Words from the (investment) wise for the week that was (March 16 – 22, 2009)
Phew – what a week! What an announcement!
The Federal Open Market Committee (FOMC) on Wednesday left the Fed funds range unchanged at zero to 0.25%, but stunned the financial markets with an announcement that it would purchase up to $300 billion in longer-term Treasuries over the next six months.
Acting boldly in an attempt to get the economy breathing again, the policy board also committed to purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, as well as a further $100 billion in agency debt.
The objective of purchasing Treasuries is to orchestrate a reduction in long-term rates in the expectation that these lower rates would filter through to mortgage rates and other private sector loans. The average 30-year fixed-rate mortgage fell to 4.98% on Thursday, down from 5.47% in early December and a high of 6.46% in mid-October (see Freddie Mac‘s weekly survey).
“They’re calling it ‘The Rambo Fed‘,” said Richard Russell (Dow Theory Letters). “Bernanke is not fooling around any longer. He’s playing all his cards. He’s going to put a floor under housing and boost asset prices in an all-out attack on the bear market. Bernanke will in no way accept deflation. The Fed will go all out in printing Federal Reserve Notes in its massive assault on deflation. Bernanke will accept a collapsing dollar rather than a repeat of the Great Depression.”
“These actions are high-quality bond-friendly and dollar-unfriendly,” commented Bill Gross of Pimco (via Reuters). “To the extent that they are successful and Treasury efforts match these efforts, certain risk assets may benefit as well, although their ultimate prices will reflect the ability of government to successfully reflate.”
On the announcement, the yield on the US ten-year Treasury Note recorded its sharpest fall since the Wall Street crash of 1987, the US dollar suffered its biggest weekly loss for almost 25 years, gold bullion surged by more than $80 at one stage, and oil and base metals gained handsomely.
The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.
Stock markets initially rose strongly on the Fed’s move to revive the economy, adding to the gains of the rally that commenced on March 10. Although stocks succumbed to profit-taking towards the close, indices nevertheless managed to register a second straight week of gains – the first such stretch since May 2008 in the case of the US bourses.
Elsewhere in the world stocks also performed strongly, with the MSCI World Index gaining 4.4% (YTD -14.2%) and the MSCI Emerging Markets Index ahead by 4.7% (YTD -2.5%). Returns ranged from +17.7% in the case of Romania to -5.6% for Bermuda. The Shanghai Composite Index (+7.2%) had another solid week and remains at the top of the field for the year to date with a 25.0% gain in US dollar terms. (Click here to access a complete list of global stock market movements, in local currency terms, as supplied by Emeginvest.)
As far as US exchange-traded funds (ETFs) are concerned, John Nyaradi (Wall Street Sector Selector) reports that the strongest sectors this week were energy, commodities and emerging markets. Leaders included SPDR S&P Oil and Gas Exploration (XOP) (+7.6%), PowerShares Commodity Tracking Index (DBC) (+9.4%) and iShares MSCI South Korea Index (EWY) +7.5%. On the other end of the performance spectrum Real Estate Investment Trust (REIT) stocks had a torrid time, with SPDR DJ Wilshire REIT (RWR) losing 12.3% and Vanguard REIT (VNQ) down by 10.3%.
Notwithstanding supply concerns and a US budget deficit expected to hit $1.8 trillion this year, government bond yields around the globe declined as the US central bank joined the Bank of England, the Bank of Japan and the Swiss National Bank in a policy of quantitative easing. Yields of 10-year Treasuries and Bunds were down by 22 and 5 basis points respectively on the week. However, the yield on the 10-year Gilt rose by 7 basis points even as the Bank of England continued to buy long-dated bonds.
“… I think the US government bond market is a disaster waiting to happen for the simple reason that the requirements of the government to cover its fiscal deficit will be very, very high,” said Marc Faber in a CNBC interview. “There will be a time when the Federal Reserve will have to increase interest rates to fight inflation, and it will be reluctant to do so because the cost of servicing government debt will rise substantially.”
Not surprisingly, the US dollar got whacked. According to Bespoke, the US Dollar Index had its third biggest one-day decline (-2.69%) on Wednesday since daily pricing started back in 1970. The greenback broke below its 50-day moving average and short-term uptrend, but is still trading above its 200-day moving average and longer-term uptrend. Given the Fed’s “nuclear” strategy, further damage appears likely.
In the expectation that the Fed’s printing of massive amounts of money will stoke inflationary pressures, Treasury Inflation-protected Securities (TIPS) surged to a level last seen in October 2009, as shown by the performance of iShares TIPS Bond ETF (TIP).
Bernanke’s “inflate or die” approach also caused gold bullion to shine. After having traded below $884 prior to the Fed’s announcement, the yellow metal rose sharply to $967 before easing back to close the week at $952.
Commodities benefited as the Fed’s announcement saw the US dollar nose-diving, with West Texas Intermediate Crude (+10.7%) rising above $50 for the first time since November. Similarly, copper touched a four-month high as the price breached $4,000 a metric ton.
Next, a tag cloud of al the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “bank”, “market”, “economy”, “Fed” and “government” featured prominently, whereas “China” is also attracting more attention by the week.
Turning to the stock market again, the 800 level on the S&P 500 Index needs to be exceeded for stocks to make further headway. It not only represents a 50% retracement of the January/March decline, but is also the resistance level of the two-month downtrend and the 50-day moving average.
