Words from the (investment) wise for the week that was (March 2 – 8, 2009)
“Down, down, deeper and down”. So goes the chorus of a Status Quo song, but it is eerily starting to sound like the stock markets’ anthem.
Another week and another plunge of equities on fears about the intensity of the global recession and renewed skepticism regarding the beleaguered financial sector. And, yet again, flight-to-safety trades such as the US dollar (at a three-year high) and government bonds took center stage.
Our family yesterday celebrated my son’s eighth birthday. While the kids were amusing themselves in pirate garb, the parents engaged in a more subdued deliberation about the exhausting stream of ugly news on the financial front. Interestingly, never in a career of 26 years have I had so many people sympathizing with my “day job” as investment manager. Will the arrival of food parcels at my front door perhaps herald a bottom in the stock market?
Back to the past week’s action on the markets. Globally, stocks were generally in the red, as summarized by the week’s movements of the MSCI Global Index (-7.1%, YTD -24.2%) and the MSCI Emerging Markets Index (-2.2%, YTD -13.9%). As far as mature markets are concerned, European countries like Italy (+15.6%), Denmark (-11.7%), Belgium (-10.0%) and Holland (-9.2%) were on the receiving end of the selling orders.
The FTSE Eurofirst 300 Index touched the lowest level in its 12-year history, whereas the Japanese Nikkei 225 Average (-5.2%) came to within a stone’s throw of a 26-year low.
But a few bourses also up put a good show, mostly among emerging markets. The Russian Trading System Index (+5.8%) and Chinese Shanghai Composite Index (+5.3%) brought some joy to investors, while Eastern European markets like Poland (+2.9%) and Romania (+2.3%) rebounded. (Click here to access a complete list of global stock market index movements, in local currency terms, as supplied by Emerginvest.)
As shown in the table below, the major US indices suffered another miserable week, recording eight losing weeks out of nine in 2009 and falling to 12-year lows. The Dow Jones Industrial Index’s 2009 year-to-date decline of 24.5% is by far the worst start to a year after 44 trading days since 1900. According to Bespoke, there have been 19 previous years where the Dow was down 5% or more at this point, and only four of those years ultimately finished in positive territory.
The Dow is currently down by 53.2% since its peak of October 2007. Chart of the Day points out that since 1896 only the bear market that started in 1929 has produced a larger slump.
On the exchange-traded fund (ETF) front, John Nyaradi (Wall Street Sector Selector) reports that “all things short” was again the theme of the week, with ProShares Short Financial (SEF) leading the way with a gain of 18.1%. Other inverse leaders were ProShares Short Russell 2000 (RWM) (+10.0%) and ProShares Short MidCap 400 (MYY) (+9.3%).
Among “long” ETFs the notable leaders were iShares MSCI Taiwan Index (EWT) (+5.0%) and US Oil (USO) (+3.5%).
Notwithstanding supply concerns, government bond yields in the US, UK and Germany declined as investors continued their flight to safety. Yields of 10-year Treasuries, Bunds and Gilts were down by 15, 58 and 20 basis points respectively.
In the case of the UK, the Bank of England introduced quantitative easing as its new monetary tool and unveiled an ambitious plan to buy UK government paper by printing money. Speculation rose that the Federal Reserve may also commence a program of buying longer-dated government securities. In typical David Fuller style, he offered the following advice to governments: “The patient is hemorrhaging on the operating table; do anything and everything to resuscitate (inflate) this deflating body.”
On the credit front, Markit‘s spreads show that the cost of insuring corporate debt against default has increased markedly throughout the world over the past month. This is illustrated by the movement in the spreads (expressed in basis points) for the five-year credit derivative indices listed below.
• CDX (North America, investment-grade) Index: up from 196 to 250
Next, a tag cloud of all the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “banks”, “economy” and “markets” dominated the list, whereas “China” seems to be gaining more prominence by the week.
Having breached the November 20, 2008 and October 2002 lows, the Dow and S&P 500 have fallen significantly below their respective 50- and 200-day moving averages, as shown in the customary table summarizing important chart levels. The large deviations of the moving averages point to a massively oversold situation – almost like a spring that is stretched too far. Meanwhile, I have added the July 1996 lows to the table as these levels are now in sight of the indices.
According to Thomas Lee, US Equity Strategist at JPMorgan, retracing 12-year lows for the Dow is an incredibly rare event (see chart below). “Besides the retest of 1997 lows seen on Monday, this has only happened two other times, on April 8, 1932, and December 6, 1974,” said Lee (via The Big Picture). It is noteworthy that the 12-year low in 1932 was three months before the end of the bear market and the one in 1974 was exactly the low for that bear market.
Barry Ritholtz added: “Hitting a 12-year low is by no means proof the bear market is over. And, two prior examples do not make a sufficient sample. [But] the oversold nature of the market, as well as the virtual straight down drop that brought us here, does present a real possibility of a strong market rally.”
