Words from the (investment) wise for the week that was (Dec 15 – 21, 2008)
“Americans have always been able to handle austerity and even adversity. Prosperity [greed!] is what is doing us in,” said James Reston, former New York Times journalist and Pulitzer Prize winner.
Another chapter in dealing with the current credit and economic adversity was written on Tuesday when the US Federal Reserve announced a no-holds-barred set of measures in a determined attempt to fix the broken credit machine, revive economic activity and stem the deflationary tide.
The Federal Open Market Committee’s (FOMC) policy statement noted: “The Fed will employ all available tools to promote the resumption of sustainable economic growth … In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the Fed funds rate for some time.”
Although the FOMC slashed the Fed funds rate to a target range of 0 to 0.25% – the lowest the central bank’s key rate has been on record – the Fed was actually simply aligning its target rate with the effective rate, thereby pushing the US into an era of Zirp – a zero-interest-rate policy like that used by Japan for six years in its own fight against deflation.
The Fed’s communiqué also said: “The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level.” The statement discussed specific actions that would move the Fed further towards a quantitative easing approach to monetary policy.
Source: Daryl Cagle
President-elect Barack Obama told reporters the fact that the Fed had no more room to cut rates underscored the case for a big fiscal stimulus. “We are running out of the traditional ammunition that’s used in a recession, which is to lower interest rates,” he said according to the Financial Times. Word circulated that Obama may ask Congress next year to approve a stimulus plan of about $850 million.
Investors’ concerns about the outlook for the global economy deepened on the back of the Fed’s announcement, as seen from government bond yields plunging to record lows and a sharp sell-off in oil prices (despite the announcement of the largest supply cut in Opec’s history). Furthermore, the dollar also tumbled on worries about the US’s public debt expansion and the potential inflationary implications of the “printing press”, although a relief rally did take place on Friday. (Also see my post “Greenback slumped on the canvas”.)
As far as stock markets are concerned, investors have again been shrugging off bad news – a pattern seen since the poor manufacturing and payrolls data of more than two weeks ago. “The newspapers may be giving us a parade of bad news, but the stock market is beginning to march to a different drummer,” said venerable newsletter writer Richard Russell (Dow Theory Letters). This is evidenced from the MSCI World Index (+2.4%), S&P 500 Index (+0.9%) and the MSCI Emerging Markets Index (+5.5%) all improving for a second week running.
The scamster Bernard Madoff’s Ponzi scheme also vied for a place in the history books, causing more billions to evaporate to money heaven – yet another example of how greed clouded the minds of people during the halcyon days. (Click here to track the fallout from the fraud.)
Bill King (The King Report), never one to mince his words, commented as follows: “Madoff allegedly engaged in a scheme that is similar to what the US government has been perpetrating for years – giving people benefits now and promising future benefits, even though the benefits are mathematically impossible to pay, by using new cash flows from taxpayers.”
On the bailout front, the White House gave Detroit their Christmas wish, announcing that General Motors (GM) and Chrysler will receive $13.4 billion in emergency government loans in exchange for substantially restructuring their businesses, according to Bloomberg. “Another $4 billion will be available to GM in February provided Congress releases the second half of the $700 billion TARP fund originally set up to bail out financial institutions.”
Some cheer has also been seen in the credit markets, with the TED spread (i.e. three-month dollar LIBOR less three-month Treasury Bills) declining by 43 basis points to 1.48% – the lowest level since the Lehman bankruptcy in September. Although this measure is moving in the right direction, credit spreads need to narrow further to indicate that confidence is returning and liquidity is starting to move freely again.
The cost of buying credit insurance for US and European companies also eased as shown by the narrower spreads for both the CDX (North America, investment grade) Index (down from 263 to 213) and the Markit iTraxx Europe Index (down from 214 to 191). High-yield credit indices also improved.
There is also some encouragement from the weekly average rates for US 30-year fixed mortgages having declined to 4.94% from 6.30% at the beginning of November, according to Zillow.com.
Next, a tag cloud from the dozens of 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 such as “bank”, “economy”, “Fed”, “market”, “prices” and “rate”.
Regarding the outlook for the stock market, the Wall Street Journal’s MarketBeat blog reported legendary money manager Jeremy Grantham as predicting that beaten-down equities will rally until spring, at which time the bear market will resume.
“While he said that equities in the last couple of months had reached a level of cheapness than had not been seen in years, he still expects more pain to come. Those who can invest with a seven-year time horizon should do well, saying that ‘we’ve popped all of the bigger bubbles’, but he expects ‘we’ll overrun on the downside’.
“He says that the market will likely continue to rally into the spring, and it ‘will be big enough to convince about three-quarters of the players that [the bear market] is all over’. However, he doesn’t believe it is over – expecting a ‘good rally and a different kind of decline, on the sheer grinding of bad news’. He expects something similar to 1974, where the market takes a step forward and a couple steps back, and is fed ‘a diet of ugly earnings’.”
From across the pond, David Fuller (Fullermoney) added: “… markets had fallen sufficiently so that one could nibble on weakness, taking a long-term view. My guess is that China has not only bottomed but is also leading the way back up. However the case is not proven, and will not be until we see base formations for China and most other markets, plus breaks above the 200-day moving averages, which have also turned up. At that point, the next bull market should be well under way.”