The key chart levels for the major US indices are provided in the table below.
Kevin Lane, technical analyst of Fusion IQ, said: “… we continue to view this current rally as having legs with maybe another 10-15% up from present levels. However, ultimately we think this rally will fade and we will get a retest of the recent lows (check the history books, we almost always get a retest). How the market handles that retest will tell us a lot with regard to the longer-term picture.”
“While our sense is that the rally has more to go on the upside in the weeks to come, we feel it is still too early to say the final bottom has been put in place,” added Jeffrey Saut of Raymond James.
Back to the venerable Richard Russell, who said: “The rally is running into some hesitation. Transports have been down four out of the last six sessions. When the Averages disagree, it’s often a sign of distribution. Let the market have its fun. As far as I’m concerned, the primary trend of the stock market remains bearish although the secondary trend has turned up. When a market becomes too oversold, the secondary correction acts like the ‘release valve’ in an over-heated boiler. Some of the steam escapes, and they call that an upward correction.
“Often, these explosive corrections look better than the real thing, Furthermore, they can prove costly to both bulls and bears. Corrections in a bear market are always tricky and deceptive, and I’ve learned not to fool with them.”
In the extreme bearish camp, Nouriel Roubini shared the following caveat emptor (via Tech Ticker, Yahoo Finance): “Dear investors, do enjoy this dead cat bounce and bear market sucker’s rally … don’t wait too long until you jump ship while the financial Titanic hits the next financial iceberg: you may get squeezed and crashed in the rush to the lifeboats.”
The Achilles heel of the stock market is the uncertainty regarding corporate earnings. The graph below, courtesy of Chart of the Day, illustrates that 12-month, as-reported S&P 500 real earnings have declined over 80% over the past 18 months, making this by far the largest decline on record (the data go back to 1936). “During Q4 2008, the S&P 500 came in with its first negative earnings quarter ever and the amount lost during the quarter was more than the index has ever earned during a single quarter,” said Chart of the Day.
Also, it is important that confidence be restored for the recent gains to be more enduring. The chart below shows the strong historical relationship between the US Consumer Confidence Index and the 12-month change in the S&P 500 Index. One needs to take a view on the direction of confidence, but should it for argument’s sake pick up from 30 to 40 by the end of June, the relationship indicates a S&P 500 decline of 30-35% in year-ago terms. Using end-of-quarter prices, this means an Index at between 832 and 896.
Source: Plexus Asset Management (based on data from I-Net Bridge)
Taking one step at a time, the next hurdle is the release of potentially ugly earnings and guidance announcements in April. By then a clearer picture should also start emerging on the results of the Fed’s medicine and whether credit markets are thawing and confidence is beginning to improve. Very selective stock picking is in order, but tread carefully otherwise.
For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Fed employs nuclear option” and “Technical Talk: Rally continues …“. (And do make a point of listening to Donald Coxe’s webcast of March 20, which can be accessed from the sidebar of the Investment Postcards site.)
I am keen to meet as many of the Investment Postcards readers as possible on the one day I will be in the Big Apple and have scheduled an informal get-together in midtown Manhattan from 17:30 to 19:00 that afternoon. If you are interested in joining me for a drink, and “putting a face to the name”, please get in touch through the “comments” or “contact” sections of the site so that that I can send the details to you.
Confidence is very poor across all industries, particularly in manufacturing, where it has never been as bleak. For example, Eurozone manufacturing activity continued to plummet in January, falling by 3.5% from the previous month, when it dropped by a revised 2.7%. In year-ago terms it fell by 17.3% – the steepest fall on record.
Source: Moody’s Economy.com
As shown by Rebecca Wilder (News N Economics), retail sales are likewise anemic around the world.
The World Bank has reduced its 2009 growth forecast for China from 7.5% to 6.5%, but indicated that the country’s economy was showing “early signs” of stabilization as government-sponsored investment mitigated the negative impact of contracting exports. “In an era when exports may continue to shrink due to an external demand collapse and consumption may prove difficult to stimulate as deflation has arrived, fixed asset investment championed by the government would be vital for China’s economic growth this year,” said US Global Investors.
“Although corporate savings played a more important role in financing investment than bank loans in the recent cycle, credit expansion, which has accelerated rapidly since December, remains a key driver for public sector investment which is likely to dominate this year.”
It hardly comes as a surprise that the International Monetary Fund has cut its forecast for global growth this year from +0.5%/-0.5% to -0.5%/-1.0%. According to CEP News, the report said Japan’s economy will contract by 5.8% in 2009, that of the US by 2.6% and the Eurozone’s by 3.2%. In 2010, the US and Eurozone are expected to see anemic growth, and the Japanese economy is forecast to see a mild annual contraction in GDP.
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.)
“In sum, although the economy remains mired in a severe recession, we have seen nothing of late to dissuade us from our forecast of recovery getting under way in the fourth quarter of this year. In fact, what we have seen of late increases our confidence in the forecast,” concluded Paul Kasriel (Northern Trust).
Not disputing the downward momentum in economic data, Binit Panel, economist at Goldman Sachs, asked in a recent research report (via the Financial Times ) “what could go ‘right’ for the world economy”. He listed a number of developments that might be potential bright spots.
