Words from the (investment) wise for the week that was (February 9 – 15, 2009)
“Words from the Wise” this week comes to you from my abode in a visibly depressed Europe, from where I am compiling this report as welcome relief from gloomy conversations with taxi drivers and cheerless meals in deserted eateries.
Events during the past few days were dominated by the announcement of US Treasury Secretary Timothy Geithner’s financial stability plan and a deal reached by Congress on the economic stimulus bill. However, the much-anticipated bailout bang soon whimpered as investors were disappointed about the lack of “beef”. Meanwhile, markets were also mired in uncertainty on the back of fresh evidence of headwinds facing the global economy – notably in major economies such as the UK, continental Europe and Japan.
Jim Rogers gave the bank rescue plan a big thumbs-down: “(Geithner) … has been dead wrong about everything for 15 years in a row … This (the rescue plan) is not going to solve the problem, it’s going to make it worse.”
Referring to the stimulus bill, Steve Forbes said: “It’s just a grab bag of every spending proposal that’s been banging around Congress for years.”
And Bill King (The King Report) commented as follows: “A cure should have something to do with the diagnosis. The classic argument for fiscal stimulus presumes that the central cause of our current economic problems is this: We, the people and our government, are not doing nearly enough borrowing and spending on consumer goods. The government must step in to force us all to borrow and spend more. This diagnosis is tragically comic once said aloud.”
Stock markets were on the receiving end as risk-averse investors sought out the safe havens of the US dollar (+0.8% in the case of the US Dollar Index), gold (+3.1%) and bonds (with the yields of 10-year Bunds and Gilts down by 21 and 17 basis points respectively).
The week’s movements of the MSCI Global Index (-3.9%, YTD -9.0%) and MSCI Emerging Markets Index (-0.6%, YTD -2.2%) reflect global investors’ skepticism about the rescue plans. Strong performances came from China (+6.4%) and Russia (+14.3%), but still left these markets in the red by 61.9% and 63.0% since their respective bull market highs. As mentioned before, the chart pattern of the Chinese Shanghai Composite Index shows arguably one of the most bullish formations of the major stock market indices.
The major US indices suffered their worst weekly losses this year (to record five losing weeks out of six): Dow Jones Industrial Index -5.2% (YTD -10.6%), S&P 500 Index -4.8% (YTD -8.5%), Nasdaq Composite Index -3.6% (YTD -2.7%) and Russell 2000 Index -4.7% (YTD -10.2%).
John Nyaradi (Wall Street Sector Selector) pointed out that among the exchange-traded funds (ETFs) none of the main economic sectors registered positive returns, as summarized in the chart below. Not shown, the KBW Bank Index ETF (KBE) lost 14.3% on the week, and the Dow Jones US Real Estate Index ETF (IYR) 12.0%. The ProShares Short Dow30 ETF (DOG) led the way among inverse funds with a gain of +5.3%.
As investors became more fearful of the economic situation, gold bullion (+3.1%) assumed its traditional safe-haven role. “Inflows into gold-backed exchange-traded funds surged in January, pushing their bullion holdings to an all-time high of 1,317 tons. Last month’s flows of 105 tons were above September’s previous record of 104 tons, and absorbed about half the world’s gold mine output for January,” said Barclays Capital, as reported by the Financial Times.
The chart below shows the long-term trend of the yellow metal (green line) together with a 14-month rate of change (ROC) indicator (red line). Monthly indicators come in handy for defining the primary trend. In this case the ROC line above zero depicts the bull market in bullion that commenced in 2001. And there is more to come: According to Gary Dugan, the chief investment officer of Merrill Lynch, gold prices may hit US$1,500 an ounce in the next 12 to 15 months.
In addition to last week’s bailout actions, policymakers are also working on a housing subsidy plan that will use government money to help reduce interest rates for struggling borrowers. The details are to be announced by President Obama on Wednesday.
Needless to say, Capitol Hill’s various actions come at a hefty price. According to The Wall Street Journal, Strategas Research estimates that the federal budget will work out to roughly 13.5% of GDP in 2009. Asha Bangalore (Northern Trust) added: “2009 will go down in history as the year during which the US economy recorded the largest federal budget deficit as a percent of GDP in a span of eighty years, excluding the war years. The budget deficit as a percent of GDP through the war years of 1942 to 1945 was 14.2%, 30.3%, 22.7% and 21.5%, respectively.”
Next, a tag cloud of the text of all the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. As the saying goes: A picture paints a thousand words …
But back to the stock market. Key resistance and support levels for the major US indices are shown in the table below. All the indices are trading below their 50-day moving averages and the Industrial and Transportation Averages have also breached the December 1 lows. The all-important November 20 lows are now within close reach – already broken by the Transportation Average – and must hold in order to prevent considerable technical damage.