The S&P 500 could fall to as low as 600 in 2009 and “alternative assets” like commodities and currencies will provide no shelter for investors, said Gary Shilling in an interview on Tech Ticker (hat tip: Clusterstock). “Having been appropriately bearish heading into this year, Shilling sees ‘few good places to hide’ in 2009. His ‘S&P 600’ prediction, a 33% drop from current levels, is based on a view that S&P earnings will be $40 per share next year (versus the consensus of $83) and the index will trade at a P/E multiple of 15. (Here’s the math: $40 EPS x 15 P/E = 600.)”
Jeffrey Hirsch (Stock Trader’s Almanac) draws our attention to the so-called Santa Claus Rally. This is the trading period from the day after Christmas to the close of the second trading day of the New Year. During this period stocks historically tended to advance, but when recording a loss, it was frequently a sign of trouble ahead.
In my opinion, stock markets are still caught between the actions of central banks pulling out all stops to stabilize the financial and economic situation on the one hand, and a worsening economic and corporate picture on the other. The major US indices seem locked in a short-term trading range, having fallen back below their 50-day moving averages.
The CBOE Volatility Index (VIX) has declined from more than 80 in October and November to 44.9 on Friday. It is not uncommon for short-term volatility to be at extreme levels at bottom turning points, and for stocks to improve as the “storm” grows quieter. It nevertheless remains too early to tell whether a secular stock market low has been recorded on November 20 and, failing further technical and fundamental evidence, I remain distrustful of rallies. In short, we are in a wait-and-see mode. (Also see my post “Stock markets: is this it?”.)
Economic reports released in the US during the past week confirmed a world of “depression economics” (to coin Nobel Prize winner Paul Krugman’s phrase). According to Briefing.com, industrial production declined by 0.6% in November, housing starts plummeted by 18.9% (marking the largest decline since March 1984), building permits hit a record low, and weekly initial jobless claims held near a 26-year high. Furthermore, the seasonally unadjusted CPI fell 1.9% in November, the largest drop since the 1930s.
Elsewhere in the world, data releases compounded anxiety about a severe global recession, as seen from the following:
• Germany’s Ifo Business Climate Index fell to a record low in December. The outcome reflects the ongoing stresses in the financial markets and weaker global and domestic economic activity, which have weighed on business sentiment. The downward trend in the Ifo suggests that economic activity in Germany will be very weak in the fourth quarter and prospects going forward remain bleak.
• BBC News reports that France will enter recession in the first quarter of 2009, according to Insee, the country’s national statistics agency. France is the Eurozone’s second biggest economy, and would be the latest major world economy to enter recession.
• The Bank of England’s Monetary Policy Committee voted unanimously in favour of the decision to cut the main repo rate by 100 basis points to 2% at the December monetary policy meeting. However, the minutes revealed that the central bank had considered an even more aggressive interest rate cut, heightening expectations that the UK could follow the US in adopting a quantitative easing policy.
• Confidence among Japanese businesses capitulated during the fourth quarter, with the Tankan Survey Index for large manufacturers recording its biggest decline in more than three decades. Business sentiment in Japan is now at its lowest level in more than six years.
• The Bank of Japan followed the lead of the Fed and moved to a near-zero interest rate environment at its December monetary policy meeting. The central bank cut its overnight call rate target by 20 basis points to 0.10%.
• China’s industrial production growth rose only 5.5% year-on-year in November, the slowest gain since 1999 and steeply slower than the 17% growth reported in March, said RGE. Electricity production fell 9.6% – more than in October, which had marked the first fall in a decade.
Source: Financial Times, December 16, 2008.
Summarizing the economic situation, Nouriel Roubini, professor at New York University and chairman of RGE, said in an article in Forbes: “The outlook for the US and the global economy is now very bleak and getting worse as the global economy experiences its worst recession in decades. In the US, recession started last December and will last at least 24 months until next December – the longest and deepest US recession since World War II, with the cumulative fall in gross domestic product possibly exceeding 5%.”
Source: Yahoo Finance, December 19, 2008.
Next week’s US economic highlights, courtesy of Northern Trust, include the following:
1. Real GDP (December 23): The final estimate of third-quarter Real GDP is expected to be left at -0.5%. Consensus: -0.5%.
2. Existing Sales (December 23): Consensus: 4.90 million versus 4.89 million in October.
3. New Home Sales (December 23): Consensus: 420,000 versus 433,000 in October.
4. Durable Goods Orders (December 24): Consensus: -3.0% versus -6.2% in October.
5. Personal Income and Spending (December 24): Consensus: Personal income +0.0% versus +0.3% in October; Consumer spending: -0.7% versus -1.0% in October.
Click here for a summary of Wachovia’s weekly economic and financial commentary.
Source: Wall Street Journal Online, December 19, 2008.
This week I am giving the customary review of the various asset class movements a skip as family time calls, especially as we have just moved into a new house (located in the scenic Stellenbosch winelands region – about 35 minutes from Cape Town).