“First, a stabilization in consumer demand in the US – and an improvement in the UK and Germany.
“Second, an early end to the US housing downturn and a stabilization in the UK housing market.
“Third, the successful operation of the Federal Reserve’s term asset-backed securities loan facility, or Talf.
“Fourth, greater international co-operation – for example at the forthcoming G20 meeting.
“Fifth, better signs from the Bric (Brazil, Russia, India and China) emerging market economies – in particular China.”
Interestingly, after months of bleak economic news, an increasing proportion of Americans now say they are hearing a mix of good and bad economic news, while fewer say they are hearing mostly bad news. “As has been the case for the last few months, very few say they are hearing mostly good news about the economy,” reported The Pew Research Center for the People & the Press.
Source: Yahoo Finance, March 20, 2009.
In addition to Fed Chairman Ben Bernanke’s testimony to the House Financial Services Committee (Tuesday, 24 March), 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 20, 2009.
“You are too concerned about what was and what will be. There is a saying: yesterday is history, tomorrow is a mystery, but today is a gift. That is why it is called the present,” said Oogway (Kung Fu Panda – hat tip: Charles Kirk). These words ring especially true as I mourn the sad loss of Bennet Sedacca. He was not only a brilliant strategist and regular contributor to the Investment Postcards site, but also a dear personal friend. Rest in peace, Bennet.
That’s the way it looks from Cape Town.
The Wall Street Journal: Obama on The Tonight Show with Jay Leno
Source: The Wall Street Journal, March 19, 2009.
CEP News: IMF slashes global growth forecast for 2009
“The report said Japan’s economy will contract 5.8% in 2009, the US economy by 2.6%, and the euro zone economy by 3.2%. In 2010, the US and euro zone are expected to see anemic growth, and the Japanese economy is forecast to see a mild annual contraction in GDP.
“Going forward, the IMF said essential action includes additional easing in monetary policy, and more concerted action to steady markets – namely dealing with toxic bank assets.
“For its part, the US rescue plan was criticized by the IMF for lacking detail.
“Furthermore, there is a serious risk of deflation in some advanced economies, the report said. As for emerging economies, there is a ‘serious risk’ they will not have funding, the report added.
“At the G20 meeting on April 2 in London, world nations are expected to consider up to $500 billion in additional funding for the IMF in order to aid emerging economies.”
Source: Megan Ainscow, CEP News, March 19, 2009.
CEP News: FOMC keeps rates unchanged, announces purchase of $300 billion in Treasuries
“The Federal Open Market Committee also committed to purchasing an additional $100 billion in agency debt, and up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year.
“‘Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth,’ the statement reads.
“The FOMC said it continues to ‘employ all available tools to promote economic recovery and to preserve price stability’, a comment identical to the January statement. The statement also mentioned that ‘economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period’, also unchanged from last month.
“Absent from this month’s statement is the assessment that ‘conditions in financial markets have improved’.
“The committee said it expects inflation will remain subdued in light of increasing economic slack in the US and abroad. ‘Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term,’ the statement said.
“The committee also said it will continue to ‘carefully monitor the size and composition of the Federal Reserve’s balance sheet’ in light of evolving financial and economic developments.”
Source: Stephen Huebl, CEP News, March 18, 2009.
Reuters: Pimco’s Gross – unclear why Fed moved Wednesday
“The move came as the government prepares its latest efforts to resuscitate credit markets with a program aimed at consumer and small business lending.
“But that program faces an uphill battle given the backdrop of public outrage over the fact that taxpayer money will be used to pay $165 million in bonuses for executives at bailed-out insurer American International Group.
“As a result, the shock move by the Fed raises the question of whether the immediate effect of buying Treasuries was deemed necessary in the event these programs fail to produce credit market improvement as quickly as hoped.
“‘It’s unclear whether today’s policy changes by the Fed are coordinated with the Treasury,’ Gross, co-chief investment officer at Pacific Investment Management Co, told Reuters in an interview on Wednesday.
“The uproar over AIG’s retention bonuses are seen by many hedge funds, private equity and big money managers as significantly raising the risks associated with partnering with the government on its Term Asset-Backed Securities Loan Facility, or TALF, as well as the Treasury’s public-private plan to buy toxic assets from ailing banks.
“An irate US Congress, fuming over AIG’s bonus payments to executives after the insurer was bailed out three times using taxpayer dollars, are more likely than ever to change the rules of engagement – possibly retroactively – and that is unnerving money managers at hedge funds, private equity firms and banks on the eve of the long-delayed launch of the government’s newest rescue efforts.
“On Thursday, applications from investors are due to participate in the Treasury and Fed’s $1 trillion TALF program.
“Gross, who helps oversee more than $800 billion at Pimco, said the economy and, by extension, the financial markets ‘needed a substantial shot of adrenaline’.
“‘The Fed’s balance sheet may approach $3.5 trillion – nearly a 100% addition – which will help substitute for the private sector’s deleveraging over the past 12 to 18 months,’ Gross said.
“‘These actions are high-quality bond-friendly and dollar unfriendly,’ Gross said.
“‘To the extent that they are successful and Treasury efforts match these efforts, certain risk assets may benefit as well, although their ultimate prices will reflect the ability of government to successfully reflate.’”
