stock allocation in the face of declining markets. As noted, the last time the market was at current levels back in 2003, stock allocation was at 68% versus 58% now. This is definitely a chart that contrarians like to see.”
Source: Bespoke, November 6, 2008.
Bespoke: “Full House” buy signal for European equities
“While we don’t normally highlight specific calls by strategists, we think Draaisma’s prior calls are worth pointing out. Judging by the buy and sell signals that we were able to document since 1996, his calls have been pretty timely.”
Source: Bespoke, November 4, 2008.
John Authers (Financial Times): Democrats and the dollar
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Source: John Authers, Financial Times, November 3, 2008.
Financial Times: IEA predicts oil price to rebound to $100
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Source: Carola Hoyos and Javier Blas, Financial Times, November 5, 2008.
Seeking Alpha: UBS lowers gold expectations again
“‘The revised UBS commodity price outlook reflects an extended recessionary scenario with base metal prices in both 2009/2010 that are mostly below the marginal industry costs and current spot prices,’ the investment bank said in a report. ‘If such a recessionary scenario were to unfold, we believe that almost all North American mining companies could experience challenges to liquidity and/or business continuity.’
“Platinum saw a US$200 per ounce reduction for those years to US$900 and US$1,100, respectively.
“UBS has also adjusted its base metals forecasts. Most significant for gold equities, copper moved from US$2.50 and US$3.00 per pound to US$1.30 and US$1.55.
“‘UBS believes gold will remain under pressure in 2009 from a combination of slowing demand for jewelery and disinvestment as inflation slows,’ the report said. ‘Silver forecasts have been lowered sharply to take account of the dramatic underperformance of silver compared to gold in recent months. Platinum forecasts have been reduced to reflect exposure to weak auto sales in 2009/2010 due to a deeper global slowdown.’”
Source: Seeking Alpha, November 2, 2008.
The Wall Street Journal: A golden future
Source: The Wall Street Journal, November 6, 2008.
Bloomberg: Commodities send sell signal before long recession
“Industrial raw materials measured by the Journal of Commerce fell at an annual rate of as much as 56% last week, the most since 1949 and worse than the declines before every recession since then. Crude oil, copper and wheat tumbled more than 50% from records this year as the US economy declined in the third quarter by the most since 2001.
‘”The industrial sector, which was helping to keep the recession relatively mild, has completely given way and now we need to be prepared for a much more severe recession,’ said Lakshman Achuthan, managing director at the Economic Cycle Research Institute in New York, which compiles the Journal of Commerce data. ‘It’s at least going to look something like what we saw in the early 1980s, but it could be worse.’
“Goldman Sachs Group, once among the biggest commodity proponents, said on October 23 that the risk of a ‘sharp global economic slowdown’ may send prices even lower. Codelco, the world’s largest copper miner, said this year’s price collapse signals the end of a ‘supercycle’ for the metal.”
Source: Millie Munshi, Bloomberg, November 3, 2008.
Bloomberg: Ship orders plunged 90% last month
“Shipowners ordered a total of 37 container ships, tankers and other vessels in October, compared with 378 a year earlier, Lloyd’s Register Chief Executive Officer Richard Sadler said in an interview yesterday at a conference in Dalian, China.
“Hyundai Heavy Industries, the world’s largest shipyard, has also reported declining orders for the three months through September as shipping lines are slowing expansion plans because of a lack of financing and plunging demand for shipments of oil, raw materials and finished goods. The global full-year order tally will likely fall more than the 15% previously predicted by Lloyd’s Register, Sadler said.
“‘We underestimated it,’ he added. ‘On the positive side, compared to 2006, 2007 was an exceptional year.’
“The Baltic Dry Index, a measure of commodity-shipping costs, surged to a record 11,793 on May 20, having more than tripled in three years. Rates have since tumbled 93 percent, to near six- year lows, as traders are struggling to get credit for shipments. Chinese steelmakers are also curbing production amid slowing demand for new buildings and cars.”
Source: Wendy Leung, Bloomberg, November 7, 2008.
Reuters: Trichet on ECB rate cut
“In the interview at the bank’s headquarters in Frankfurt, ECB President Jean-Claude Trichet said future rate cuts, beyond Thursday’s lowering of the benchmark rate to 3.25%, would depend on the trend of oil and commodities prices.”
Source: Reuters, November 6, 2008.
Victoria Marklew (Northern Trust): ECB cuts again
“Earlier this week the European Commission released its latest economic forecasts, anticipating real GDP growth of just 0.1% for the 15-member Euro-zone next year, and 0.2% for the 27-member EU. Q3 GDP data are due November 14, but the Commission stated that the Euro-zone is already in a technical recession. Assuming that the Q3 data are as weak as expected, and given the extent to which forward-looking data are deteriorating, the ECB is likely to ease again at the December 4 policy meeting.”
Source: Victoria Marklew, Northern Trust – Daily Global Commentary, November 6, 2008.
BCA Research: Bank Of England – too late
“The rate cut was prompted by real risks of deflation and evidence that consumers are finally capitulating. Falling house and equity prices have knocked over 150% of GDP off household balance sheets over the past twelve months, at a time when the personal savings ratio stands only slightly above 1%. Unfortunately, further steep falls in consumption are still inevitable in the coming months. The Christmas spending season will likely be the weakest in real terms, since the 1940s.
“Although the government is leaning on financial institutions to increase lending in exchange for capital injections, credit demand will stay weak. The wealth destruction is consistent with a slow rise in the personal savings ratio to at least early 1990 recessionary levels of close to 10%, at a time when the rise in unemployment has only just begun. Bottom line: Stay short sterling and long gilts within global hedged fixed income portfolio.”
