Words from the (investment) wise for the week that was (April 20 – 26, 2009)
“Words from the Wise” this week comes to you in a shortened format as my traveling in the US precludes me from doing my customary commentary. However, a full dose of excerpts from interesting news items and quotes from market commentators is provided.
On Friday, Federal Reserve regulators have released a white paper outlining the criteria they used to assess the financial health of the nation’s 19 biggest banks. On the same day they also briefed the banks about how their companies had fared in the examination. The banks will have until Tuesday to dispute any of the results before they are made public on May 4.
According to the Financial Times, senior Fed officials said US authorities will ask some of the country’s biggest banks to raise more capital following the completion of bank stress tests. The officials also indicated that a second, larger, group of banks will be asked to improve the quality of their capital by increasing their amount of common equity.
Last week investors’ mood was also influenced by tentative signs of economic stabilization in a number of countries and a barrage of earnings reports – generally better than feared. As the equity rally ground to a halt on some bourses, the US dollar and government bonds offered little safety appeal and edged weaker. Gold, on the other hand, advanced after China revealed it has almost doubled its gold reserves since 2003. Treasury Inflation Protected Securities (TIPS) also improved on the week.
The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.
After rising for six consecutive weeks, global stock markets experienced a volatile week, including the worst losses since early March on Monday. In the end, the MSCI World Index gained 0.1% (YTD -4.1%) on the week and the MSCI Emerging Markets Index 0.7% (YTD +14.2%), but the S&P 500 Index shaved off -0.4% (YTD -4.1).
Click on the table below for a larger image.
As far as the earnings season is concerned, Bespoke indicated that 156 S&P 500 companies had reported earnings by Thursday, beating estimates in 67% of the cases. Also, so far earnings are down 16.6% versus the first quarter of 2008. While down, this is much better than the -37.3% expected at the start of the earnings season. “The earnings season still has a long way to go, but the current trend has investors optimistic,” said Bespoke.
In an attempt to cast light on the debate of whether we are dealing with a bull market or a bear market rally, William Hester (Hussman Funds) highlighted the following: “Contracting volume is not enough evidence to qualify that this is a bear-market rally with certainty. There are other measures that are showing more strength – such as various indicators of market breadth. But new bull markets, whether at their inception or soon after, have a history of recruiting noticeable improvements in volume. So far this rally lacks that important quality. Over the next few weeks stock market volume will be a metric to watch closely.”
The stock market will show its hand in due course, but it is crucial that the lows of March 9 hold in order for base formation development to remain intact. Should these levels – 677 for the S&P 500 and 6,547 for the Dow Jones – be breached, further downside movements may be in store.
For more discussion on the direction of stock markets, see my recent posts “Video-o-rama: Economy – Recovery or relapse?” and “Has stock market rally run its course?” (And do make a point of listening to Donald Coxe’s webcast of April 24, which can be accessed from the sidebar of the Investment Postcards site.)
Next, a quick textual analysis of my week’s reading. No surprises here, with key words such as “banks”, “market”, “economy”, “economic”, “government” and “prices” featuring prominently.
For a further perspective on the outlook for the global economy, also read my posts “Economic rate of decline slowing down?“, “Goldman raises China’s growth forecasts” and “Chinese economy on the rebound“.
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.)
April 20, 2009
Source: Yahoo Finance, April 24, 2009.
In addition to interest rate announcements by the Federal Open Market Committee (FOMC) (Wednesday, April 29) and the Bank of Japan (Thursday, April 30), 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, April 24, 2009.
“To find yourself, think for yourself,” said Socrates (hat tip: Charles Kirk.) And we know the stock market is a dangerous place if you don’t think rationally and know your own investment personality. Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers in crystalizing their thoughts to come up trumps with their investment decisions.
That’s the way it looks from Cape Town (or, more accurately, from beautiful Dana Point, California, for the next few days).
Financial Times: IMF puts financial losses at $4,100 billion
“The IMF said in its Global Financial Stability Report that many loans sitting on institutions’ balance sheets were eroding in value, not just the toxic sub-prime securities which first triggered the crisis.