The precipitous stock market declines are reflected in the results of this week’s survey of investor sentiment by the American Association of Individual Investors (AAII), courtesy of Bespoke. Investors are now at their most bearish levels since the start of the survey in 1987 with 70.27% of respondents currently in the bearish camp – a necessary prerequisite for a major market low.
James Montier, strategist of Société Générale, said (via FT Alphaville): “We have long argued that the final stage of the de-bubbling process is revulsion. This phase is characterized by overwhelmingly cheap asset prices. Recent price moves in the UK and European stock markets have taken us to levels that have generally been associated with revulsion. Of course, cheap markets can always get cheaper, but for the long-term investor this may provide an excellent entry point.”
Montier’s preferred valuation measure is the so-called Graham and Dodd price-earnings ratio that pitches the share price against a 10-year moving average of reported earnings. On this basis, the S&P 500 Index is currently trading at 13.6 compared with an average of 18 since 1871 and a typical “bargain basement” level of 10. (Keep in mind that this indicator dropped to 5 in the Great Depression.)
As usual, some interesting thoughts were also contributed by Richard Russell (Dow Theory Letters): “The stock market doesn’t live in a vacuum. This huge decline in less than two years is telling us (me) something. It’s a warning. I think it’s a warning of very hard times to come, maybe as difficult as those times we saw during the Great Depression.
“I know that great bull markets and great bear markets tend to overrun at the extremes. Let me leave you with one thought – prepare for the extremes. Just as the bull market that ended in 2007 rose to the extremes, I believe this bear market will go to the extremes.”
At this juncture, short-term movements are almost impossible to predict, although the sell-off over the past few days – a capitulation in some respects – could nourish the long-awaited tradeable rally. Also, Lowry‘s 90% down-days, like we experienced on Monday and Thursday, are often followed by two- to seven-day bounces. But we are not yet at the point where we leave the defeated bear’s carcass behind, although each downward move brings us closer to the eventual bottom.
For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Gloomy investors shun risky trades“, “Technical talk: Bounce not that impressive …“, “Louise Yamada: Don’t ‘venture into the waters’” and “Stock market performance round-up: Nowhere to hide“. (And do make a point of listening to Donald Coxe’s weekly webcast, which can be accessed from the sidebar of the Investment Postcards site.)
Confidence is uniformly weak across all industries and regions of the globe, as highlighted in a recent Forbes article by Nouriel Roubini (RGE Monitor): “With economic activity contracting in 2009’s first quarter at the same rate as in 2008’s fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation).
“The scale and speed of synchronized global economic contraction are really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully-fledged financial crisis, starting with emerging Europe.”
The European Central Bank’s growth projections for the Eurozone were significantly lowered from a range of -1.0% / 0.0% to a range of -3.2% / -2.2% for 2009, while for 2010 the range was revised from +0.5% / 1.5% to -0.7% / +0.7%, incorporating the possibility of an extended recession. As a result, the ECB lowered its refinance rate by 50 basis points to 1.50%, bringing its cumulative rate cuts to 275 basis points since mid-October 2008.
In an attempt to restore flagging confidence, the Bank of England also cut its target interest rates by 50 basis points to 0.5% and announced plans to start quantitative easing by printing money to purchase government bonds and other securities with an initial amount of £75 billion.
On a more positive note, China’s manufacturing Purchasing Managers’ Index (PMI) strengthened for a third consecutive month in February, climbing to 49.0% from 45.3% the previous month. As discussed in a recent post (“China – better days ahead“) and as shown in the graph below, China’s improving PMI seems to indicate that the country might have seen the worst of its GDP growth statistics in this cycle. (The Hong Kong PMI is used as a proxy of the Chinese PMI prior to 2004.)
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 data releases.)
Commenting on the payroll employment data, Asha Bangalore (Northern Trust) said the statistics need to be evaluated within the context of the growth of the labor force. “The chart below takes into account the growth of the labor force and indicates the extent of job losses in each recession in the post-war period from the peak of payroll employment to the end of a recession. The 3.17% drop in payroll employment in the current recession of 14 months is the largest percentage drop in jobs since the 1957 recession.”
At the same time, Bangalore said there was a silver lining in the housing market that might have been overlooked. As shown in the chart below, the Housing Affordability Index of the National Association of Realtors shot up to a record high of 166.8 in January. Also, the Obama administration has made available details of the Homeowner Affordability and Stability Plan, which raises expectations of improvement in the housing market.
Week’s economic reports
Source: Yahoo Finance, March 6, 2009.
The US economic highlights for the week include the following:
Source: Northern Trust
Click here for a summary of Wachovia’s weekly economic and financial commentary.
Source: Wall Street Journal Online, March 6, 2009.
“Every man has a right to his opinion, but no man has a right to be wrong in his facts,” said legendary investor Bernard Baruch. Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers to get the facts right, and provide some fodder for formulating sensible opinions. But remember the golden rule: don’t take investment decisions that will keep you from a good night’s sleep.