Richard Russell (Dow Theory Letters), 84-year old doyen of investment newsletter writers, interprets the technical situation as follows: “The Point & Figure chart below may currently be the most important single chart in the world. This is the DJ Industrial Average, and it’s in the act of testing its November 20 low. If the Dow violates its low, it will have confirmed the prior bearish penetration of the Transportation Average. If that happens, the primary bear market will be reconfirmed. But if the Industrials stubbornly refuse to break to a new low, then the inference is that something else is happening. The inference is that the bear market may be forming a temporary bottom.”
“What I think we’ve seen, so far, is the end of forced selling. At this point, professionals are trying to gauge whether the huge market collapse of 2007-2008 has discounted the worst to come or whether ‘the worst’ still lies ahead,” said Russell. “The drama should be played out over the next week or so.”
Given all the cross-currents, short-term movements are almost impossible to predict and traders will simply have to remain level-headed and wait for Mr Market to show his hand, especially as far as the November 20 lows are concerned.
For more discussion about the direction of stock markets, also see my recent posts “Finally, the plan … sort of” and “Video-o-rama: Risk appetite fades on stimulus gloom“.
A snapshot of the week’s US economic data is provided below. (Click on the dates to see Northern Trust‘s assessment of the various reports.)
Friday, February 13
Thursday, February 12
Wednesday, February 11
Tuesday, February 10
Monday, February 9
In last Sunday’s “Words from the Wise” I referred to the surge in the Baltic Dry Index (BDI) – measuring freight rates for iron ore and other bulk goods. The Index has gained 188% over the past two months after plunging by 94% since its high in May. In my opinion, the rally in the BDI is in the expectation (or, should I say, “hope”) that the manufacturing Purchasing Managers’ Indices (PMIs) will start improving, i.e. moving closer to the neutral level of 50 (see graph below). This does not mean the global economy will expand, but merely that the trough of the logjam in international trade might have been reached. Not shown, the trends of the BDI and credit spreads follow a strong inversely correlated path.
Source: Plexus Asset Management
Source: Yahoo Finance, February 13, 2009.
In addition to Fed Chairman Bernanke speaking at the National Press Club in Washington (Wednesday, February 18) and the Bank of Japan’s monetary policy announcement (Thursday, February 19), the US economic highlights for the week include the following:
Source: Northern Trust
Click the links below for the following reports:
Source: Wall Street Journal Online, February 13, 2009.
“It is the markets’ job to reallocate money from the ignorant to the intelligent, from the lazy to the hard working and studious, from the naive to the educated, and from the speculator to the investor,” said Barry Ritholtz (The Big Picture). Hopefully the “Words from the Wise” reviews offer assistance to Investment Postcards‘ readers not to get separated from their hard-earned funds in these taxing times.
That’s the way it looks from Cape Town (or, more accurately, from “gnomeland”, Switzerland, for the next few days).
Barry Ritholtz (The Big Picture): Stimulus package explained (Q&A)
Q. What is an Economic Stimulus Payment?
Q. Where will the government get this money?
Q. So the government is giving me back my own money?
Q. What is the purpose of this payment?
Q. But isn’t that stimulating the economy of China?
“Below is some helpful advice on how to best help the US economy by spending your stimulus check wisely:
If you spend that money at Wal-Mart, all the money will go to China.
If you buy a car it will go to Japan and Korea.
“And none of it will help the American economy. We need to keep that money here in America. You can keep the money in America by spending it at yard sales, going to a baseball game, or spend it on prostitutes, beer (domestic only), or tattoos, since those are the only businesses still in the US.”
Source: Barry Ritholtz, The Big Picture, February 13, 2009.
CEP News: Financial rescue plan unveiled
“However, the final details of the toxic debt program remain unclear, according to Treasury Secretary Tim Geithner. ‘We are exploring a range of different structures for this program, and we will seek input from market participants and the public as we design it,’ Geithner said. ‘We believe this program should ultimately provide up to $1 trillion in financing capacity, but we plan to start it on a scale of $500 billion, and expand it based on what works.'”
Source: CEP News, February 10, 2009.
BCA Research: Where’s the beef Mr. Geithner?
“Markets yesterday gave Treasury Secretary Geithner’s Financial Stability Plan a resounding thumbs down because of a lack of detail about how it will work, following a build-up of expectations that concrete measures were ready to go.
“The plan’s tenets are broadly sound – examining and stress testing bank balance sheets and then using government money to re-capitalize banks and eventually induce private sector purchases of the banks’ toxic assets; supporting a US$1 trillion Consumer and Business Lending Initiative modeled on the Fed’s Term Asset Backed Securities Loan Facility (TALF) to keep credit flowing to the private sector; and, launching a comprehensive program to stabilize the beleaguered housing sector.
“Yet, Geithner offered no specifics on the implementation process needed to identify and value the toxic assets, compel banks to disgorge them, and incentivize private capital to acquire them, though he indicated that details would be forthcoming in the weeks ahead. In short, many of the hurdles that befell the original TARP plan remain in place.
“Bottom line: Financial market risks will remain elevated until policymakers spell out more clearly how banks can be restored to health and encouraged to lend.”