Source: Jennifer Ablan, Reuters, March 18, 2009.
Bill King (The King Report): Why has Ben opted for nuclear option?
“We thought the main FOMC issue would be its monetization disposition. But we did not think that Ben would play his final option now. Either something systemic is terrifying Ben and the solons or China, as the US’s Creditor in Chief, told Hillary the cold hard facts of debtor life.
“And when the US didn’t respond fast enough, China publicly expressed their concern about US debt.
“The US cannot jump through the proverbial hoop and buy bonds from China. But it can monetize bonds in the market, which helps China indirectly, and directly if China hits the Fed’s syndicate bid.
“However, China cannot be happy that the dollar tanked. This not only nullifies much of the bond market rally in yuan terms, it also strengthens the yuan, which will further crimp China’s exports.”
Source: Bill King, The King Report, March 18, 2009.
BCA Research: The Fed gets more aggressive
“The FOMC remains very concerned about the economic and financial outlook. The Fed’s balance sheet recently has shrunk modestly, but that does not reflect any deliberate actions. The Fed’s support of commercial paper has unwound as activity in that market has declined. The Fed’s balance sheet should start to grow again as the TALF program ramps up.
“Moreover, the decision to boost purchases of agency debt and mortgages, and to start directly buying Treasurys, suggests that the Fed’s balance sheet will mushroom in the months ahead. The key point is that monetary policy will remain highly accommodative and proactive until there are signs that financial intermediation is working more effectively. The Fed’s actions should be positive for both stocks and bonds.”
Source: BCA Research, March 19, 2009.
Asha Bangalore (Northern Trust): The Fed’s announcement – indicators to track
“How would we track the impact of this announcement and other programs in place? The immediate impact should be visible in credit markets as we have seen since the current crisis commenced in August 2007.
“The chart below illustrates the recent behavior of the federal funds rate, 10-year Treasury note yield and the Moody’s Aaa corporate bond yield. The 10-year Treasury note yield closed at 2.51% on March 18 after the FOMC policy statement was published from 3.00% earlier in the day. A statement on the New York Fed’s website indicates that the Fed’s purchase will focus on the 2- to 10-year sector of the nominal Treasury curve. The purchases will be conducted through the Fed’s primary dealers 2-3 times per week. Further details will be available early next week and the plan is to hold the first purchase operation late next week. The objective of the Fed’s explicit purchase of long-dated Treasuries is to bring down borrowing costs which in turn should be reflected in lower yields of other private sector securities in the weeks ahead.
“The increase in the purchase of mortgage-backed securities is focused on driving down mortgage rates. The Fed has been successful in this regard since the program was operational from early-January 2009. As of the week ended March 19, the 30-year fixed rate on mortgages was 4.98%, down from 5.47% in early-December and a high of 6.46% in mid-October.
“The TALF program is aimed at unlocking the frozen consumer and small business loan sector. The accomplishments of this program will be visible in the interest spreads with regard to asset-backed securities such as those of credit cards and autos. These spreads have narrowed since their peaks in late-2008. Additional improvements in these spreads would indicate that the Fed’s program is working in the desired direction. These actions combined with the fiscal policy stimulus package are expected to get the economy back on track.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 19, 2009.
CEP News: Fed expands collateral for TALF
“The program is designed to free up capital for lending by purchasing securities backed by high-quality assets from financial institutions. The Fed plans to spend about $1 trillion through the program.
“In a release on Thursday, the Fed said it will accept securities backed by mortgage servicing advances, securities backed by loans or leases relating to business equipment, and securities backed by floorplan loans.
“‘The additional new asset-backed securities categories complement the consumer and small business loan categories that were already eligible,’ the Fed said in a press release.”
Source: Adam Button, CEP News, March 19, 2009.
Bloomberg: Ross says TALF will help end recession “more quickly”
Source: Bloomberg, March 19, 2009.
BBC News: US deficit “to hit $1.8 trillion”
“The White House said the prediction by the Congressional Budget Office (CBO) would not alter President Barack Obama’s policy agenda. Nor would it affect its goal to cut the deficit in half by 2013, it added.
“The massive deficit forecasts come after President Obama’s $3.55 trillion budget plan for the 2010 financial year, which includes big spending programs to address healthcare, education and curb greenhouse gas emissions.
“The CBO also issued gloomy forecasts for the US economy, projecting that it will contract 3% in 2009 before growing 2.9% next year and expanding 4% in 2011.”
Source: BBC News, March 20, 2009.
CNBC: Meredith Whitney – credit crunch & financials
Source: CNBC, March 17, 2009.
Nouriel Roubini (Forbes): United States of Ponzi – behold the Madoff in the mirror
“‘I am a reporter, and I am doing a story on Bernard Madoff’s life after pleading guilty. As part of this, I was wondering if you could comment on what significance he will have in the history of this period. Will he represent more than a scamster who stole a lot of money from a lot of people? As Bernie Ebbers and Ken Lay came to embody corporate greed and deceit, what will Madoff symbolize?’
“Here is my answer fleshed out in full:
“Americans lived in a ‘Made-off’ and Ponzi bubble economy for a decade or even longer. Madoff is the mirror of the American economy and of its over-leveraged agents: a house of cards of leverage over leverage by households, financial firms and corporations that has now collapsed in a heap.