Source: BCA Research, November 7, 2008.
Victoria Marklew (Northern Trust): Swiss National Bank opts for intra-meeting rate cut
“With Switzerland’s major export markets slowing sharply the economy is set to fall into recession around the turn of the year, and could be in for more than two consecutive quarters of negative real GDP growth. If current trends continue, the SNB is likely to ease again at its next scheduled policy meeting on December 11.”
Source: Victoria Marklew, Northern Trust – Daily Global Commentary, November 6, 2008.
BBC News: Spanish jobless hits 12-year high
“The number claiming unemployment benefit rose by 192,658 to 2,818,026 – the highest level since April 1996. Since October 2007, the number of those claiming jobless benefits has risen 37.5%.
“A severe slowdown in the construction industry has been one of the main causes of the economic slowdown. Recent figures showed that the economy contracted by 0.2% in the third quarter compared to the previous three-month period.
“On Monday the government set out a plan to help unemployed people who had difficulty keeping up with mortgage payments.”
Source: BBC News, November 4, 2008.
James Pressler (Northern Trust): India – Reserve Bank is still behind the curve
“The details of this weekend’s surprise easing are fairly straight-forward. The repo rate was trimmed by 50 basis points, to 7.50%, after being cut by 100 basis points two weeks ago, and the RBI also reduced the reserve requirement ratio by one percentage point, to 24%, effective this coming Saturday. This loosening should free up significant liquidity into a market that has been running dry of late, and is quite likely not the last measure to be seen this month. The Reserve Bank did note that inflation was still a concern and would be monitored, but keeping the markets stable took priority. Inflation is disturbingly high, but recent figures suggest prices have peaked for now.”
Source: James Pressler, Northern Trust – Daily Global Commentary, November 3, 2008.
Bloomberg: Chinese manufacturing shrinks by record, survey shows
“The CLSA China Purchasing Managers’ Index fell to a seasonally adjusted 45.2 in October from 47.7 in September, CLSA Asia-Pacific Markets said today in an e-mailed statement.
“A government-backed survey released on November 1 also showed a record contraction, adding to concern that the world’s fastest-growing economy may slump. Australia reported today that manufacturing shrank by the most since data began in 1992 as the crisis rips across Asia Pacific.
“‘The very sharp fall in the October PMI confirms that China is more integrated into the global economy than ever,’ said Eric Fishwick, head of economic research at CLSA in Singapore. ‘Chinese manufacturers are seeing their order books cut, both at home and abroad, as the world economy falls into recession.’
“Tom Albanese, chief executive officer of mining company Rio Tinto Group, said yesterday that China’s slowdown is deepening and demand for metals won’t rebound until 2009. The nation’s economy expanded in the third quarter at the slowest pace since 2003, growing 9%.”
Source: Nipa Piboontanasawat, Bloomberg, November 3, 2008.
City Wire: Mobius buying stocks as emerging markets approach bottom
“Within the last week, there has been growing concern about the economic situation in Pakistan. This has fuelled worries about the security situation since political instability has been increasing in recent times. Mobius, however, says Chinese investment is likely to aid Pakistan and stabilise the surrounding countries.
“‘I think China is going to invest in Pakistan and help them through their balance of payments problems so we can be a little bit more positive about the situation there. Pakistan is going through a slow transition back to parliamentary democracy and in the process some very tough economic decisions are required.’
“On Tuesday, China slashed its interest rates by 27 basis points to 6.66% – a third such cut in six weeks. And while the reason behind lower rates is widely believed to be fear of slowing global demand, Mobius points out that China has not suffered as much as expected.
“‘There’s no question there will be a hit to the export market’, Mobius conceded. ‘We have seen that in a number of countries around the world but the actual exports of China have not come down yet. Some of the demand for Chinese products is ever-lasting because China is the only place that can make these products for these prices,’ he says.
“Mobius believes that the Chinese economy will continue to grow at around 6% to 8%. ‘They’ve diversified their exports to emerging markets around the world and been pumping up domestic demand. So we see a surprisingly low decline in their exports but it remains to be seen how long the slowdown lasts,’ he says.”
Source: Drazen Jorgic, Citywire, October 31, 2008.
James Pressler (Northern Trust): Australia – strong rate cut, bold statement about economy
“Looking forward, we believe the OCR has more room to fall, and the RBA could easily participate in any coordinated global rate cuts this year. By end-June 2009, most people are placing the OCR at 4.00% to 4.50%, and we place our bid at the lower end of that range. We also believe that Australia will avoid a formal, two-contracting-quarters recession, as monetary, fiscal and now exchange rate stimulus will all sustain a low level of expansion.
“Downside risks do exist – particularly any second-round impact of liquidity tightening and possible bank failures – but we insist that the country is in better position than most of the G-7 to handle such problems without severe economic pain.”
Source: James Pressler, Northern Trust – Daily Global Commentary, November 4, 2008.
Fin24: South African Credit Act a worldwide hit
“A number of African and European countries are studying the act with the aim of hardening their own credit legislation and reining in reckless lending.
“The ongoing credit turmoil, the architect of which is the world’s financial powerhouse, the US, has laid bare to the global community how greedy and heedless lenders can ruin the world economy and its financial markets.
“Peter Setou, a senior manager at the National Credit Regulator (NCR), said this week in the light of the global credit crunch many African and European nations had been soliciting advice from South Africa to help them with strengthening their credit policies.
“‘There has been a lot of interest from mainly African and European countries wanting to study the act,’ said Setou. He said the NCR had received delegations from Botswana, China, Mongolia and the European Coalition for Responsible Credit (ECRC) wanting to learn about the act.”
Source: Andile Ntingi, Fin24, November 2, 2008.
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