Source: BCA Research, February 11, 2009.
CNN: Yves Smith – “Banks must be nationalized”
Source: CNN, February 11, 2009.
Martin Wolf (Financial Times): Why Obama’s new Tarp will fail to rescue the banks
“What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.
“Yet hoping for the best is what one sees in the stimulus programme and – so far as I can judge from Tuesday’s sketchy announcement by Tim Geithner, Treasury secretary – also in the new plans for fixing the banking system. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years’ economic crisis, has let Congress shape the outcome.
“The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this “progeny of the troubled asset relief programme” fails, Mr Obama’s credibility will be ruined. Now is the time for action that seems close to certain to resolve the problem; this, however, does not seem to be it.
Click here for the full article.
Source: Martin Wolf, Financial Times, February 10, 2009.
Bill King: Tell the truth about toxic assets
“Though Geithner offered up to $2 trillion to aid banks and credit markets, stocks tanked because the plan had few specifics and was lamer than what had been leaked and proffered over the past several weeks.
“More importantly, Geithner and Team Obama have been furiously polling private equity and Street titans to gauge their interest and participation thresholds in various bailout plans. Geithner’s lame plan implicitly indicates that few people wanted to participate in the leaked/proposed plans.
“Private investors know toxic paper remains incalculable with open-ended liability. The market understands that no bank bailout has been announced because there is no plan, barring an outright gift, that will fly with private investors. And an outright gift will infuriate taxpayers.
“Also, as any trader that has bought into any syndicate or group offering would tell you, a major problem is calculating the behavior of the other buyers. How much pain can they stand? When will they panic?
“If other buyers cannot endure pain or go bust themselves, bids will be hit and the entire buying group will suffer huge losses … It keeps coming back to toxic payer and transparency.
“Geithner asserted, ‘We will have to try things we’ve never tried before.’ You mean like telling the truth about the quantity and quality of toxic assets?”
Source: Bill King, The King Report, February 11, 2009.
Financial Times: Nouriel Roubini – Anglo-Saxon model has failed
“Answering questions from FT.com readers, Prof Roubini, who is widely credited with having predicted the current financial crisis, said the supervisory system “relied on self-regulation that, in effect, meant no regulation; on market discipline that does not exist when there is euphoria and irrational exuberance; on internal risk management models that fail because – as a former chief executive of Citi put it – when the music is playing you gotta stand up and dance.”
“‘All the pillars of Basel II have already failed even before being implemented,’ he added, referring to the internationally agreed set of banking regulations that are forcing banks to set aside more capital to maintain their existing lending.
“Prof Roubini also predicted that it was possible another large bank could fail, saying: ‘In many countries the banks may be too big to fail but also too big to save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system.’
“He also criticised the US and UK approach to bank bail-outs, comparing it with attempts by Japan in the 1990s to solve its banking crisis. ‘The current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze,’ he said.”
Source: Financial Times, February 9, 2009.
“The bill, which Obama says is designed to energize the American economy and save 3.5 million jobs, passed in a 60-38 vote. Three moderate Republicans voted in support of the bill, giving it the crucial 60-vote support, which it needed to be approved.
“Earlier on Friday, the House or Representatives voted 246-183 in favour of the bill, while no Republicans supported the legislation.
“The bill contains roughly $212 billion, or 27%, in tax cuts for individuals and businesses. Republicans had wanted at least 40% of the bill to be dedicated to tax relief.
“A stabilization fund for education, police and fire services at the state level was set at $53.6 billion, and $87 billion was allotted for Medicaid.
“The final version of the bill scales back tax credits for home and car first-time buyers.
“The final version of the package also contains a softer version of the controversial ‘Buy American’ clause, which now stipulates that all government spending from the plan must use American-made products and labour, but only if this does not violate current trade deals with US trade partners.”
Source: CEP News, February 14, 2009.
Bloomberg: Krugman says stimulus not up to scale of recession
Source: Bloomberg, February 13, 2009.
Bloomberg: Feldstein says Senate stimulus bill better than House’s
Source: Bloomberg, February 9, 2009.
Bloomberg: US housing plan to fund interest-rate reductions
“US Treasury Secretary Timothy Geithner intends to make the plan public in coming days, possibly within a week, said the person, who declined to be identified before the announcement. Some elements can begin immediately, and others must be considered by Congress.
“Foreclosure filings in the US surged 81% last year to 2.3 million, the highest on record, as home prices fell and tighter mortgage standards made it harder for homeowners to sell or refinance, according to RealtyTrac, a provider of real estate data. The administration has pledged to use $50 billion to $100 billion for housing relief, taken from the $700 billion bank rescue package enacted last year.
“‘Our focus will begin on using the full resources of the government to help bring down mortgage payments and help reduce mortgage interest rates,’ Geithner told the Senate Banking Committee yesterday.”
Source: Rebecca Christie and Margaret Chadbourn, Bloomberg, February 12 2009.