“When you put zero down on your home, and you thus have no equity in your home, your leverage is literally infinite and you are playing a Ponzi game.
“And the bank that lent you, with zero down, a NINJA (no income, no jobs and assets) liar loan that was interest-only for a while, with negative amortization and an initial teaser rate, was also playing a Ponzi game.
“And private equity firms that did over a $1 trillion of leveraged buyouts (LBOs) in the last few years with a debt-to-earnings ratio of 10 or above were also Ponzi firms playing a Ponzi game.
“A government that will issue trillions of dollars of new debt to pay for this severe recession and socialize private losses may risk becoming a Ponzi government if – in the medium term – it does not return to fiscal discipline and debt sustainability.
“A country that has – for over 25 years – spent more than income and thus run an endless string of current account deficit – and has thus become the largest net foreign debtor in the world (with net foreign liabilities that are likely to be over $3 trillion by the end of this year) – is also a Ponzi country that may eventually default on its foreign debt if it does not, over time, tighten its belt and start running smaller current account deficits and actual trade surpluses.”
Click here for the full article.
Source: Nouriel Roubini, Forbes, March 19, 2009.
Bespoke: Geithner gone chatter
Source: Bespoke, March 18, 2009.
Asha Bangalore (Northern Trust): Index of Leading Indicators – continued contraction of economic activity
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 19, 2009.
Asha Bangalore (Northern Trust): Multi-family starts lift total housing starts
“Starts of single-family homes are still down 80.5% from the peak in January 2006.
“The surprise strength in housing starts in February, which was largely in the volatile multi-family sector, reduces expectations of a continued recovery of home building because single-family starts are the larger and more stable component of total housing starts. Moreover, the elevated inventory of unsold homes suggests that a robust recovery in home building will be possible only after there is a substantial reduction in the inventory of unsold new single-family homes.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 17, 2009.
Bill King (The King Report): Don’t trust housing starts
“Also, the spring selling season is commencing and we don’t know what seasonally adjusted magic was used to craft the numbers.”
Source: Bill King, The King Report, March 18 , 2009.
Asha Bangalore (Northern Trust): Current account deficit shrinks as imports fall
“The current account deficit as a percent of GDP was 3.7% in the fourth quarter of 2008, the lowest since the fourth quarter of 2001. On an annual basis, the current account deficit was 4.7% of GDP, the lowest since 2002. In sum, the current account deficit has narrowed to a significant extent.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 18, 2009.
Asha Bangalore (Northern Trust): Higher gas prices mostly responsible for sharp increase in CPI
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 18, 2009.
Asha Bangalore (Northern Trust): Core wholesale prices show a moderating trend
“On a year-to-year basis, the finished goods wholesale price index fell 1.3% and the core PPI rose 4.0%. The core PPI posted a cycle high of 4.7% in October 2008.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 17, 2009.
Bespoke: The commodity rebate
“In July, when the price of oil and other key commodities were trading at record highs, the impact of rising prices was translating into an extra $4.77 per American per day versus the start of 2008.
“Ever since then, however, commodities have crashed back down to earth, resulting in an effective rebate for consumers. As a result, even after the recent rebound in oil prices, the average American is saving $4.10 per day due to lower commodity prices. While this may not sound like much, multiplied out over a year, it works out to just under $1,500 per year per individual, and nearly $6,000 per year for a family of four.”
Source: Bespoke, March 18, 2009.
The Wall Street Journal: Pension bills to surge nationwide
“In an effort to stave off tax increases, New Jersey lawmakers on Monday will consider a bill that would allow municipalities to defer payment of half their annual pension bill, due April 1, for one year. Those towns, counties and schools that opt to defer would face a higher pension bill for years to come.
“Other states and municipalities are facing similarly difficult choices. In Pennsylvania, the state employees and public teachers pension funds both have warned that employer contribution rates could surge seven-fold from about 4% of payroll to 28%, starting in 2012. The Detroit police and fire pension plan might have to double employer contribution rates to 50% of payroll by 2011, according to the fund’s outside actuary.
“‘It’s going to be huge showdown’ between taxpayers and public employees, said Susan Mangiero, president of Pension Governance, a consulting and research firm in Trumbull, Conn. ‘The anger is more acute today when people are feeling economic hardship.’”
Source: Craig Karmin, The Wall Street Journal, March 16, 2009.
CEP News: US House passes bill to take back AIG bonuses
“AIG paid out $165 million in bonuses to executives after the company received up to $180 billion, in government aid, many executives whom politicians say were responsible for bringing the company to near-collapse.
“The US government kept the insurance giant on a lifeline by dumping several multi-billion dollar bailouts into it. The US government now owns 80% of the company.
“The bill passed by the House Thursday will impose a 90% tax on any bonuses paid out to executives earning $250,000 a year or more working at companies given more than $5 billion in government bailout cash.”
Source: Megan Ainscow, CEP News, March 19, 2009.
DK Matai (Silicon Valley Watcher): The size of derivatives bubble = $190K per person on planet
1. Listed credit derivatives stood at USD 548 trillion;
2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:
a. Interest Rate Derivatives at about USD 393+ trillion;
b. Credit Default Swaps at about USD 58+ trillion;
c. Foreign Exchange Derivatives at about USD 56+ trillion;
d. Commodity Derivatives at about USD 9 trillion;
e. Equity Linked Derivatives at about USD 8.5 trillion; and
f. Unallocated Derivatives at about USD 71+ trillion.”