On a different note, Madoff’s jeer at the investing public, keeps reminding me of the old adage: “If something sounds too good to be true, that must be because it is too good to be true.” Let’s hope that the news items and words from the investment wise below will assist in bringing cheer to our portfolios during 2009.
Thank you for your friendship and support in making Investment Postcards such a fulfilling experience. Here’s wishing you a great festive season full of fun, laughter and joy. May you have a wonderful 2009.
Source: Daryl Cagle
Krishna Guha (Financial Times): Fed slashes rates to near
“In a historic statement, the US central bank said it would target a record low interest rate, expressed as a range of between zero and 0.25%. It said it expected to keep rates at ultra-low levels ‘for some time’ and vowed to use ‘all available tools to promote the resumption of sustainable growth and to preserve price stability’.
“The Fed said it ‘stands ready’ to step up its planned purchases of securities issued by Fannie Mae and Freddie Mac, the mortgage giants now under government control. It also said it was ‘evaluating the potential benefits of purchasing longer-term Treasury securities’.
“The aggression of the statement caught the markets by surprise. Mohamed El-Erian, chief executive at Pimco, the bond fund manager, said it was ‘an incredibly strong public declaration that the Fed will throw everything it has in attempting to stabilize the financial and economic situation’.
“The US central bank laid out a strategy that aims to drive down actual borrowing costs for households and companies. It seeks to do so by supporting demand for such loans, reducing the risk spreads on them. At the same time, it wants to keep government bond yields low.
“This means expanded credit and outright asset purchase programs, likely to be funded, at least for now, by expanding reserves and therefore the money supply. Jan Hatzius, chief US economist at Goldman Sachs, called this ‘quantitative easing’. But a senior Fed official said its policy was different from the quantitative easing pursued in post-bubble Japan. The Fed policy is driven by its credit operations whereas Japan targeted bank reserves.
“The Fed said the outlook for economic activity had ‘weakened further’ and acknowledged that ‘inflationary pressures have diminished appreciably’.
“The decision to set a range for interest rates reflects an admission that the US central bank cannot tightly control the actual rate that prevails in the market in current conditions.
“Barack Obama, president-elect, told reporters that the fact that the Fed had no more room to cut rates underscored the case for a big fiscal stimulus. ‘We are running out of the traditional ammunition that’s used in a recession, which is to lower interest rates,’ he said.”
Source: Krishna Guha, Financial Times, December 17, 2008.
BCA Research: US monetary policy – unconventional easing underway
“In the statement that followed, the FOMC shifted emphasis away from the target rate as the Fed’s primary means of implementing monetary easing in favor of aggressively expanding its balance sheet to drive private sector borrowing rates lower.
“Early clues to its latest thinking were provided late last month upon the launch of its agency and MBS purchase programs and Term Asset-Backed Liquidity Facility (TALF). At that time, it promised to increase the size, the scope and the term of its liquidity facilities as necessary to get credit markets moving again. These comments were echoed in the FOMC statement, which confirms the Fed is prepared to do whatever it takes to restore order to the financial system and head off a potentially damaging bout of deflation.
“The Fed will drive agency and agency-backed MBS yields lower, and will keep Treasurys well bid. If investment-grade corporate bond yields do not fall in the coming months, the Fed could add new facilities to support this market as well.”
Source: BCA Research, December 17, 2008.
Nouriel Roubini (Forbes): Helicopter Ben goes ZIRP!
“The Fed is now undertaking even more unorthodox policy actions. These actions are occurring while the US and the global economy are at risk of a protracted bout of ‘stag-deflation’ (stagnation and deflation).
“While it is now fashionable to talk about such deflationary risks (and the latest US Consumer Price Index figures confirm that we are entering into deflation), some of us were worrying about the coming deflation well before the mainstream – concerned with short-run and unsustainable increases in commodity prices – discovered the deflationary risks in the global economy.
“It was clear to those who saw, early on, the risks of a severe US and global recession, that deflationary rather than inflationary pressures would emerge alongside a slack in goods, labor and commodity markets. Welcome to the world of stag-deflation or, as Paul Krugman would put it, the world of ‘depression economics’.
So what is the outlook for 2009? And what is the likely policy response to the risks of a global stag-deflation?
“The outlook for the US and the global economy is now very bleak and getting worse as the global economy experiences its worst recession in decades. In the US, recession started last December and will last at least 24 months until next December – the longest and deepest US recession since World War II, with the cumulative fall in gross domestic product possibly exceeding 5%.”
Click here for the full article.
Source: Nouriel Roubini, Forbes, December 18, 2008.
John Authers (Financial Times): The Fed’s morning after
Click here for the article.
Source: John Authers, Financial Times, December 17, 2008.
Paul Kedrosky (Infectious Greed): ZIRP-ishness around the world
“It is interesting how, for the most part, ZIRP neatly breaks down into the BRIC/emerging markets versus the rest of the world.”
Source: Paul Kedrosky, Infectious Greed, December 18, 2008.
Bloomberg: Obama may seek a stimulus plan exceeding $850 billion
“Obama’s transition team believes the amount, about 6% of the US’s $14 trillion economy, is needed to reverse rising unemployment, said the adviser, who spoke on condition of anonymity. The sum would exceed initial estimates by House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, as well as surpassing what some economists and the International Monetary Fund say is required.