“The IMF estimated that total writedowns on US assets would reach $2,700 billion, up from the $2,100 billion estimate it made in January and almost double what it forecast in October last year. Including loans originated in Japan and Europe, the writedowns would hit $4,100 billion, it added.
“Banks would bear about two-thirds of the losses, it said, with insurance companies, pension funds, hedge funds and others taking the rest.
“Efforts to cleanse these bad assets from balance sheets and replenish viable institutions with capital had so far been ‘piecemeal and reactive’, the IMF said, calling for more decisive government action.
“‘The current inability to attract private money suggests the crisis has deepened to the point where governments need to take bolder steps and not shrink from capital injections in the form of common shares even if it means taking majority, or even complete, control of institutions,’ it said.”
Source: Sarah O’Connor, Financial Times, April 21, 2009.
The New York Times: Regulators disclose criteria for bank “stress tests”
“In a 21-page report, the Federal Reserve regulators broadly laid out the tools they used to project bank losses if the economy worsens, and officials established an unspecified baseline to measure how much additional capital the banks should add as a buffer against higher losses. But they provided no concrete metrics to assess the depths of the troubles facing the industry or specific banks.
“Still, the Federal Reserve report suggested that regulators are focusing on the amount of capital that they want banks to hold in common stock, which makes it easier for them to absorb future losses as the recession wears on. That could force at least a handful of the 19 banks to raise significant amounts of new capital and could lead to greater government ownership stakes in the banks.
“‘Losses associated with the deepening recession and financial market turmoil have substantially reduced the capital of some banks,’ the Federal Reserve report on the stress test said. ‘Lower overall levels of capital – especially common equity – along with the uncertain economic environment have eroded public confidence in the amount and quality of capital held by some firms, which is impairing the ability of the banking system to perform its critical role of credit intermediation.’
“The stress test criteria were released as federal regulators started briefing top executives from the 19 large banks about how their companies fared on the examination. In closed-door meetings at the regional Federal Reserve Bank offices, the regulators plan to review their preliminary findings and inform bankers if they need additional capital. The banks will have until Tuesday to dispute any of the results before they are made public on May 4.”
Source: Eric Dash, The New York Times, April 24, 2009.
The New York Times: US may convert banks’ bailouts to equity share
“In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.
“Converting those loans to common shares would turn the federal aid into available capital for a bank – and give the government a large ownership stake in return.
“While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.
“The Treasury has already negotiated this kind of conversion with Citigroup and has said it would consider doing the same with other banks, as needed. But now the administration seems convinced that this maneuver can be used to make up for any shortfall in capital that the big banks confront in the near term.
“Each conversion of this type would force the administration to decide how to handle its considerable voting rights on a bank’s board.
“Taxpayers would also be taking on more risk, because there is no way to know what the common shares might be worth when it comes time for the government to sell them.
“Treasury officials estimate that they will have about $135 billion left after they follow through on all the loans that have already been announced. But the nation’s banks are believed to need far more than that to maintain enough capital to absorb all their losses from soured mortgages and other loan defaults.”
Source: Edmund Andrews, The New York Times, April 19, 2009.
Financial Times: US to put conditions on Tarp repayment
“‘Our general objective is going to be what is good for the system,’ the senior official said. ‘We want the system to have enough capital.’
“His comments come as Goldman Sachs, JPMorgan Chase and other relatively strong banks are pressing to be allowed to repay their bailout funds. On Sunday, Lawrence Summers, President Barack Obama’s top economic adviser, told NBC’s Meet the Press that repayments could eventually help the government provide further resources to help the sector. Such a move could also allow healthier institutions to differentiate themselves from weaker banks and free them from constraints on executive pay, and other activities, that come with bailout money.
“‘Not surprisingly different banks are in different situations; they are going need different levels of assistance of taxpayers,’ Mr Obama told a press conference at a summit in Trinidad on Sunday, while promising: ‘I’m not going to simply put taxpayer money into a black hole.’