Source: DK Matai (via Silicon Valley Watcher), October 16, 2008.
Fabius Maximus: A look at the new world – after the downturn
Source: Fabius Maximus (via RGE Monitor), March 19, 2009.
CNBC: Treasurys are “disaster waiting to happen”
“Federal Reserve policymakers start a two-day meeting on Tuesday, weighing options on how to spur lending to help cash-strapped consumers kickstart the economy.
“Economists expect them to leave rates at zero and look to other ways of boosting liquidity, such as buying government bonds – a measure which has already been taken by the Bank of England.
“‘Well I think other central banks have done it already around the world but basically what it amounts to is money printing and in fact I don’t think that it will help the bond market at all in the long run,’ Faber told CNBC’s Martin Soong.
“‘… I think the US government bond market is a disaster waiting to happen for the simple reason that the requirements of the government to cover its fiscal deficit will be very, very high,’ Faber said.
“‘The Federal Reserve will have to buy Treasurys, otherwise yields will go up substantially,’ he said, adding that as their reserves were dwindling, foreign investors were likely to scale down their purchases.
“But there will be a time when the Federal Reserve will have to increase interest rates to fight inflation, and it will be reluctant to do so because the cost of servicing government debt will rise substantially.
“‘So we’ll go into high inflation rates one day,’ Faber said.
“The stock market is likely to continue its bounce at least for a while, but the outlook is bleak, he added.
“‘I think we may still have a rally (in the S&P) until about the end of April and probably then a total collapse in the second half of the year sometimes, when it becomes clear that the economy is a total disaster,’ Faber said.”
Source: CNBC, March 17, 2009.
John Authers (Financial Times): Fed’s shock and awe
Click here for the article.
Source: John Authers, Financial Times, March 18, 2009.
Bespoke: S&P 500 financial sector approaches November lows
Source: Bespoke, March 19, 2009.
Bespoke: S&P 500 stops dead in its tracks at 50-day moving average
Source: Bespoke, March 19, 2009.
Richard Russel (Dow Theory Letters): What are the signs of a final bottom?
(1) a dramatic non-confirmation by either the Industrials or the Transports (this is what occurred in 1974).
(2) or we might see an extended ‘line’ in the Averages, in which the Averages fluctuate within a 5% zone for many weeks on low volume. At some point both averages will surge higher on increasing volume.
(3) Values – We will see blue chip stocks selling ‘below known values’ with P/E ratios at single digits and the yield on the Dow near 6%.
“In the area of the final bear market lows, public attitude towards stocks and the stock market will be black-pessimistic and even angry. Wall Street will be despised and denounced as a scam. Actually, we are beginning to see just a bit of that via the highly-publicized debate between Jim Cramer and John Stewart, in which Stewart literally calls both Cramer and Wall Street a fraud.
“Already the public is turning against Wall Street, and, of course, the Bernie Madoff scheme only adds to the public anger against the ‘crooks of Wall Street’. Already, the ‘buy and hold’ creed (religion?) is being denounced along with the image of stocks as wealth-building vehicles. Warren Buffett is being tarred and feathered – Berkshire Hathaway lost billions of dollars over the last year, despite Buffett’s cheer-leading role a few months ago when he announced that he was buying stocks.
“Taking it to the present, the big question is whether we have already seen the bottom of the bear market and whether the recent strength in the market is the beginning of a new bull market. My opinion is that the latest rally is part of a bear market correction – not the beginning of a new bull market. The primary trend was recently re-confirmed as bearish when both the Industrials and the Transports broke to simultaneous new lows.
“One hint as to where we are is that prior to a major low, Lowry’s Selling Pressure Index (supply) turns down while their Buying Power Index (demand) leads on the upside. This did not occur at or near the recent lows.”
Source: Richard Russell, Dow Theory Letters, March 16, 2009.
Forbes: Barry Ritholtz on whether the stock market is near the bottom
Source: Forbes, March 16, 2009.
Richard Bernstein (Banc of America Securities-Merrill Lynch): The best risk-reward potential
“He says: ‘Investors often lose sight of longer-term historical investment results, especially during short-term periods of extreme volatility and trending markets.
“‘We have investigated the true long-term risk/return characteristics of standard asset classes.’
“Instead of defining risk as the standard deviation of returns, Mr Bernstein defined it as the percentage of the historical returns that were negative. If an asset provided a negative return during five of 25 periods studied, the risk measure would be 20%.
“Mr Bernstein says longer time horizons tend to reduce the probability of losing money in an investment – although gold appeared to be an exception.
“He said: ‘Gold was the only asset class that generated a significant proportion of negative returns over 10-year periods.
“‘Small stocks offered the best risk/reward potential, regardless of time horizon.
“‘With the exception of gold, investors had little chance of losing money in our selected asset classes over 10-year time periods.
“‘Only in the current bear market did many equity benchmarks generate their first trailing 10-year losses for the periods we analysed.’”
Source: Richard Bernstein, Banc of America Securities-Merrill Lynch (via Financial Times, March 18, 2009.