“The latest proposal is circulating in Congress as Obama’s advisers work with lawmakers to craft a package aimed at improving roads, bridges and other parts of the US’s crumbling infrastructure. The plan probably will also include state aid for unemployment and health-care programs and incentives such as tax credits to promote renewable energy production, lawmakers have said.
“The president-elect wants to create as many as 2.5 million jobs over the next two years. As unemployment has increased, estimates of what is needed to pull the nation out of the slump have continued to grow, with some economists calling for a $1 trillion spending program.
“They include Kenneth Rogoff, a Harvard University professor who was an adviser to Republican presidential candidate John McCain, and Joseph Stiglitz, a Nobel Prize winner who served in President Bill Clinton’s White House.
“UBS AG economists calculate a global stimulus of 1.5% of gross domestic product has so far been lined up for next year. The IMF has called for packages of at least 2% of GDP to stem the economic crisis that’s sweeping the globe.”
Source: Lorraine Woellert, Bloomberg, December 18, 2008.
Bloomberg: $1 trillion stimulus
Source: Bloomberg (via YouTube), December 18, 2009.
Bloomberg: GM and Chrysler will get $13.4 billion in loans
“Another $4 billion will be available to GM in February provided Congress releases the second half of the $700 billion Troubled Asset Relief Program fund originally set up to bail out financial institutions. The automakers have until March 31 to meet the conditions of the loans, including demonstrating they have a plan to become profitable, or be forced to repay.
“Winning the assistance is a reprieve for GM, the biggest US automaker, and No. 3 Chrysler after they said they would run out of operating funds as soon as this month. Bush is stepping in after Senate Republicans’ refusal last week to take up a House- approved rescue raised the prospect that the companies would fail, costing millions of jobs.
“‘These are not ordinary circumstances,’ Bush said at the White House today. ‘In the midst of a financial crisis and a recession, allowing the US auto industry to collapse is not a responsible course of action.’
“The cost of letting automakers fail would lead to a 1% reduction in the growth of the US economy and mean about 1.1 million workers would lose their jobs, including those in the auto supply business and among dealers, the White House said in a fact sheet.
“President-elect Barack Obama endorsed the plan, calling it a ‘necessary step’ to avoid a major blow to the economy.
“‘The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely required to save this critical industry,’ Obama said in a statement.
“The United Auto Workers are ‘disappointed’ that Bush added ‘unfair conditions singling out workers’, the union’s president, Ronald Gettelfinger, said in a statement. ‘We will work with the Obama administration and the new Congress to ensure that these unfair conditions are removed,’ Gettelfinger said.
“The package is intended for GM and Chrysler initially. Ford Motor Co., the second-biggest US automaker, has said it can continue operating without aid for now.”
Source: Roger Runningen and John Hughes, Bloomberg, December 19, 2008.
Bloomberg: Fed becoming lender of last resort – interview with Merrill Lynch chief economist David Rosenberg
Source: Bloomberg (via YouTube), December 17, 2008.
CNN Money: Economy rescue – adding up the dollars
Click on the thumbnail for a large table.
Source: CNN Money, December 15, 2008.
FT Alphaville: Welcome to debt central
“‘We have never been given to wailing and gnashing our teeth over the US’ growing debt, for during our nearly six decades of life and three and one half decades of trading in markets, we’ve seen the nation’s debt grow even as the quality of life and wealth of the country grew faster. But now, even we are becoming concerned; now even we see potential disaster looming; now even we are depressed … Now even we are considering that double hemlock!’
“As can be seen in the chart below, the figure has certainly ballooned somewhat substantially of late.
“But Americans shouldn’t feel too lonely. There’s at least one other G7 country that can rival the States in the debt to GDP rankings. Have you guess which one it is? Some clues: Land of the Great British Krona, home to Team GB … Yes – it’s the grand old United K. Just take a look at this chart from the Spectator.
“And that’s not even total debt, just external.”
Source: Izabella Kaminska, FT Alphaville, December 12, 2008.
CEP News: Leading nations’ GDP poised to decline in 2009
“The IIF forecast is calling for the US economy to decline by 1.3% after rising 1.2% this year, while the euro area economies are projected to decline by 0.9% in 2008 and 1.5% in 2009. Japan’s economy is expected to fall by 1.2% after a flat performance this year.
“IIF Managing Director Charles Dallara said, ‘we now face extraordinary challenges. The extent of the declines in the major economies in the current quarter and in the next quarter or two may be substantial, with the US and the euro area likely to see falls in real GDP in the fourth quarter of this year of respectively 5% and 3%.’
“The IIF is also predicting the downturn in the major economies to impact the leading emerging-market economies. They project the growth in emerging markets to average 5.9% in 2008 and 3.1% in 2009. Weak growth is anticipated to hit central, eastern and southern Europe with growth of just 0.3% for 2009, while the IIF is forecasting growth in South America to come in at 1% next year.
“Overall, global economies are poised to grow 2.0% in 2008 and fall 0.4% in 2009.”
Source: Steve Stecyk, CEP News, December 18, 2008.