“The official, meanwhile, said banks that had plenty of capital and had demonstrated an ability to raise fresh capital from the market should in principle be able to repay government funds. But the judgment would be made in the context of the wider economic interest. He said the government had three basic tests. It needed first to ‘make sure the system is stable’. Second, to not create ‘incentives for more deleveraging which would deepen the recession’. Third, to make sure the system had enough capital to ‘provide credit to support the recovery’.”
Source: Krishna Guha and Daniel Dombey, Financial Times, April 19, 2009.
Fox Business: Will banks make the grade?
Source: Fox Business, April 24, 2009.
PBS: Bill Moyers talks to Simon Johnson and Michael Perino
Source: Bill Moyers Journal, PBS, April 24, 2009.
Bill King (The King Report): Ken Lewis’s testimony
‘Immediately after learning on December 14,2008 of what Lewis described as the “staggering amount of deterioration” at Merrill Lynch, Lewis conferred with counsel to determine if Bank of America had grounds to rescind the merger agreement by using a clause that allowed Bank of America to exit the deal if a material adverse event (“MAC”) occurred. After a series of internal consultations and consultations with counsel, on December 17,2008, Lewis informed then-Treasury Secretary Henry Paulson that Bank of America was seriously considering invoking the MAC clause. Paulson asked Lewis to come to Washington that evening to discuss the matter.
‘At a meeting that evening Secretary Paulson, Federal Reserve Chairman Ben Bernanke, Lewis, Bank of America’s CFO, and other officials discussed the issues surrounding invocation of the MAC clause by Bank of America. The Federal officials asked Bank of America not to invoke the MAC until there was further consultation. There were follow-up calls with various Treasury and Federal Reserve officials, including with 2 Treasury Secretary Paulson and Chairman Bernanke. During those meetings, the federal government officials pressured Bank of America not to seek to rescind the merger agreement. We do not yet have a complete picture of the Federal Reserve’s role in these matters because the Federal Reserve has invoked the bank examination privilege…
‘On the issue of terminating management and the Board, Secretary Paulson indicated that he told Lewis that if Bank of America were to back out of the Merrill Lynch deal, the government either could or would remove the Board and management. Secretary Paulson told Lewis a series of concerns, including that Bank of America’s invocation of the MAC would create systemic risk and that Bank of America did not have a legal basis to invoke the MAC (though Secretary Paulson’s basis for the opinion was entirely based on what he was told by Federal Reserve officials).
‘Secretary Paulson’s threat swayed Lewis. According to Secretary Paulson, after he stated that the management and the Board could be removed, Lewis replied, “that makes it simple. Let’s deescalate.” Lewis admits that Secretary Paulson’s threat changed his mind about invoking that MAC clause and terminating the deal. Secretary Paulson has informed us that he made the threat at the request of Chairman Bernanke. After the threat, the conversation between Secretary Paulson and Lewis turned to receiving additional government assistance in light of the staggering Merrill Lynch losses.'”
Calculated Risk: BofA CEO – “Credit is bad, going to get worse”
“‘Let me make a couple comments about our given environment. Credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve. Whether that turn is later this year or in the first half of 2010, I’m not going to hazard a guess … For the rest of the year we look for charge-offs to continue to trend upward …”
Source: Calculated Risk, April 20, 2009.
CEP News: IMF revises down global growth estimates
“The International Monetary Fund expects the global economy to contract 1.3% in 2009, a downward revision from the previous forecast calling for a contraction of between 0.5% and 1.0%, according to its semi-annual report released on Wednesday.
“The Fund also said that in 2010 the global economy should grow 1.9% versus a previous forecast for 3% growth.
“‘This is not the time for complacency, and the need for strong policies, both on the macro and especially on the financial fronts, is as acute as ever,’ said IMF chief economist Olivier Blanchard. ‘But, with such policies in place, there is light at the end of this long tunnel. World growth can turn positive by the end of this year, and unemployment can start decreasing by the end of next year.’
“All G7 nations are expected to contract in 2009 with the US economy shrinking 2.8% in 2009, with zero growth in 2010.
“The Japanese economy is expected to contract 6.2% in 2009 and grow 0.5% in 2010, the euro zone economy is forecast to shrink 4.2% in 2009 and 0.4% in 2010, the Canadian economy is seen falling 2.5% in 2009 and growing 1.2% the following year, and the UK economy is expected to decline 4.1% in 2009 and 0.4% in 2010.