CEP News: JPMorgan and Citigroup announce moratorium on foreclosures
“Citigroup announced it will be halting foreclosures starting February 12. The bank said it will uphold this commitment until US President Barack Obama has finalized the details of his plan to modify mortgage loans to benefit US residents at risk of losing their homes.
“Minutes later, JPMorgan announced it will also put a moratorium on foreclosures for a three-week period, or until March 6. Morgan Stanley later made a similar statement.
“Bank of America CEO Ken Lewis already announced a similar pledge earlier this week in a hearing before the House Financial Services Committee.
“On Wednesday, CEOs from Bank of America, Goldman Sachs, Citigroup, Morgan Stanley, Wells Fargo, JPMorgan Chase, Bank of New York Mellon and State Street all faced harsh criticism from lawmakers for allowing the financial system to come crashing down in 2008.
“All of the executives said they will do what they can to boost lending and stem foreclosures to aid the US economic recovery.”
Source: CEP News, February 13, 2009.
Peter Schiff (Seeking Alpha): This is just the beginning
“In 2008, the bubble economy that I had meticulously described years ago finally hit the pin that I knew was out there. The corporate losses, frozen credit markets and plunging home prices were the opening salvo in the unfolding economic crisis. However, the vast majority of air has yet to leak out of the bubble. As it does, the US economic crisis will kick into a much higher gear. I have positioned my clients to withstand the full fury of the gale, and when it finally comes, the question ‘was Peter Schiff right?’ will finally be answered.
“Thus far, our economy has actually been spared the worst due to the temporary strength in the dollar and the recent desirability of our Government’s debt. These movements derailed the short-term performance of many of my investment recommendations (though clearly not to the extent alleged by my critics) and threw a life-line to the downing US economy. The demand for US Treasuries has led to one of the sharpest dollar rallies on record, which has helped bring about just as pronounced a decline in commodity prices. As a result, although consumer income has fallen, so too have prices and interest rates.”
Click here for the full article.
Source: Peter Schiff, Seeking Alpha, February 8, 2009.
Google Video: Peter Schiff’s presentation at the Global Competitiveness Forum
Source: Google Video, February 9, 2009.
Chales Munger (The Washington Post): How we can restore confidence
“Sensible reform cannot avoid causing significant pain, which is worth enduring to gain extra safety and more exemplary conduct. And only when there is strong public revulsion, such as exists today, can legislators minimize the influence of powerful special interests enough to bring about needed revisions in law.
“Many contributors to our over-the-top boom, which led to the gross bust, are known. They include insufficient controls over morality and prudence in banks and investment banks; undesirable conduct among investment banks; greatly expanded financial leverage, aided by direct or implied use of government credit; and extreme excess, sometimes amounting to fraud, in the promotion of consumer credit. Unsound accounting was widespread.
Click here for the full article.
Source: Charles Munger, The Washington Post, February 11, 2009.
CNN: Vanguard founder blames banks
Source: CNN, February 11, 2009.
Financial Times: Sales of PCs to fall for first time in eight years
“Evidence has been accumulating since the start of the year that the deterioration has reached unexpected parts of the market, with trouble appearing even in some emerging markets, which had previously been seen as the main source of growth.
“‘We’re definitely more pessimistic,’ said Loren Loverde at IDC, the technology research group.
“He said IDC’s latest official forecast, for 4 per cent growth in the number of PCs sold this year, was unlikely to hold: ‘As things sink in, it could easily be in negative territory.’
“Weak earnings reported last week by Lenovo, the world’s fourth-biggest PC maker, showed that corporate buyers in particular have been cutting back.
“That, and softening sales in emerging countries, suggests that the pain has spread beyond consumers in the developed world, who had been expected to be the main source of industry weakness.
“Last month Microsoft warned that the first half of this year at least could see even weaker conditions than the final quarter of last year, when an expected 10-12% increase in the PC market completely evaporated.”
Source: Richard Watersin, Financial Times, February 8, 2009.
CNBC: Marc Faber: “US will default on debt or enter hyperinflation”
Source: CNBC (via YouTube), February 5, 2009.
Asha Bangalore (Northern Trust): Housing market update – applications for both purchase and refinance decline
“The Refinance Index fell sharply to 2722.7 from 3906.3 in the prior week. The 30-year fixed rate mortgage has risen to 5.19% during the week ended February 6 from a low of 4.89% in the week ended January 9. Although the Housing Affordability Index is at a record high, demand for homes will gather momentum only after employment conditions have improved.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 11, 2009.
Asha Bangalore (Northern Trust): Retail sales stabilized in January, future remains gloomy
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 12, 2009.
Asha Bangalore (Northern Trust): Consumer sentiment remains gloomy
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 13, 2009.
Asha Bangalore (Northern Trust): Sharp drop in exports and imports reflects global recession
The Wall Street Journal: $100 bills as toilet tissue?
Source: The Wall Street Journal, February 12, 2009.
Telegraph: GM and Chrysler “Chapter 11″ to protect US taxpayers
“The move, which is one of a range of options understood to be being considered by government advisers, would ensure that taxpayers would be paid out first in the event that either company actually collapsed.