The Times: IMF fears unrest without action on economy
“Dominique Strauss-Kahn sounded a stark warning over the consequences of what he argued was weak and uncertain government reaction to the economic crisis. He used a hard-hitting speech in Madrid to single out eurozone nations over what he attacked as an inadequate response.
“The broadside from the IMF’s managing director came as fears over a protracted global recession, and political fallout, mounted after China said that its factories’ output registered the weakest growth in almost a decade last month.”
Source: Gary Duncan, The Times, December 16, 2008.
George Magnus (Financial Times): Five ways to start the world economic recovery
“First, governments have already acted decisively to preserve the integrity of the formal banking system, while the so-called shadow banking system is collapsing. Over $8,000 billion of programmes to stem the collapse in credit and housing have been announced but it is too soon to declare victory. To strengthen banks in the recession and sustain lending, European banks will need a further $100 billion to $150 billion of capital, while US banks, including regional banks, should quickly be allocated most of the unspent Tarp money of $350 billion.
“Second, governments must continue to facilitate the enormous task of sustaining credit flows and restructuring debt. Bankruptcies are inevitable but additional direct lending programmes, asset purchases and government guarantees are needed to keep liquidity flowing to good corporate and residential borrowers, especially while bank balance sheets are constrained by the need to soak up bad assets that were previously held off-balance sheet. Equity-for-debt swaps will be required for companies with excessive debt.”
Click here for the full article.
Source: George Magnus, Financial Times, December 18, 2008.
CNBC: Feldstein – digging out of the recession
Source: CNBC, December 18, 2008.
Duke University: CFO Survey – historic recession to last another year
“These are some of the findings of the year-end 2008 quarterly survey, which asked 1,275 CFOs from a broad range of global public and private companies about their expectations for the economy.
CFO Optimism Index: Key Measures
“Weak consumer demand is the top corporate concern. CFOs also continue to worry about credit markets, which are devastating lower-rated firms. Companies rated B or lower face interest rates that are 225 basis points higher than their cost of borrowing before the crisis began.
“The CFO optimism index has proven accurate in predicting future GDP growth, employment and capital spending. This quarter’s extreme pessimism foretells a poor economy in 2009. Thirty-nine percent say the economy will not begin to recover until 2010.”
Source: Duke University, December 10, 2008.
Casey’s Charts: Foreign buyers help drive rates to zero
Source: Casey’s Charts, December 17, 2008
The New York Times: Chart of the day – deflation
Asha Bangalore (Northern Trust): CPI plunges
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 16, 2008.
Asha Bangalore (Northern Trust): Money supply growth trims decline of LEI
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 18, 2008.
Asha Bangalore (Northern Trust): Construction of new homes at new low
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 16, 2008.
Washington Post: New poll shows 63% are already hurt by downturn
“A new Washington Post-ABC News poll also found that a rapidly increasing share of Americans – 66%, up from just over half a year ago – are worried about maintaining their standard of living. Nearly two in 10 said they or someone living in their household had lost a job in the past few months, and more than a quarter said they had their pay or hours reduced. And 15% said that at some point in the past year they fell behind on their rent or mortgage.
“The poll captures the widening fallout from the faltering economy that policymakers are struggling to contain.
“The poll found that nearly two-thirds of Americans support new federal spending to stimulate the economy, and majorities of both Democrats and Republicans back the idea. Concern about deficit spending, however, mutes enthusiasm for the stimulus plan. When respondents were asked whether they would back the plan if it increased the deficit, support dropped to 47%. Overall, nearly nine in 10 said they are worried about the size of the federal budget deficit, including nearly half who are ‘very concerned’.”
Source: Michael Fletcher & Jon Cohen, Washington Post, December 17, 2008.
Bloomberg: Retailers may be weeded out during “Darwinian” competition
“‘The United States is massively over-stored in all categories,’ Gregory Segall, a managing partner at buyout firm Versa Capital Management, said today during a panel discussion held at Bloomberg LP’s New York offices. ‘You could probably see 50,000 retail outlets close and it wouldn’t impact the availability and selection and choice of what you buy.’
“Only retailers with healthy balance sheets will survive the recession, said Matthew Katz, a managing director at consulting firm AlixPartners.‘This is a very Darwinian time,’ Katz said.
“Plunging home prices, rising unemployment and tightening credit have led consumers to rein in spending, resulting in what may be the worst holiday season in at least four decades. Macy’s, Kohl’s Corp. and other retailers have marked down items 50% to lure customers, eroding margins at a time when store owners hope to make a third or more of their annual profit.”
Source: Allison Schwartz, Bloomberg, December 17, 2008.
Clusterstock: Bernie Madoff’s victims: the slideshow
Click here to view the slideshow
Click here for a more comprehensive text list of Madoff’s victims.
Source: Clusterstock, December 14, 2008.
Bespoke: If you ever see a chart like this, run away fast
Source: Bespoke, December 16, 2008.
BCA Research: Still a bond-friendly world
“Aggressive monetary easing by each of the major central banks has helped fuel the rally at the long-end of the curve. While the recent drop in yields leaves most government bond markets well into overvalued territory, we are in no rush to take profits on our long duration call. Government bond prices may not have much more upside but value is not a timing tool and the growth and inflation backdrop is likely to keep yields suppressed for an extended period.