That’s the way it looks from Cape Town.
Dateline: Jim Rogers on the economy, markets
Source: Dateline, March 1, 2009.
Bloomberg: Jim Rogers – China stimulus can’t pull world out of “hole”
“China’s parliament convened today in its annual meeting in Beijing, where Premier Wen Jiabao reiterated the government’s pledge to ‘significantly increase’ investment in 2009 to help counter the slowest growth in seven years. He didn’t announce any new stimulus spending.
“‘China can’t solve the world’s problems,’ Rogers, the author of ‘A Bull in China: Investing Profitably In The World’s Greatest Market’, said in a phone interview today. ‘China is a wonderful and growing economy but it cannot pull the world out of the hole.’
“Wen’s report to lawmakers, the equivalent of a US State of the Union speech, reiterated the country’s 8% growth target. That’s more optimistic than the International Monetary Fund’s forecast that the nation’s economy will expand 6.7%, the least in almost two decades.
“‘One question people keep asking is can China bring the whole world along out of this recession,’ said Lee King Fuei, a Hong Kong-based portfolio manager at Schroder Investment Management, which oversees about $158 billion worldwide. ‘The fact that they’re even asking this question tells me they’re being unrealistic.’
“Rogers, chairman of Singapore-based Rogers Holdings, said he hasn’t bought any Chinese stocks since November as valuations are not attractive.
“The Hang Seng China Enterprises Index, which tracks Chinese companies mostly traded in Hong Kong, is valued at 8.9 times reported earnings. Valuations fell to 7.4 times the week ended October 24, the lowest in almost seven years, according to Bloomberg data. The Shanghai Composite’s 20% gain this year also made it the best performer among 91 benchmark indexes tracked by Bloomberg.
“‘I haven’t bought any Chinese stocks since November and haven’t sold anything either,’ Rogers said. ‘I’m waiting for cheaper prices. I’m not buying Chinese shares at these levels.’
“Rogers added he remains ‘extremely bullish’ on agriculture and that ‘commodities are the only sector in the world where the fundamentals are improving’.”
Source: Chua Kong Ho, Bloomberg, March 5, 2009.
Nouriel Roubini (Forbes): US financial system is effectively insolvent
“There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession. Here’s why:
“First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the US and China. Some signals that the second derivative was turning positive for the US and China turned out to be fake starts. For the US, the Empire State and Philly Fed indexes of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels, suggesting accelerating job losses; and January’s sales increase is a fluke – more of a rebound from a very depressed December, after aggressive post-holiday sales, than a sustainable recovery.
“For China, the growth of credit is only driven by firms borrowing cheap to invest in higher-returning deposits, not to invest, and steel prices in China have resumed their sharp fall. The more scary data are those for trade flows in Asia, with exports falling by about 40% to 50% in Japan, Taiwan and Korea.
“Even correcting for the effect of the Chinese New Year, exports and imports are sharply down in China, with imports falling (-40%) more than exports. This is a scary signal, as Chinese imports are mostly raw materials and intermediate inputs. So while Chinese exports have fallen so far less than in the rest of Asia, they may fall much more sharply in the months ahead, as signaled by the free fall in imports.
“With economic activity contracting in 2009’s first quarter at the same rate as in 2008’s fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe.”
Click here for the full article.
Source: Nouriel Roubini, Forbes, March 5, 2009.
Prison Planet: Celente – US has entered “The Greatest Depression”
“In his latest Trend Alert bulletin, Celente attacks mainstream pundits who falsely predicted a market bottom and the start of a recovery, noting that conventional analysts have been proven ‘dead wrong’ again and that, ‘There will be no turn around in the second quarter of 2009 or 2010 or 2011.’
“‘The global financial system, built on endless supplies of cheap money, rampant speculation, fraud, greed, and delusion is terminally ill and will not be coaxed into remission by stimulus packages nor restored to health by government buyouts and bailouts,’ writes Celente.
“The most positive prediction that Celente makes is that the Dow will not reach zero, a tongue in cheek reaction to yesterday’s record plunge which saw the Dow rolled back to 1997 levels well below 7,000.
“Celente warns that the first signs of real panic are starting to set in, unrest that will cause governments to ‘take draconian measures to prevent total economic collapse and public panic’.
“‘Expect massive bank failures, runs on banks, and bank holidays,’ writes Celente. ‘Even if deposits are FDIC insured, quick access to money is by no means assured. At minimum, have reserves on hand for emergencies,’ he forecasts.
“Celente cites gold as one of the few investments that will continue to rise in value, eventually reaching $2,000 an ounce and beyond.
“Celente’s dire forecasts were initially scoffed at by the media but as the crisis has worsened, his credibility has soared.
“Celente, who successfully predicted the 1997 Asian Currency Crisis, the subprime mortgage collapse and the massive devaluation of the US dollar, told UPI in November 2007 that the following year would be known as ‘The Panic of 2008′, adding that ‘giants (would) tumble to their deaths’, which is exactly what we have witnessed with the collapse of Lehman Brothers, Bear Stearns and others.”