“Chapter 11 is designed to allow a company to undertake drastic restructuring measures while protecting it from its creditors. However both companies have in the past said that a move into Chapter 11 would destroy them, as customers would lose confidence and many suppliers would cease working with them.
“As the current loan agreements stand, the US Treasury’s loans stand behind those from other creditors, including banks such as Goldman Sachs and Citigroup, as those lenders have, according to Bloomberg News, first position on some assets.
“It is thought that Treasury officials are aiming to renegotiate their position in the debt chain ahead of a March 31 deadline. By then, both car manufacturers must show that they have begun to restructure their operations to such an extent that they will be able to return to profitability. If not, the government can demand return of the loans.”
Source: James Quinn, Telegraph, February 9, 2009.
Dealbreaker: CDS death bill introduced in the house
“Instead, OTC contracts must either be cleared centrally or reported to the CFTC. Ouch. This would pretty much end the custom options and swap business, making it very difficult to tailor specific instruments for specific risk.
“The bill also gives ‘the CFTC the authority to suspend credit default swap trading, with the concurrence of the president.'”
Source: Dealbreaker, February 12, 2009.
Bloomberg: Post-election movements of Dow
Source: Bloomberg (via Fullermoney), February 12, 2009.
Bespoke: A look at 10-year market returns
“As shown, there have only been four other periods where the 10-year return has been negative, and three of the four periods saw returns float around the negative to flat line for quite some time. While it may have taken ‘buy-and-holders’ a few years to end up making money if they got in early when the 10-year returns went negative, they did end up making money.
“When looking at 10-year returns, however, where the market was 10 years ago is just as big of a factor as where it is now. Ten years ago, the market was just about to hit the peak of the Internet bubble, and once it burst, the 10-year return was destined to take a big hit right about now.”
Source: Bespoke, February 9, 2009.
Bespoke: Percentage of stocks above 50-day moving averages
“On a sector basis, Financials have the weakest breadth with just 16% of stocks above their 50-days. Health Care, Energy, and Technology are the three sectors that currently have more than 50% of stocks above their 50-days.”
Source: Bespoke, February 13, 2009.
John Authers (Financial Times): The importance of dividends
Click here for the article.
Source: John Authers, Financial Times, February 10, 2009.
Bespoke: Earnings season “beat rate” at 55%
“Nearly 1,000 US companies have already reported, and there is only a week or so left of earnings season, so this number is definitely starting to firm up. The current ‘beat rate’ of 55% is the weakest reading in about 8 years, but it still hasn’t gotten as low as it got during the ’00-’02 bear market. Bears will argue that the ‘beat rate’ needs to get down to the ’00-’02 levels before a bottom can be put in, while bulls will argue that it’s an indication that things aren’t as bad as people think. Only the market will eventually tell us who is right.”
Source: Bespoke, February 9, 2009.
The New York Times: Why analysts keep telling investors to buy
“At the top of the market, they urged investors to buy or hold onto stocks about 95% of the time. When stocks stumbled, they stayed optimistic. Even in November, when credit froze, the economy stalled and financial markets tumbled to their lowest levels in a decade, analysts as a group rarely said sell.
“And last month, as the Dow and Standard & Poor’s 500-stock index suffered their worst January ever, analysts put a sell rating on a mere 5.9% of stocks, according to Bloomberg data. Many companies have taken such a beating in the downturn, analysts argue, that their shares are bound to bounce back.
“Maybe. But after so many bad calls on so many companies, why should investors believe them this time?”
Source: David Ranson, The New York Times, February 8, 2009.
David Fuller (Fullermoney): Where should we look for global stock market leadership?
“So where should we look for global leadership and what is Wall Street doing at present?
“Taken in reverse order, US stock market indices are ranging in potential base formation development. However, the Dow and S&P 500 are uncomfortably close to their November lows. Both need to sustain moves above this week’s highs to remain consistent with base development. While this may seem like a ‘big ask’ to some, the Nasdaq 100 is considerably firmer.
“However the largest capitalisation market seldom leads. With the US economy remaining the epicentre of global economic risk, there is no chance that it will lead on the upside, although it could still drag other stock markets lower.
“If the S&P and Dow stay within their current trading ranges, let alone move higher, markets with better fundamentals such as China and Brazil will do considerably better, as we are already seeing. Fortunately, they remain highly favoured Fullermoney investment themes.”
Source: David Fuller, Fullermoney, February 11, 2009.
Charles Dumas (Lombard Street Research): A bleak outlook for Asia
“‘China’s imports are down 40% over six months, as are the exports of South Korea and Taiwan, and almost certainly Japan,’ he says.
“‘By contrast, the drop in Chinese exports has been a ‘mere’ 20%. This suggests that Chinese final assemblers of goods for export are lowering their sales expectations.’