“‘These projections are based on an assessment that financial market stabilization will take longer than previously envisaged, even with strong efforts by policy-makers,’ according to Blanchard and José Viñals, head of the IMF’s Monetary and Capital Markets Department, in a joint statement.”
Source: CEP News, April 22, 2009.
BCA Research: From economic free-fall to sliding
“Our global leading economic indicator and boom/bust index have both ticked higher, albeit from historically depressed readings. Similarly, purchasing managers’ surveys and business confidence measures appear to have bottomed across the developed world, after free-falling late last year. Even last week’s release of the Fed’s Beige Book highlighted that the level of economic activity remains extremely weak, although slightly less so than the previous report.
“Still, the economy has merely shifted from falling off a cliff to sliding down a slope. The latter is certainly less terrifying and justifies the unwinding of Armageddon trades but is hardly bullish. Risk assets may continue to move higher from oversold levels over the next few weeks but sustained upside will require evidence that the spate of positive second derivative of growth indicators will turn into a meaningful recovery.
“Aggressive fiscal stimulus in most countries, combined with the potential for a positive inventory adjustment, should stabilize GDP growth in Q3 and Q4. However, an ongoing improvement in growth conditions will be reliant on fixing the global banking system and credit channels, allowing liquidity to begin flowing to the real economy. While our financial sector stress index has eased modestly, it remains extremely elevated. Similarly, bank lending surveys have improved but standards are not yet easing.
“Bottom line: Policymakers will need to continue acting aggressively for the recovery in risk assets to persist. We are positioned modestly in favor of reflation but prefer taking bets in fixed income spread product rather than equities due to relative value and a better yield pickup in case a sustainable upleg takes time to develop.”
Source: BCA Research, April 24, 2009.
Nouriel Roubini (Rediff News): End of economic gloom?
“The emerging consensus among economists is that growth next year will be close to the trend rate of 2.5%.
“Investors are talking of ‘green shoots’ of recovery and of positive ‘second derivatives of economic activity’ (continuing economic contraction is the first, negative, derivative, but the slower rate suggests that the bottom is near).
“As a result, stock markets have started to rally in the US and around the world. Markets seem to believe that there is light at the end of the tunnel for the economy and for the battered profits of corporations and financial firms.
“This consensus optimism is, I believe, not supported by the facts. Indeed, I expect that while the rate of US contraction will slow from -6% in the last two quarters, US growth will still be negative (around -1.5 to -2%) in the second half of the year (compared to the bullish consensus of +2%).
“Moreover, growth next year will be so weak (0.5 to 1%, as opposed to the consensus of 2% or more) and unemployment so high (above 10%) that it will still feel like a recession.
“In the euro zone and Japan, the outlook for 2009 and 2010 is even worse, with growth close to zero even next year. China will have a more rapid recovery later this year, but growth will reach only 5% this year and 7% in 2010, well below the average of 10% over the last decade.
“Given this weak outlook for the major economies, losses by banks and other financial institutions will continue to grow. My latest estimates are $3.6 trillion in losses for loans and securities issued by US institutions, and $1 trillion for the rest of the world.”
Click here for the full article.
Source: Nouriel Roubini, Rediff News, April 15, 2009.
Alan Abelson (Barron’s): Don’t bank on it
“He points out that the two groups that paced the sharp upswing were financials and consumer cyclicals, in which there are, respectively, net short positions of 5 billion and 2.7 billion shares. Which strongly suggests that not an insignificant part of the rally has been provided by shorts running for cover.
“He also points out that the Russell 2000 small-cap index is up 36% since the March low, and has outperformed the S&P by some 980 basis points. As David says, ‘the last time it pulled such a massive rabbit out of the hat’ was in the stretch from late November to early January, and the major averages proceeded to make new lows two months later.
“Another amber light he spots is investor confidence. Over the past five weeks, he reports, Rasmussen, which takes a daily reading, has seen its investor-confidence index surge 32 points, an unprecedented climb in so short a span. This could be, he suspects, a ‘fly in the ointment for a sustained equity-market rally’.