Source: Paul Watson, Prison Planet, March 3, 2009.
BCA Research: US Capital Assistance Program – a costly necessity
“The Chairman of the FDIC, Sheila Bair, contends that US banks are well capitalized. However, she must be referring to the multitude of small banks, rather than large banks (i.e. there are many small banks that are well capitalized).
“The top 20 financial institutions have a thin capital cushion of only 3.4% (defined as tangible capital/total assets). In other words, it would require a writedown of total assets of only 3%-4% to wipe out all tangible capital for the largest banks.
“The FDIC data on the broader banking universe confirms that the capital cushion of large banks is much less than their smaller counterparts. Moreover, toxic assets are concentrated in large financial institutions. Level 3 assets represent 5.5% of total assets and are 62% larger than tangible capital, for the top 20 institutions.
“The implication is that the stress tests will likely reveal that many of these institutions are not properly capitalized even in the base-case economic scenario (not to mention the worst-case scenario). We suspect that the authorities are publicly downplaying the amount of recapitalization that is likely to be required, but behind closed doors they must realize that the CAP will be a large sinkhole for taxpayer funds. Indeed, the Administration has ‘penciled in’ another $750 billion for bank support in its budget proposal for the next fiscal year.
“Bottom line: The final cost of the bailout plan announced last week will be dramatic. Nonetheless, it is a critical element in ending the financial crisis and stabilizing the economy.”
Source: BCA Research, March 4, 2009.
Bloomberg: Ron Paul – Government needs to get out of the way and let the market sort itself out
Source: Bloomberg (via YouTube), March 3, 2009.
CNBC: Roubini – nationalization debate is moot
Source: CNBC, March 3, 2009.
The Wall Street Journal: “Bad Bank” funding plan starts to get fleshed out
“The Obama team announced its intention to partner with the private sector to buy $500 billion to $1 trillion of distressed assets as part of its revamping of the $700 billion bank bailout last month. It’s central to the administration’s efforts to unglue credit markets, alongside a Federal Reserve program aimed at spurring consumer lending in areas such as credit cards and home loans that will be officially launched Tuesday.
“No decision has been made on the final structure of what the administration is calling a private-public financing partnership, but one leading idea is to establish separate funds to be run by private investment managers. The managers would have to put up a certain amount of capital. Additional financing would come from the government, which would share in any profit or loss.
“These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate. To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans.
“… the government wants to encourage private investors to buy up the assets in a way that would come closer to setting a market price where no market currently exists. Some within the administration believe establishing multiple funds could help with that goal. The funds would most likely target all types of assets, such as mortgage-backed securities, rather than focusing on one specific type of distressed security.”
Source: Deborah Solomon and Jon Hilsenrath, The New York Times, March 3, 2009.
AFP: FDIC warns US bank deposit insurance fund may tank
“The Federal Deposit Insurance Corporation is warning banks that its deposit insurance fund could dry up this year amid rising bank failures although the deposits would remain fully backed by the government.
“The head of the Federal Deposit Insurance Corporation, Sheila Bair, in a letter to bank chief executives dated March 2, defended the FDIC’s plan to raise fees on banks and assess an emergency fee to shore up the fund and maintain investor confidence.
“Bair acknowledged the new fees, announced Friday, would put additional pressure on banks at time of financial crisis and a deepening recession, but insisted they were critical to keep the insurance fund solvent and protected.
“‘Without these assessments, the deposit insurance fund could become insolvent this year,’ Bair wrote.
“The FDIC chief said in the letter that the rapidly deteriorating economic conditions raised the prospects of ‘a large number’ of bank failures through 2010.”
Source: AFP (via Google), March 6, 2009.
Bloomberg: Gary Shilling says US getting “close” to depression
“Gary Shilling, president of A. Gary Shilling & Co., talks with Bloomberg’s Peter Cook about the outlook for the US economy. Shilling also discusses the labor market, housing and the government’s economic stimulus efforts.”
Source: Bloomberg, March 6, 2009.
CNBC: Fed Chairman Bernanke’s testimony to House committee
Source: CNBC, March 3, 2009.
Asha Bangalore (Northern Trust): Bernanke hints more may be necessary
“One, he hinted that more policy action may be necessary when he noted the following: ‘The goal of the fiscal package is not just to provide a one-time boost to the economy, but to lay the groundwork for a self-sustaining, broad-based recovery. Historical experience strongly suggests that without a reasonable degree of financial stability, a sustainable recovery will not occur. Although progress has been made on the financial front since last fall, more needs to be done.
“‘As you know, in response to ongoing concerns about the health of financial institutions, the Treasury recently announced plans for further steps to ensure the strength and soundness of the financial system and to promote a more smooth flow of credit to households and businesses. The plan would use the remaining resources appropriated to the Treasury under the Emergency Economic Stabilization Act – approximately $350 billion – and also involve additional spending to support the activities of Fannie Mae and Freddie Mac.