“Mr Dumas acknowledges that the highly disruptive new year period means the position cannot be fully judged until March data are released. ‘But the scale of these trade declines means that in any scenario the outlook for this particular set of mercantilist ‘savings gluttons’ is for a much worse recession than in the deficit economies with currency and monetary flexibility – i.e. the Anglo-Saxons.’
“He suggests the fall in exports will wipe out more than half of China’s 10% trend growth – leading to a significant knock-on to consumer spending, he says.
“‘Of course, Beijing will strive to offset the collapse of private demand – but the chance of actual Chinese recession looks major.’
“In Japan, Mr Dumas says a fall of 30-40% in exports implies a fierce recession – and much the same applies to Korea and Taiwan.
“‘This Asian recession could be worse than the Asian crisis of 1997-98.'”
Source: Charles Dumas, Lombard Street Research (via Financial Times), February 11, 2009.
Moneywise: Could you profit from new frontiers?
“Countries such as Vietnam, Nigeria and Kazakhstan are often associated with images of political unrest and corruption – few of us imagine that they could offer a sound investment opportunity. Yet these countries belong to a relatively unknown sector called ‘frontier markets’, which has performed very well in recent years. Although highly volatile, this sector may hold hidden treasures for those investors willing to take the risk.
“Frontier markets are, in essence, very small emerging markets. Just 15 years ago, the BRIC markets (Brazil, Russia, India and China) were classed as frontier markets, but they now form a part of many investors’ portfolios. Today’s frontier markets, however, are virgin territory for most of us. They can be found across the globe, from Bulgaria to Bangladesh and from Kazahkstan to Kenya.
“According to Morgan Stanley Capital International, which launched the MSCI Frontier Market Index in November 2007, there are about 20 frontier market countries vying to become tomorrow’s emerging markets.
“‘Frontier market economies are generally much smaller and less developed than emerging markets, but investors understand their potential to grow and become tomorrow’s success stories,’ says Mark Mobius, executive chairman of Templeton Asset Management and manager of its range of emerging market funds.
“So, if you dare to step into the unknown, you could find that high returns are there for the taking.”
Source: Liam Tarry, Moneywise, February 9, 2009.
Steven Lewis (Monument Securities): A yield too high?
“He says rising yields risk nullifying the actions being taken by the Fed and the Treasury in other policy areas to stimulate the economy. The authorities need to assess the impact of their fiscal and Tarp-related (troubled asset relief programme) measures on Treasury yields, he says, and balance the loss to demand from higher yields against the gains to demand expected from their actions.
“‘It is entirely possible that a point might be reached where the loss would exceed the gains. This would, in effect, set a limit to what the US authorities could do to support the economy.
“‘Any attempt to reflate the economy beyond that point would be as futile as an attempt to travel faster than the speed of light.’
“Mr Lewis says the Fed may believe it can circumvent this constraint by holding down yields in the marketplace.
“‘If they initiate a strategy of buying Treasuries in such circumstances, they will very likely find plenty of willing sellers.
“‘But to keep yields steady, the Fed might have to progressively increase the scale of its purchases, and eventually wind up holding most of the Treasury debt in issuance. This looks like a route-map to the destruction of financial markets and the establishment of a command economy.'”
Source: Steven Lewis, Monument Securities (via Financial Times), February 9, 2009.
Neil Mellor (Bank of New York Mellon): Why the ruble still looks risky
“He notes that the ruble’s jump on Wednesday was the biggest since the current composition of its euro/dollar trading basket was established two years ago. ‘On the face of it, the central bank’s efforts to steer the ruble away from the lower boundary of its trading band appear to be working,’ he says.
“‘But in doing so, the Bank has been obliged to draw upon its full arsenal; it has hiked interest rates, limited the money on offer at its liquidity operations, cautioned investors against depreciation bets and put its money where its mouth is by using up around one third of its reserves to defend the currency. Yet it remains to be seen whether this will be enough.’
“Mr Mellor says that for the week to February 6, the central bank spent a further $4.6 billion defending the ruble; and that if weakening optimism indeed bodes ill for the oil price, this might be at the lower end of the expenditure scale.
“‘The ruble might have enjoyed a degree of respite, but, at the very least until the price of oil shows greater signs of life, pressure on the currency is unlikely to desist – resulting in central bank intervention that can only further undermine confidence in Russia’s current credit ratings.'”
Source: Neil Mellor, Bank of New York Mellon (via Financial Times), February 12, 2009.
Bespoke: Baltic Dry, winning streaks, and China
“And while the Baltic Dry doesn’t have much correlation with US stocks, it does follow China’s equity market pretty closely. Over the Baltic Dry’s 16-day winning streak, China’s Shanghai Composite index is up 14% as well, and it really looks like it’s beginning to turn a corner. Below we provide a chart of the Baltic Dry Index compared to China’s Shanghai Composite. While the percentage changes are more extreme for the Baltic Dry, the direction of its move is very similar to China. Given the fact that China is such an export based economy, it’s no surprise that this trend exists.