Reuters: China and Russia question dollar’s reserve status
“Calls for a rethink of the dollar’s status as world’s sole benchmark currency come amid concerns about its long-term value as the US Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.
“Russia met representatives of China, India and Brazil ahead of the G20 finance ministers meeting last week, as the big emerging powers seek to up their influence on decision-making globally. Their first ever joint communiqué did not mention a new currency but the source said the issue was discussed.
“‘They (China) did not formally put forward their position for the G20 summit but unofficially they had distributed their paper regarding the same ideas (the need for the new currency),’ the source told Reuters, speaking on condition of anonymity.
“The source said the Chinese paper envisaged the International Monetary Fund’s Special Drawing Rights (SDRs) being first assigned a role of a clearing currency on some transactions and then gradually becoming the main global reserve currency. ‘They said that the role of reserve currency should be given to SDR,’ the source said.”
Source: Gleb Bryanski, Reuters, March 19, 2009.
Globalists: Skip Amero, bring on Acmetal
“That’s quite an endorsement for Nazarbayev, who is indisputably one of the world’s most corrupt dictators (he’s been running Kazakhstan since the Soviet era).
“Supporters of the currency, to be called the acmetal (or akmetal), say the proposal ‘holds great promise’.
“But I wonder, as Alan Watt did in his March 12 radio show, ‘Holds great promise for whom?’
“Nazarbayev, speaking at an economic forum in the glitzy new capital he has built on the Kazakh steppe, defended his proposal for the ‘acmetal’ world currency saying it might ‘look kind of funny’ but was not.”
Source: Mark Baard, Globalists, March 14, 2009.
CNBC: Dr Gloom – choose gold over AIG insurance
Source: CNBC, March 17, 2009.
Richard Russell (Dow Theory Letters): Why I am bullish on gold
“For the following reasons:
(1) I believe gold is in a major or primary bull market. I believe the gold bull market is currently in its second phase. This is the phase where sophisticated and seasoned investors and the funds enter the market. I don’t believe the public is in the gold market to any extent. They are interested and watching the action, but they do not have the nerve to buy gold. In fact, the public doesn’t know how to buy gold, although ads are now appearing telling them of the ‘wonders’ of gold and how they can buy the coins (at huge premiums over spot gold).
(2) If there is only one bull market in progress, it will attract broad new coverage and attention – just as Thursday’s $70 rise in gold did.
(3) I believe the bear market in stocks will continue erratically and the deflationary trends will persist. This will drive Fed Chairman Bernanke up the wall, and I think he will stop at nothing (including massive printing of dollars) in his effort to halt deflation.”
Source: Richard Russell, Dow Theory Letters, March 20, 2009.
David Fuller (Fullermoney): IMF gold sales not great concern
“Yesterday, I discussed this with a subscriber who used to work for the IMF. In addition to confirming that an additional $500 billion has been agreed for the IMF, he mentioned that each contributing country could pay 75% of their allocation in their own currencies, and the remaining 25% in either another viable currency or gold.
“Clearly, an extra $500 billion will not be sufficient in what is arguably the worst global recession since the ’30s. Additional contributions will be required. It is not unreasonable to assume that US, UK and most likely some other countries will print the 75% in their own currencies. Presumably individual Euroland countries cannot print euros but the ECB can and almost certainly will. This reinforces the long-term bullish outlook for gold.
“However, the prospect of IMF sales is a headwind for bullion. There are likely to be more central bank sales of gold under the Washington Agreement, than purchases by creditor nations during the economic slump. I also mentioned that gold had become a crowded trade on the brief look at $1000 in late February, adding that since fear was the most recent motive to buy gold, the yellow metal would be susceptible to a correction once stock markets firmed.
“I think any IMF gold sales would be handled discretely and it could also be a case of: ‘Sell the rumour, buy the news.’”
Source: David Fuller, Fullermoney, March 18, 2009.
Bespoke: Bespoke’s commodity snapshot
Source: Bespoke, March 17, 2009.
Money News: Gartman – oil headed higher, sooner
“‘A huge sum of oil has been put in storage,’ Gartman told Bloomberg TV. ‘Over many months, when the contango was extraordinarily wide, you could make almost 30% or more.’
“Contango refers to the situation when distant-month futures contracts trade at a higher price than front-month contracts. In a wide contango, prices would be much higher in far out months than nearby ones.
“You make money off that ‘by buying front month crude, taking delivery if you had the storage facilities, and then selling deferred futures,’ Gartman says.
“‘If you were borrowing money at 5% and lending money via the crude future contango at 35%, you would have locked in profit.’
“But now, Gartman says, ‘we are seeing the inordinately wide contango coming in dramatically. When contango narrows, it is really saying to crude itself, we need you. There’s demand; please come out of storage.’
“Bottom line: ‘That’s bullish for crude,’ he says. “We can trade to $50 maybe $55 over the next two to three months,’ Gartman says.”
Source: Money News, March 13, 2009.
CEP News: Euro Zone industrial output falls at sharpest pace on record
“In the 12 months to January, euro zone industrial production fell 17.3%, down from both the 15.5% tumble expected and December’s 11.8% contraction.
“On a monthly basis, industrial output fell 3.5% in January, adding to the previous month’s 2.7% slide, which was revised down from -2.6%. Economists had expected a more pronounced decline of 4.0% for the month.”