“‘Whether further funds will be needed depends on the results of the current supervisory assessment of banks, the evolution of the economy, and other factors. The Administration has included a placeholder in its budget for more funding for financial stabilization, should it be necessary.’
“Two, he also indicated that any early consideration of reducing the accommodation from easy monetary and fiscal policy action carries the risk of stopping the recovery process. In other words, caution is the key. Here is the excerpt from the testimony: ‘In particular, the Congress will need to weigh the costs of running large budget deficits for a time against the possibility of a premature removal of fiscal stimulus that could blunt the recovery. We at the Federal Reserve will face similar difficult judgment calls regarding monetary policy.'”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 3, 2009.
Asha Bangalore (Northern Trust): Employment report underscores severity of recession
“Even so, the sharp plunge in payroll employment needs to be evaluated within the context of the growth of the labor force. The chart below takes into account the growth of the labor force and indicates the extent of job losses in each recession in the post-war period from the peak of payroll employment to the end of a recession or after 14 months whichever is applicable (recessions vary in duration). The 3.17% drop in payroll employment in the current recession of 14 months is the largest percentage drop in jobs since the 1957 recession.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 6, 2009.
Bloomberg: Hatzius sees US unemployment rate rising into 2010
Source: Bloomberg, March 6, 2009.
CEP News: US Treasury unveils details of mortgage modification plan
“The program announced last week aims to alleviate the terms of more than 7 million homeowners in the United States through smaller payments and debt reduction by banks.
“‘It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets, just as we work to stabilize our financial system, create jobs and help businesses thrive,’ said Treasury Secretary Tim Geithner in the Treasury Department’s press release. ‘Economic recovery requires action on all three fronts.’
“Lenders will have to reduce mortgage payments to no more than 38% of the Front-End Debt-to-Income (DTI) ratio, after which the government will match an additional reduction to 31% of this ratio.
“The program also includes reductions on principal for mortgage borrowers who make their payments on time, as well as incentives for lenders to participate in the program.
“Last week the Treasury also announced intentions to broaden portfolios on Fannie Mae and Freddie Mac.”
Source: Erik Kevin Franco, CEP News, March 4, 2009.
Breitbart: 12% in US behind on mortgage or in foreclosure
“The reckless lending practices in states like Florida, California and Nevada that were the epicenter of the housing crisis are no longer driving up the nation’s delinquency rate. Instead, the foreclosure crisis now is being fueled by a spike in defaults in states like Louisiana, New York, Georgia and Texas, where the economies are rapidly deteriorating and thousands are losing their jobs.
“A record 5.4 million American homeowners with a mortgage of any kind, or nearly 12%, were at least one month late or in foreclosure at the end of last year, the Mortgage Bankers Association reported. That’s up from 10% at the end of the third quarter, and up from 8% at the end of 2007.”
Source: J.W. Elphinstone, Breitbart, March 5, 2009.
Asha Bangalore (Northern Trust): Home sales remain under stress
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 3, 2009.
Asha Bangalore (Northern Trust): Auto sales decline once again
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 3, 2009.
Barry Ritholtz (The Big Picture): Vehicle sales halve
• GM’s sales fell 53%
“Hyundai Motor was the sole automaker to post a month over month sales gain (down 1.5% year over year).”
Source: Barry Ritholtz, The Big Picture, March 3, 2009.
Asha Bangalore (Northern Trust): Jobless claims – too early to identify a turning point
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 5, 2009.
Asha Bangalore (Northern Trust): ISM Manufacturing Survey – insignificant gain in February
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 2, 2009.
Asha Bangalore (Northern Trust): Consumer spending gains strength in January
“Personal saving as a percentage of disposable income was 5.0% in January. The spike in the saving rate in May/June 2008 was related to the tax rebates of 2008. On a monthly basis, the personal saving rate in January 2009 is the largest since March 1995.
“Net worth of households and the saving rate move in opposite directions. Given the large loss in net worth of households, the rising unemployment rate, and uncertainty in the economy, it is not surprising that the saving rate has risen in the past few months.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 2, 2009.
Casey’s Charts: Shop till you drop
“With consumers losing access to credit and incomes being threatened by rising unemployment, the spending spree has come to an end. As a result, retail sales have fallen 11% since June, GDP contracted by 6.4% in the fourth quarter, and consumer confidence is the lowest on record. The economy is barely running on fumes, and Washington has now become the ‘spender of last resort’.”
Source: Casey’s Charts, March 5, 2009.
Reuters: Food stamp enrolment jumps to record 31.8 million
“Food stamps, which help poor people buy groceries, are the major US anti-hunger program, forecast to cost at least $51 billion in this fiscal year ending September 30, up $10 billion from fiscal 2008.