“Finally, it’s important to note a few things regarding the Baltic Dry. First, the index declined more than 94% from its peak to trough over the last two years. While it has made a nice move upward in the past few weeks, it is still way, way down from its highs.”
Source: Bespoke, February 10, 2009.
Bespoke: Commodity snapshot
“As shown, oil has once again taken a turn for the worse, and it is currently testing support at its prior lows over the past couple of months. Metals, on the other hand, continue to surge. Gold, silver, and platinum are all trading at the very top of their trading ranges. They’ve rallied nicely over the past few weeks, and a further move of 1% to 2% higher will put them at overbought levels.”
Source: Bespoke, February 12, 2009.
Richard Russell (Dow Theory Letters): Gold frenzy lies ahead
“Those subscribers who have heeded my advice – ‘buy gold’. They are doing OK today. Of course, for years I advocated buying gold coins and hiding them away and never looking at them or thinking of selling those little beauties. Now if you want gold, you have to buy ‘paper gold’ in the form of GLD. Which is probably OK. Below we see an up-dated chart of GLD. And we see the breakout today at 92.29. This completes a huge base, which started at the 69 box and since has been building and building.
“Today, with the upside breakout at the 93 box on the P&F chart, we’re forced to buy gold in the 944 (April futures) area. For those who missed out on gold when it was in the 700s and 800s, this is a scary proposition. So question – is it too late to buy GLD or high-premium coins if you can find them? As I see it, the frenzy, the speculative phase of gold, the rush of a frightened public lies ahead.
“Big bull markets always find a way to keep you frightened and OUT. Big bull markets are devils with no conscience – to get in you have to ‘close your eyes, and just do it’. Not easy, but in this business nothing is easy except losing money. ‘There’s no fever like gold fever.’ And I’m beginning, just beginning, to feel the fever now. When I look at the chart below, I can sense the fever rising.”
Source: Richard Russell, Dow Theory Letters, February 11, 2009.
Business Intelligence: Merrill Lynch – $1,500 target for gold
“Dugan termed his apprehensions of gold striking such a high as a ‘fear’ that may come true. He reasoned that such a price would mean the other commodities and streams of investments have been shunned by investors.
“With confidence in currencies shaken to the core, the yellow metal is increasingly assuming the role of ‘the most trusted currency’, Dugan said. ‘We have never seen such a rush to buy gold. It’s bringing in security and it’s still affordable.’
“Merrill Lynch commodity price forecast authored by Dugan showed that gold prices can rise from the currently prevailing US$913 per ounce to US$1,100 in the first quarter of 2009 and to US$1,150 in the second quarter. ‘While demand for gold has been rising production has been declining. South Africa, which accounts for the major share of global gold production, is facing political issues and has energy problems,’ Dugan said.
“With reports of declining returns from other investment options, ‘cash’ – keeping money safe in banks and investing in government bonds – is the option in front of investors, Dugan said.
“‘Fear’ and eventual decline of the greenback are the two factors that will drive gold prices, he said. While commodity markets could also bounce back in the first half of the year, a rebound is likely to be short-lived in the absence of strong US consumer demand.”
Source: Business Intelligence, February 8, 2009.
Financial Times: Bullion sales hit record in rush to safety
“The US Mint sold 92,000 ounces of its popular American Eagle coin last month, almost four times that which it sold a year ago and more than it shipped during the whole of the first half of 2007.
“Other countries’ mints have also reported strong sales. ‘Large purchases of coins are perhaps the ultimate sign of safe-haven gold buying,’ said John Reade, a precious metals strategist at UBS.
“Inflows into gold-backed exchange traded funds surged in January, pushing their bullion holdings to an all-time high of 1,317 tonnes. Last month’s flows of 105 tonnes were above September’s previous record of 104 tonnes, and absorbed about half the world’s gold mine output for January, said Barclays Capital.
“‘We estimate that investment demand [into gold] could double in 2009 compared to 2007,’ said Mr Reade. ‘Purchases of physical gold have jumped over the past six months as investors’ fears about the current financial crisis … have intensified.’
“The move into gold is being driven by the very rich, with bankers saying that some clients are hoarding gold in their vaults. UBS and Goldman Sachs said last week that investor hoarding would drive prices back above $1,000 an ounce.
“Traders and analysts said jewellery demand, historically the backbone of gold consumption, had collapsed under the weight of the high prices. Sharp falls in demand in the key markets of India, Turkey and the Middle East have capped the potential of any price rally. But the lack of jewellery demand has not discouraged investors.
“GFMS, the precious metal consultancy, estimated bullion coin demand last year reached its highest level in 21 years.”
Source: Javier Blas, Financial Times, February 9, 2009.
CEP News: Euro Zone GDP contracts at record pace in fourth quarter
“According to advance estimates from Eurostat, the euro zone economy contracted by a record 1.5% in the fourth quarter of 2008 compared to the previous quarter. Economists had expected a more modest fall of 1.3% following Q3’s 0.2% decline.