Source: CEP News, March 20, 2009.
CEP News: German investor sentiment rises for fifth consecutive month
“In a press release issued on Tuesday, the ZEW reported that investor sentiment rose to a reading of -3.5 in March, despite expectations of a fall back to -8.0 from -5.8 in February.
“While the improvement from February to March has slowed compared to previous months, the impression remains that investors are becoming more hopeful regarding the German economic outlook in six-months time, the ZEW said.
“‘According to the financial market experts, the economic slowdown is gradually phasing out,’ ZEW President Dr. Wolfgang Franz said. ‘The bottom of the recession is likely to be reached this summer.’
“Meanwhile, euro zone investor confidence also unexpectedly improved in March, rising to a reading of -6.5 from -8.7 previously. Economists had forecast a fall back to -12.0 for the month.”
Source: CEP News, March 17, 2009.
CEP News: EU leaders agree to stimulus spending, to increase aid to non-EMU members
“Speaking to reporters following the first day of an EU summit held in Brussels on Thursday, Czech Prime Minister Mirek Topolanek said that the EU heads of state were close to agreeing on a €5 billion stimulus spending plan.
“Germany had raised concerns, but later compromised when it was agreed that the funds, to be used for infrastructure projects, would be spent by the end of next year.
“‘Substantial parts’ of the projects would need to be in progress by then, ‘otherwise it won’t contribute to dealing with the crisis, which will be over after a certain period of time,’ German Chancellor Angela Merkel said.
“Also speaking to the press on Thursday, European Commission President Jose Manuel Barroso said that the maximum amount of aid available to EU states outside the monetary union could rise to €50 billion from its current €25 billion level.
“The EU also pledged to increase funding to the International Monetary Union. The amount ‘should be quite a large figure’, Czech Finance Minister Miroslav Kalousek said to reporters late Thursday evening, adding that the range would likely be between €75 billion and €100 billion.”
Source: CEP News, March 20, 2009.
CEP News: UK house prices higher for second consecutive month
“The two consecutive months of gains come after three straight months of losses that saw the average price fall from £229,691 in October.
“On an annualized basis, house prices declined 9.0% in March, slightly less than the 9.1% annual decline in February.”
Source: Adam Button, CEP News, March 15, 2009.
Financial Times: Swiss warn lifting secrecy “will take time”
“Hans-Rudolf Merz, Switzerland’s finance minister, said renegotiating the country’s more than 70 double taxation treaties ‘won’t be so fast’ as each would have to be approved individually by the country’s parliament.
“New treaties could be subject to referendums, he told the Financial Times in an interview, while putting in place the rules prescribed by of the Organisation for Economic Co-Operation and Development would also require negotiations and ‘will take time’.
“The comments from Mr Merz, who is head of state under Switzerland’s rotating presidency, came as some of the countries that have pressed hard for greater international tax transparency greeted last week’s move with caution.”
Source: Haig Simonian, Financial Times, March 16, 2009.
RGE Monitor: China now expected to grow by 6.5% in 2009
“The new World Bank forecast is in line with that of the IMF; the IMF downgraded their forecast of 2009 Chinese economic growth to 6.7% at the end of January.
“The Chinese government recognizes that export-led growth is not sufficient in the current economic environment. In addition to supporting its export sector – the government plans to reduce export taxes to zero – the Chinese government is focusing on the domestic economy with fiscal stimulus measures and promoting domestic consumption. The fiscal stimulus already in place (4 trillion yuan announced in November) is probably passing through to the economy, as China’s PMI increased for the third consecutive month in February.
Chinese growth is expected to improve in 2010, where the World Bank forecast is 8.0%.”
Source: Rebecca Wilder, RGE Monitor, March 18, 2009.
China Daily: Slide in reserves reported
“The Reuters report did not disclose the exact amount of declining reserves, but said the decline was partly due to the US dollar’s appreciation and withdrawal of capital by foreign companies and investors hurt by the financial crisis.”
Source: China Daily, March 18, 2009.
CEP News: Chinese entrepreneur sentiment improving, says PBOC
“According to the central bank’s first quarter entrepreneur survey results, sentiment regarding business operations is recovering. Meanwhile, bank lending levels have improved, as reflected in the sharp gain in the bank lending index, the PBOC added.
“Nevertheless, firms’ domestic and foreign orders indexes are still deteriorating, pointing to ongoing weakness in overall demand levels, the central bank said.”
Source: Todd Wailoo, CEP News, March 11, 2009.
Herald Tribune: Medvedev announces plan to rearm Russia
“In a speech before generals in Moscow, Mr. Medvedev cited encroachment by NATO as a primary reason for bolstering the military, including nuclear forces.
“Mr. Medvedev did not offer specifics on how much the budget would grow for the military, whose capabilities deteriorated significantly after the fall of Soviet Union.
“Russia has increased military spending sharply in recent years, but with the financial crisis and the drop in the price of oil, the country’s finances are under pressure, suggesting that it would be hard to lift these expenditures further.
“Even so, Mr. Medvedev’s timing was notable. He is expected to hold his first meeting with President Barack Obama in early April in London on the sidelines of the summit meeting of the Group of 20 industrialized and developing countries.”
Source: Clifford J. Levy, Herald Tribune, March 17, 2009.
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