“‘A weakened economy means that many more individuals are turning to SNAP/food stamps,’ said the Food Research and Action Center. Last summer food stamps were renamed the Supplemental Nutrition Assistance Program, or SNAP.
“The average food stamp benefit is $115 a month for individuals and $255 a month per household.
“In April, food stamp benefits will increase temporarily by 13% under provisions of the recently enacted economic stimulus law. Ellen Vollenger of the Food Research and Action Center said some families will see increases of $80 a month.”
Source: Charles Abbott, Reuters, March 5, 2009.
Bloomberg: Hidden pension fiasco
“The paper alchemy gives governors and legislators the easy choice to contribute too little or nothing to the funds, year after year.
“The misleading numbers posted by retirement fund administrators help mask this reality: Public pensions in the US had total liabilities of $2.9 trillion as of December 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30% less than that, at $2 trillion.
“With stock market losses this year, public pensions in the US are now underfunded by more than $1 trillion.
“That lack of funds explains why dozens of retirement plans in the US have issued more than $50 billion in pension obligation bonds during the past 25 years – more than half of them since 1997 – public records show.
“The quick fix for pension funds becomes a future albatross for taxpayers.”
Source: David Evans, Bloomberg, March 3, 2009.
The Razor’s Edge: AIG and Hank – the divorce is final
“Former AIG CEO Hank Greenberg is now suing the embattled company. He’s accusing the company of securities fraud. Yesterday, AIG posted that unbelievable loss, $62 billion. Greenberg’s lawsuit claims that AIG’s material misrepresentations and omissions led him to buy shares in his deferred compensation participation plan.
“Greenberg lead AIG for more than 40 years until he came under pressure to leave the company because of fraud charges from the New York Attorney General, Elliot Spitzer. He now claims that he was encouraged to buy stock in AIG at more than $50 per share and was mislead by the current management as to just how bad the collateralized debt on AIG’s balance sheet would turn out to be.
“The dispute arose from an investor conference in December of 2007, when the company’s stock was trading in the high $50’s. Greenberg claims that management seriously downplayed the risks to the company and shareholders, and that their auditors had already told AIG about a ‘material weakness’.”
Source: The Razor’s Edge, March 3, 2009.
Financial Times: Bank of England plans to buy gilts
Click here for the article.
Source: John Authers, Financial Times, March 5, 2009.
Bespoke: Same markets, different year
“Below we highlight the year to date performance for 83 equity markets around the world. As shown, just 10 countries are up year to date, with China leading the way at 14.97%. Venezuela, Colombia, Abu Dhabi, and Israel have also managed to register gains so far this year.
“Unfortunately, there are twice as many countries already down 20% year to date as there are countries that are up. Puerto Rico is down by far the most at -54%, followed by Qatar (-36.6%), Romania (-34%), Ukraine (-30%), and Kenya (-29.7%).
“Of the G-7 countries, Canada is doing the best this year with a decline of 9.62%. Germany has been the worst G-7 country with a decline of 21.74%. And with a decline of 18.62%, the US ranks in the bottom 30% as far as 2009 performance goes.”
Click on the thumbnail for a larger image.
Source: Bespoke, March 2, 2009.
Bespoke: 2009 – by far the worst start to a year since 1900
“Below we highlight the five years where the Dow started the year down 10% or more at this point. In 1920, the Dow continued lower for the rest of the year, but in the three other years, the market ended higher from the level that it was at 41 trading days in.
“One positive is that 1933 is one of the five years that started off down 10% this many trading days in. While this did occur during the Great Depression, it was also FDR’s first year in office. With many comparing Obama and his plans to FDR and the New Deal, it’s interesting that the market got off to a very bad start in 1933 after he was elected, but reversed when he took office (in March) and finished his first year 66.7% higher! We can only hope that 2009 turns out that way, even though it doesn’t say much for 2010, 2011, 2012, etc.”
Source: Bespoke, March 3, 2009.
Bespoke: Top strategists still expecting a 46% gain from here
“As shown below, UBS, Goldman, and Credit Suisse have now lowered their year-end price targets since the start of the year. The UBS move from 1,300 to 1,100 makes Deutsche Bank the most bullish with a target of 1,140. Barclays has the lowest price target of 874, which would be a 27% increase from here.”
Source: Bespoke, March 5, 2009.
CNBC: Yamada – Dow could hit 4,000
Source: CNBC, March 6, 2009.
Bloomberg: Leuthold says stocks will surge, depression avoided
“‘These comparisons people make with the Great Depression are totally out of touch with reality, and pretty stupid,’ he told Bloomberg Television in an interview today. ‘We’ve been in much worse, much more panicked and more scary situations in the US.’
“The economy isn’t as bad as it was in 1974, when stocks began rebounding, said Leuthold, who oversees $3.2 billion at Leuthold Weeden Capital Management in Minneapolis. He predicted the Standard & Poor’s 500 Index will surge to at least 1,000 in 2009, representing a gain of 44% from yesterday’s 12-year low of 696.33.