“However, we do advise clients to shift their long bond allocations to high quality nongovernment spread product, as we expect a significant narrowing in early 2009. We will await evidence that the global economy is beginning to stabilize, which will most likely take until the second half of 2009, before shifting further down in quality. The time-frame would move up if the Fed signaled that it would begin buying corporates in the interim. While legislation prevents the central bank from directly buying these issues, the Fed could purchase corporate bonds off balance sheet by setting up an SIV.”
Source: BCA Research, December 15, 2008.
Bespoke: 30-year fixed mortgage rates down to 5.28%
Source: Bespoke, December 18, 2008.
CNN Money: Stock picks from the experts
“For advice equal to the task – in a setting chosen to inspire thoughts of security – we invited five champion fund managers to sit down inside a massive underground vault that’s now part of a restaurant a block from Wall Street: Bob Rodriguez of First Pacific Advisors, who manages the FPA Capital and New Income funds; Susan Byrne, who heads Westwood Holdings Group; Leslie Christian, president and chief investment officer of Portfolio 21 Investments; Tom Forester, manager of the Forester Value fund; and Jeremy Grantham, chairman of asset manager GMO.
“Fortune’s Geoff Colvin led the discussion. Edited excerpts follow; stock prices are as of December 1.
“Let’s get right down to business. Bob, you’ve held a lot of cash in recent years because stocks looked too expensive. Are stocks finally cheap?
“BOB RODRIGUEZ: My value screen went to a new record low in June of 2007, and only 33 companies out of 10,000 qualified. In January of this year we went north of 200 for the first time since the summer of 2002. We went to 250 in the Bear Stearns crisis. And the week of October 16, we hit 447 – the most qualifiers in more than 20 years.
“So stocks are cheap by historical standards. However, we’re being very cautious because what we’re experiencing now is a major shift, the culmination of failed policies in the regulatory system and the private sector that have been building up for 30 years.
“Susan, are stocks cheap?
“SUSAN BYRNE: The markets are providing real returns for the risk that you take all along the spectrum, from equities to debt. So, yes, I think that prices reflect the fact that people are quite rightly very afraid of the risk in the stock market.
“Jeremy, you’ve written that stocks will get cheaper.
“JEREMY GRANTHAM: If you look back at 1982 and 1974, the market was much cheaper than it is today. In ’74 it was about 40% cheaper, and in ’82 it was about 60% cheaper. Look at the bad times we had in ’74 and ’82, and I think several of us would conclude that this time is likely to be as bad – possibly worse. Bubbles like this always overcorrect.
“How bad will you feel if you put in your cash reserves and the market continues to go down? You’re going to feel awful. And how will you feel if you don’t buy in the cheapest market for 20 years and it runs away and leaves you? Horrible. You have to step your way through so that the regret, which is going to be huge anyway, is about neutral.”
Click here for the full article.
Source: Geoff Colvin, CNN Money, December 15, 2008.
David Stevenson (MoneyWeek): Stock markets might not bottom out until 2014
“When the gauge is more than 1.0, it indicates that the market is overvaluing company assets, while a reading of less than 1.0 suggests shares are undervalued because it’s cheaper to buy quoted companies than build them up.
“The Q ratio on US equities has now dropped to 0.7 from a 1999 peak of 2.9. That could indicate shares are now cheap.
“But think again. The ratio needs to fall to 0.3 to signal the final stage of a major bear market like this one, says Russell Napier at CLSA. How does he know? Because that’s what it did at the end of the four largest US stock price declines in 1921, 1932, 1949 and 1982. That translates into the US S&P 500 index plunging another 55% by 2014. Ouch.
“But between now and then, there’s certainly a good chance of a bear market rally – maybe up to two years long, so those strategists may be right about 2009 – as Obama and the US Fed manage to delay the start of deflation with New Deal II. But those efforts will eventually blow up as ballooning government debt devalues the dollar and prompts a massive share sell-off – on both sides of the Atlantic.
“‘Bear markets always end when they begin ‘pricing in’ deflation, as the value of assets falls and the value of debt stays up, so equity gets crushed’, say Napier. ‘The results are always horrific, and equities will become incredibly cheap.’
“Albert Edwards at SocGen has christened this period the Ice Age. Another bull market will start in time. But as Edward’s description suggests, it’s still a long way away.”
Source: David Stevenson, MoneyWeek, December 11, 2008.
Jeffrey Saut (Raymond James): A rally of some import is in the works
“Speaking to the first question, participants need to monitor the credit spreads, which so far have not improved.
“As for question two, delinquencies and bank repossessions appear to finally be stabilizing. If the stock market is a discounting mechanism, the 50% decline in the S&P 500 may have already discounted everything.
“Moreover, my sense is that just like participants were conditioned to believe that any decline would not gather much traction back in 1999 and 2000, they are now being conditioned to believe that any rally will not sustain. With stocks’ aggregate value currently below the year’s GDP, we continue to think a rally of some import is in the works”.
Source: Jeffrey Saut, Raymond James, December 15, 2008.