“Germany led the way in declines, contracting 2.1% in the fourth quarter. Conversely, Slovakia was one of the few economies to show any gains over the period, rising 2.1% according to preliminary estimates.
“Year-over-year, overall output in the monetary union shrank by 1.2%, its sharpest pace in series history and down from both the 1.1% contraction expected and Q3’s annualized gain of 0.6%. Looking at 2008 as a whole, GDP growth slowed to 0.7%, down two percentage points from the rate in 2007.”
Source: CEP News, February 13, 2009.
David Fuller (Fullermoney): China has the money
“Yes, the export sector is in a mess and the PRC had been overly reliant on it for two decades. Nevertheless, by being the world’s manufacturer of first resort, China gained enormous technological know how. This will be invaluable as they move their manufacturing base to a more sophisticated level.
“China will not worry about lots of toy manufacturers going out of business. However consider these comments mentioned to me last weekend by a friend visiting from Hong Kong. China is making huge efforts to improve the economic wellbeing of its rural poor. For instance, he said the government has told manufacturers of refrigerators not to lay off workers or slash prices. Instead, it is buying surplus refrigerators at market prices and selling them to the rural poor at half price. There are plenty more rural poor who need looking after than unemployed factory workers in the Southern provinces, although China’s population statistics are astronomical for Western observers.
“The point is, China has the money to do that and does not need to borrow. However, the PRC is not just subsidising the poor with its vast surplus.
“For over a year it has been fashionable to say once again that: ‘Cash is king.’ To the extent that this is a truism, it means that anyone with cash can buy cheap assets when others are forced sellers. From Russia to Australia, China is buying cheap industrial resources for its long-term development.”
Source: David Fuller, Fullermoney, February 12, 2009.
Financial Times: Alarming times for China as exports fall
Source: Financial Times, February 11, 2009.
Bloomberg: China’s new loans rise by record on stimulus efforts
“Banks extended 1.62 trillion yuan of new local-currency loans and M2, the broadest measure of money supply, climbed 18.8% from a year earlier, the People’s Bank of China said today on its website.
“The jump in new loans to twice the record set a year earlier shows China may succeed in reviving growth even as credit markets around the world remained locked and after developed economies slumped into what the International Monetary Fund calls a ‘depression’. Loan default risk is rising and represents the biggest single threat to Chinese lenders this year, Fitch Ratings said last month.
“‘We believe China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near collapse,’ said Lu Ting and T.J. Bond, Merrill Lynch economists in Hong Kong. Soaring credit growth ‘might be at the cost of the future health of the banking system’.”
Source: Kevin Hamlin and Luo Jun, Bloomberg, February 12, 2009.
Financial Times: Economists warn of Chinese deflation
“In the latest sign of economic weakness in the country, consumer price inflation fell for the ninth month in a row to 1% in January from 1.2% the previous month as prices for clothing, transport and housing tumbled.
“Several economists forecast that consumer prices in China would begin to fall from this month.
“However, most analysts say that China will avoid a prolonged period of deflation, which could lead to a sharp drop in output as consumers and companies delay spending, because of the aggressive monetary and fiscal stimulus policies introduced by the Chinese authorities.”
Source: Geoff Dye, Financial Times, February 10, 2009.
Financial Times: Japan faces “unimaginable” contraction
“The warning from Kazuo Momma, head of the Bank of Japan’s research and statistics department, underscored the gloom surrounding the world’s second-largest economy as export orders dry up, companies shut down production lines and consumers stop spending.
“Japan, where industrial output plunged a record 9.6% month on month in December, is due to announce fourth-quarter gross domestic product data next week. Polls of economists suggest GDP will have fallen more than 3% compared with the previous quarter – an annualised decline of more than 10%.
“‘From October to December the scale of negative growth [in GDP] may have been unimaginable – and we have to consider the possibility that there could be even greater decline between January and March,’ Mr Momma said in a speech on Monday.
“His remarks came as a private research company reported a 16% year-on-year rise in the number of bankruptcies among Japanese companies to 1,360 in January, the highest level for six years. Total debts left by failed companies rose 44% from a year earlier to Y839 billion ($9.2 billion), Tokyo Shoko Research said.”
Source: Mure Dickie, Financial Times, February 9, 2009.
Financial Times: Australian Senate passes A$42 billion stimulus plan
“Independent South Australian senator Nick Xenophon switched sides after winning a commitment from Wayne Swan, Australia’s Treasurer, that the Labor government would commit almost A$1 billion to help improve water flow in the ailing Murray-Darling river system.
“The unexpected second vote, in which senators backed the amended package by 30 votes to 28, boosted the Australian dollar on hopes the stimulus payments would reach households in time to avert recession in an economy badly hit by the global slowdown.
“‘I’m not sure whether this package is going to save this country from recession,’ Xenophon told parliament. ‘I’m pleased to say I believe we have been able to reach a compromise, which while not giving everybody what they want, may give everyone what they need.'”
Source: Kevin Brown, Financial Times, February 12, 2009.
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