“Because a rally is likely, Leuthold said investors shouldn’t buy his Grizzly Short Fund. It has returned 26% in 2009. Short seller Bill Fleckenstein, who warned of the housing bubble in 2005, closed his 13-year-old bear market fund last year because valuations made it ‘too dangerous’ to bet on more losses, he said in a interview last month.”
Source: Betty Liu and Lynn Thomasson, Bloomberg, March 4, 2009.
John Authers (Financial Times): Awaiting the bottom
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Source: John Authers, Financial Times, March 3, 2009.
Bespoke: US dollar at multi-year high
“Longer term, however, the US Dollar Index remains well off its highs of this decade, or even the last six years. As shown below, as recently as 2003, the index traded above 100, which is about 12.5% above current levels.”
Source: Bespoke, February 2, 2009.
Mansoor Mohi-uddin (UBS): Dollar strength will linger
“‘At the height of the credit bubble in mid-2007, the Bank for International Settlements estimates that major European banks’ dollar funding needs was around $1,300 billion,’ he says.
“‘As the credit crunch ensued and then worsened after the bankruptcy of Lehman in September 2008, securing this funding became very difficult due to the severe disruptions in interbank and foreign exchange swap markets and in money market funds.
“‘Also, some central banks withdrew dollar foreign exchange reserves they had placed with commercial banks before the crisis.’
“Mr Mohi-uddin notes that to ease the dollar shortage, the Federal Reserve provided swap lines with other central banks in October 2008. These have been extended until October this year, reflecting the need of foreign banks to keep borrowing dollars from domestic central banks.
“‘Of course, foreign banks also bought dollars in the spot markets, as evidenced by the drop in euro/dollar since last summer.
“‘While the dollar funding shortage in global banking persists, investors in the foreign exchange spot markets should expect the greenback to stay supported against the other majors.'”
Source: Mansoor Mohi-uddin, UBS (via Financial Times), March 4, 2009.
Bloomberg: Stimulus cash to spur inflation, commodity rally
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Source: Bloomberg, March 5, 2009.
Bloomberg: Dennis Gartman sees $40 oil for “long period of time”
Source: Bloomberg, March 5, 2009.
Business Intelligence: Christopher Wood – gold may rise to US$3,500 by 2010
“The US is facing a deflationary collapse more severe than the crash that hobbled Japan’s economy in the 1990s, leaving gold as the only defensive play for investors, he said.
“Speaking at CLSA’s annual Japan Forum Conference last week, Wood said: ‘The collapse of securitization is a much more deflationary situation in the US than anything seen in Japan when the bubble collapsed in the early 1990s. What we need in the future is a more fundamentally disciplined system, even at the cost of higher levels of growth.’
“Gold is likely to more than triple from the current level to US$3,500 in 2010, he said. ‘It’s the only form of money or credit not contaminated by the credit system – and the fact it’s still money is that central banks still own a lot of it, the global paper currency system will steadily deteriorate, eastern and central Europe will face a full-scale currency collapse, putting huge pressure on western Europe.”
“Wood, who in 2003 predicted the US housing crisis and the subprime crisis, has been consistently rated among the top equity strategists on Asia – most recently by Institutional Investor magazine.”
Source: Business Intelligence, March 1, 2009.
CEP News: Euro zone manufacturing PMI hits record low in February
“According to Markit Economics, the euro zone manufacturing purchasing managers index fell to 33.5 in February, down from both the advance estimate of 33.6 and January’s 34.4 level.
“The decline in the activities indicator was driven primarily by new orders, employment and output contracting at record paces in the month.
“‘The final Eurozone PMI data are a further disappointment on the earlier flash numbers for February, and indicate that the rate of decline of manufacturing has yet to stabilise,’ Markit chief economist Chris Williamson said in a press release.
“‘The data are consistent with manufacturing output and employment falling at annual rates in the region of 12% and 5% respectively.'”
Source: CEP News, March 2, 2009.
CEP News: Euro Zone GDP confirmed to have contracted at record pace in Q4
“According to preliminary estimates, euro zone GDP fell by a record 1.5% in the fourth quarter, in line with expectations and flash estimates. Economic output had contracted 0.2% previously.
“Disaggregating the figures, Eurostat noted that the weakness was widespread over the quarter. From Q3 to Q4, household consumption fell 0.9%, despite expectations of a 0.2% fall after rising 0.1% previously.
“At the same time, government expenditure fell 0.6% quarter-over-quarter, down from the +0.7% figure forecast, while investment spending also lost ground, falling 2.7% in Q4 and adding to Q3’s 0.6% slide.
“After remaining stable in the third quarter, exports fell 7.3% in the three months to December. Imports slid 5.5% after spiking 1.4% previously.
“Year-over-year, euro zone GDP fell 1.3% in Q4, down from both the 1.2% decline expected and Q3’s 0.6% annualized increase.”
Source: CEP News, March 5, 2009.