Bespoke: Strategists’ 2009 S&P 500 price targets
“As shown below, UBS is the most bullish of the group with a year-end 2009 price target of 1,300 (a 47.2% gain). UBS was the most bullish last year as well with a 2008 price target of 1,700. Goldman and Strategas are the second most bullish this year with price targets of 1,100. Credit Suisse has a target of 1,050 (for mid-year ’09), Citi and HSBC are at 1,000, and Merrill Lynch is at 975. Merrill is the least bullish strategist of those surveyed, but they’re still looking for a gain of 10.4% from current levels.
“For those looking for direction from these strategists, their 2008 projections should be noted. All were looking for gains this year, and their targets at the start of the year are far above where the S&P 500 is currently trading.”
Source: Bespoke, December 16, 2008.
King Report: US Dollar Index is collapsing
“Bernanke can continue to expand the Fed’s balance sheet until a critical mass of investors loose confidence in either Ben or the Fed’s balance sheet. And the confidence is reflected in the dollar.
“After Ben monetized an enormous amount and assortment of assets after the Bear Stearns, GSE, Lehman, AIG and Big Nine ‘problems’ the dollar rallied sharply. This showed confidence in Ben and the Fed.
“But now the dollar is in collapse. This is a clear sign of something other than confidence in Ben/the Fed. The dollar collapse implies that Ben and the Fed are now ‘on the clock’ and investors will react negatively to further Fed balance sheet hyper expansion.
“Here’s the really big problem with Ben’s gambit. It is the same thing that FDR attempted – devalue the dollar to avert deflation and depression. However, devaluation exports deflation and depression to other countries and they will retaliate, which they did to FDR. This is another reason for The Great Depression.
“So key questions are: How long will it take for China, Japan, Germany or others to retaliate against Ben’s scheme to export deflation and depression to them? And what will be the retribution?”
Source: Bill King, The King Report, December 18, 2008.
Bespoke: Biggest six-day decline for the dollar ever
Source: Bespoke, December 17, 2008.
James Turk (GoldMoney): Whatever it takes
“The consequences of the Fed’s actions will debase the dollar, perhaps irreparably so. The dollar’s bear market rally that began in July ended last month.
“Since last month’s peak in the Dollar Index, gold has climbed 6.3%, while silver did even better. It has climbed 12.6%. These precious metals are clearly the place to be, given the path of monetary debasement being taken by the Fed.”
Source: James Turk, GoldMoney, December 16, 2008.
David Fuller (Fullermoney): Positioning for an upside move in gold
“Against this background, gold could spike higher once again – watch out if / when it maintains a break above that last high just over $900. I am not saying a huge move will occur, because I do not know. However I want to be positioned for an upside move in precious metals at this time. The price charts are increasingly showing us that gold and gold shares are performing once again.”
Source: David Fuller, Fullermoney, December 15, 2008.
I-Net Bridge: Platinum now cheaper than gold
“Both precious metals eased despite the dollar weakness, bringing a two-day rally to an end as sentiment in global markets after plans to bail out the US automotive industry collapsed.
“The $14 billion bailout for the US automotive industry, besides being a lifeline for faltering vehicle manufacturers, would have boosted platinum demand.
“Platinum, which is mainly used as a component in catalytic converters, is particularly vulnerable to a downturn in the automotive sector since the sector makes up 50% of total demand.
“Failure to provide US carmakers with the financial lifeline they so desperately need has triggered concern over additional job cuts and a possible industry collapse.
“The BullionDesk’s James Moore said gold’s movement over the past few days was ‘very encouraging’, But he said it ‘does raise a few questions about its sustainability short-term, which we suspect won’t be answered until early next year.’
“‘Overall though we would look for gold to continue trading sideways to higher as the Fed’s printing presses further erode the value of the greenback,’ Moore said.
“Turning to platinum, Moore said while the news from the US auto makers may generate some bearish sentiment, the ongoing downgrading of production forecasts should see the metal remain near equilibrium. He expected platinum to remain in the broad $780 to $880 range for the time being.”
Source: I-Net Bridge, December 12, 2008.
Bloomberg: Goldman expects crude to fall to $30 early next year
“Crude demand will fall by 1.7 million barrels a day in 2009, analysts Jeffrey Currie and Allison Nathan said in a note. Goldman previously expected West Texas Intermediate, the US benchmark oil, to average $62 in the first quarter.
“The worldwide economic decline has reduced consumer spending and weakened demand for fuel. Demand growth in China and other non-member states of the Paris-based Organization for Economic Cooperation and Development is ‘on the cusp of a sharp deceleration’, the analysts said.
“Crude has fallen for five straight months since trading at a record $147.27 a barrel, as countries including the US, Japan and Germany have entered recessions. Goldman Sachs forecast in July that oil would recover to $149 by the end of this year because consumer demand was ‘restrained, but not destroyed’.”
Source: Rachel Graham, Bloomberg, December 12, 2008.
Bespoke: What a difference seven months makes
“Seven months later, Goldman is now advising clients that ‘oil prices will fall to $30 a barrel in the next three months’. If the call for $30 oil is as accurate as the call for $200 oil, investors may want to fill up their gas tanks and lock in their heating oil prices asap.”
Source: Bespoke, December 15, 2008.