CEP News: ECB’s Noyer says EU will aid troubled member nations
“The central banker, who is also the governor of the Bank of France, echoed comments by European finance ministers and central bankers on Tuesday about the possibility that some European countries will have to seek IMF loans to finance their balance of payments deficits.
“Closer to home, Noyer also noted that credit conditions within France are improving and that a recovery in the country’s banking system is conceivable.
“He also criticized the so-called ‘Bad Bank’ plan, which would take troubled assets off the balance sheets of financial institutions, arguing that such a model is difficult to implement and not necessary in France.”
Source: CEP News, March 3, 2009.
CEP News: Quantitative easing is BoE’s new monetary policy tool
“‘Quantitative easing is clearly now going to be at the forefront in the Bank of England’s ongoing efforts to stimulate the economy,’ said IHS Global Insight Economist Howard Archer, who suggested that the BoE will expand the £75 billion in asset purchases authorized under the plan.
“The transactions will be made using the existing Asset Purchase Facility and will be funded using the central bank’s balance sheet rather than the original plan to finance the APF by using short-term debt from the Treasury, the majority of which would be government paper.
“The monetary policy decisions taken by the Bank of England on Thursday were fully expected, explained Rob Carnell at ING.
“‘At £75 billion, the amount earmarked for the expanded APF is at the lower end of expectations of £50-£150 billion. But it looks as if the Governor of the Bank of England had asked for the facility to be £150 billion,’ he said. ‘It is unclear at this stage whether there is a further £75 billion waiting in the wings and that might be only a first instalment.'”
Source: CEP News, March 5, 2009.
Financial Times: Martin Wolf – BoE’s monetary policy should start unfreezing credit markets
Source: Financial Times, March 5, 2009.
BCA Research: Japan – economic implosion!
“Industrial production plunged 10% in January, on the heels of a similar decline in prior months. Output has contracted a mind-boggling 25% in the past three months, exceeding the rate of decline in US production at any point during the Great Depression. The cuts in the transport and electronics sectors have been even more severe.
“Unfortunately, more pain looms in light of the spectacular surge in the inventory ratio, to the highest level on record. Firms will have to reduce production sharply to clear their excessive inventories in the absence of a pronounced pickup in demand, which is not in the cards.
“Last week’s export data reinforced how difficult the current situation is for Japanese producers, with overseas sales down 46% in the past year and even more sharply in the past few months.
“Policy is likely to provide little support in the near term. Instead, any improvement in Japanese activity awaits an upturn in external demand. There is no sign of that anytime soon. Bottom line: Japan’s economy will remain severely depressed in the coming months.”
Source: BCA Research, March 2, 2009.
CEP News: Chinese manufacturing PMI strengthens for third straight month
“The headline index increased to 49.0 from 45.3 in January marking a three-month rebound from November’s low of 38.8.
“The new orders component rebounded to 50.4 from 45.0 in January while the output index advanced to 51.2 from 45.5.
“The employment index also increased to 46.1 from 43.0.
“The report, coupled with expectations of additional stimulus from the Chinese government, are beginning to improve estimates of economic growth in 2009, according to Andrew Pyle, Wealth Adviser at ScotiaMcLeod.
“‘Estimates for the country’s growth outlook in 2009 have also started to levitate from the alarming 5-6% suggestions earlier this year back to 8%. Not as lofty as what we have been used to, but firm enough to put a floor under commodity prices and that’s what we’re seeing this morning,’ he said.”
Source: Erik Kevin Franco, CEP News, March 4, 2009.
Financial Times: China sets sights on 8% rise in growth
“In a two-hour speech outlining his ‘work report’ to the National People’s Congress, China’s parliament, Mr Wen said the global financial crisis was deepening but the goal of 8% growth remained realistic.
“‘The global financial crisis continues to spread and get worse. Demand continues to shrink on international markets; the trend toward global deflation is obvious; and trade protectionism is resurging,’ he said.
“But, ‘as long as we adopt the right policies and appropriate measures and implement them effectively, we will be able to achieve this target’, he added.
“He provided few extra details to help clarify how much of that investment would be genuinely new spending and where the money would be allocated.
“Mr Wen said China would run a budget deficit this year of Rmb950bn, equivalent to nearly 3% of gross domestic product – a record in recent times for China but modest compared with some of the fiscal packages being considered round the world.
“Indeed, for all the talk about China’s big fiscal plans for 2009, the 21% increase in total government expenditures for this year is slower than the 25.4% rise last year.
“Economists said China’s relatively low debt levels meant the government could expand its fiscal stimulus during the course of the year if there were few signs of recovery.”
Source: Geoff Dyer, Financial Times, March 5, 2009.
CNBC: Chinese economy unlikely to grow 8%
Source: CNBC, March 6, 2009.
Colbert Nation: Market psychology – Jim Cramer
Source: Stephen Colbert, Colbert Nation, March 6, 2009.
4 comments to Words from the (investment) wise for the week that was (March 2 – 8, 2009)
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