Financial Times: Record oil cut fails to lift prices
“Opec, which controls about 40% of the world’s oil supplies, announced a further 2.2 million barrel a day cut on top of the 2 million b/d it has already pledged since September. It said it would cut 4.2 million b/d from its September output of 29.045 million b/d, bringing its production ceiling to 24.845 million b/d in January.
“Russia said its companies would be forced to cut another 320,000 b/d early next year only if low oil prices persisted.
“The oil market, however, took a dim view of Opec’s action. Nauman Barakat, of Macquarie in New York, said: ‘A cut of 2.2 million b/d is a pretty decent cut but it will take a while for the market to see the Opec cut actually filtering into the market.’
“Even Washington questioned whether Opec members would comply fully with the announced cuts. ‘It’s not clear that Opec’s actions will be effective, given the shift in global demand and the ability of Opec members to meet the cartel’s targets,’ said Tony Fratto, the White House spokesman.
“‘Regardless, Opec has an obligation to keep the market well supplied and to consider the health of the global economy, so efforts to limit the benefits of lower energy prices are short-sighted,’ he said.
“But Chakib Khelil, Opec president, said Opec had a long-established record in meeting the challenges it faced.”
Source: Carola Hoyos, Financial Times, December 17, 2008.
Bespoke: Baltic Dry Index rally?
Source: Bespoke, December 15, 2008.
Financial Times: Shipping charter rates soar
“The revival in prices, after a disastrous six months for the industry in which charter rates fell nearly 99% for the largest vessels, could encourage ship owners to bring mothballed vessels back into service.
“One participant said yesterday that some owners were able to charge enough to cover the costs of operating Capesize ships, the largest dry bulk carriers. Average rates for these ships, which move coal and iron ore, have nearly tripled over the past week.
“The return of mothballed ships to the market could lead to a repeat of the over-supply which, combined with disappearing demand for coal, iron ore and wheat, depressed prices this year.”
Source: Robert Wright, Financial Times, December 14, 2008.
IFO Business Survey: Business climate in Germany continues to decline
“The downturn is affecting above all the manufacturers of export and capital goods and less, up until now, retailing and construction.”
Source: IFO Business Survey, December 18, 2008.
BBC News: France set for 2009 recession
“The agency says the French economy has shrunk by 0.8% in the last three months of 2008 and will contract by another 0.4% in the first quarter of 2009.
“France is eurozone’s second biggest economy, and would be the latest major world economy to enter recession.
“Figures have already shown that Germany and Japan have endured two quarters of negative economic growth, while economists in the US have declared that its economy has been in recession since earlier in 2008.
“France only narrowly avoided negative economic growth between July and September, posting growth of 0.1%.”
Source: BBC News, December 18, 2008.
Victoria Marklew (Northern Trust): Increasingly grim outlook for UK
Source: Victoria Marklew, Northern Trust – Daily Global Commentary, December 17, 2008.
Bloomberg: Japan’s Tankan confidence plunges most in 34 Years
“An index that measures confidence among large makers of cars and electronics dropped to minus 24 from minus 3, the Bank of Japan’s quarterly Tankan survey showed today. A negative number means pessimists outnumber optimists.
“The yen’s surge to a 13-year high last week has compounded woes for Japanese manufacturers who are already reeling from a collapse in export markets. Job cuts by companies including Sony and Toyota have brought the recession home to households and increased the risk of a prolonged slump.
“‘The overseas situation is worsening so quickly and so dramatically; it’s really getting dangerous,’ said Tomoko Fujii, head of economics and strategy at Bank of America in Tokyo. ‘The next few months are going to be a very severe period.’”
Source: Jason Clenfield, Bloomberg, December 14, 2008.
Asha Bangalore (Northern Trust): Japan – that sinking feeling
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 15, 2008.
Reuters: Ecuador defaults – fighting “monster” creditors
“Ecuador’s dollar-denominated debt prices plunged on news of its second default in a decade and the first in Latin America since Argentina in 2002, although the decision was not expected to lead to similar moves around the region.
“Correa, a US-trained economist and ally of Venezuela’s anti-US President Hugo Chavez, refused to make a $31 million interest payment due on Monday on 2012 global bonds, saying the debt was contracted illegally by a previous administration.
“‘I gave the order not to pay the interest and to go into default,’ Correa said. ‘We know very well who we are up against – real monsters.’
“‘If we have to face international litigation due to this, we will,’ he added at a news conference in the OPEC nation’s largest city of Guayaquil.
“The default is unlikely to have a knock-on effect in other Latin American countries’ debt policies even if some, such as Venezuela, have pledged to investigate any irregularities in their own debt …
“Correa, who had often threatened to default, will offer bond-holders a tough restructuring deal. Last month, Ricardo Patino, a top debt adviser to Correa, said investors should expect a reduction of more than 60% in the nominal value of the global paper in any negotiations.
“Ecuador’s global bonds – the 2012s, 2015s and 2030s – total $3.8 billion of its roughly $10 billion debt.”
Source: Maria Eugenia Tello, Reuters, December 12, 2008.
6 comments to Words from the (investment) wise for the week that was (Dec 15 – 21, 2008)