“David has four markers that will signal to him that the economy is finally making the turn and starting an extended expansion. The first is home prices. The second is the personal-savings rate. Marker No. 3 is the debt-service ratio, and No. 4 is the ratio of the coincident-to-lagging indicators of the Conference Board.
“Aggregating those four markers, he calculates that we are roughly 44% of the way through the adjustment process. That is a tick up from where we were last month. However, the improvement, he laments, has been very modest and very slow.
“We should add that he also stresses that it’s critical for both the economy and the market that payrolls stop shrinking. All the talk about jobless claims “stabilizing” is so much poppycock, he snorts. That number of claims, he notes, is still consistent with monthly payroll losses of around 700,000. As with industrial production, which is also in a vicious slump, employment must stop falling before a recession typically ends.
“‘Call us when claims fall below 400,000,’ he says, which is his estimate of ‘the cut-off for payroll expansion/contraction’.
“Until then, he warns, ‘the recession will remain a reality. Rallies will be brief, no matter how violent, and green shoots are a forecast with a very wide error term attached to it.'”
Source: Alan Abelson, Barron’s, April 18, 2009.
Barry Ritholtz (The Big Picture): The (false) glimmer of hope
“Excerpt: ‘But, welcome as it is, optimism contains two traps, one obvious, the other more subtle. The obvious trap is that confidence proves misplaced – that the glimmers of hope are misinterpreted as the beginnings of a strong recovery when all they really show is that the rate of decline is slowing. The subtler trap, particularly for politicians, is that confidence and better news create ruinous complacency. Optimism is one thing, but hubris that the world economy is returning to normal could hinder recovery and block policies to protect against a further plunge into the depths.'”
Source: Barry Ritholtz, The Big Picture, April 23, 2009.
Horowitz & Company: Recessions – past and present
Source: Horowitz & Company, April 2009.
Asha Bangalore (Northern Trust): Leading Index – continues to send message of weak economic conditions
“The main message is that the LEI continue to point to weak economic conditions in the near term. More is required to declare that the economy is out of the woods.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 20, 2009.
Asha Bangalore (Northern Trust): Chicago Fed National Activity Index shows a noteworthy improvement
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 20, 2009.
Asha Bangalore (Northern Trust): House Price Index points to moderation in pace of decline
“Two out of three house price indexes appear to have established a tentative bottom. The New York Times (For Housing Crisis, the End Probably Isn’t Near) story suggests that additional price declines, probably of a large magnitude, are likely in the near term. The elevated level of inventories of unsold homes and the weakness in employment conditions support the conclusion of the article. However, we should bear in mind that other sectors of the economy are showing preliminary signs of stabilization that could translate into a recovery given the historical size of the monetary and fiscal policy stimulus put in place.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 22, 2009.
Asha Bangalore (Northern Trust): Sales of existing homes appear to be stabilizing at a low level
“The seasonally adjusted inventory-sales ratio for existing single-family homes rose slightly to a 9.6-month supply mark in March from a 9.5-month supply in the earlier month. This ratio appears to have peaked in November 2008 (11.3 month supply) and has since moved in a narrow range between 9.96 months and 9.53 months.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 23, 2009.
Asha Bangalore (Northern Trust): New home sales appear to be stabilizing
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 24, 2009.
Asha Bangalore (Northern Trust): Initial Jobless Claims erase part of the improvement seen in recent weeks
“Continuing claims, which lag initial claims by one week, advanced 93,000 to 6.137 million, a new record. The insured unemployment rate rose to 4.6% from 4.5% in the previous week. The insured unemployment rate has risen one percentage point in a short span of 10 weeks which has occurred only on two other occasions. The jobless claims report presents a serious challenge to policymakers.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 23, 2009.
Casey’s Charts: Pouring fuel on the fire
“After pumping $350 billion worth of freshly printed dollars into the system, they’ve succeeded in forcing mortgage rates to near historic lows. Great news for homeowners able to refinance; yet new home sales remain stagnant.
“There’s no telling when the housing market will stabilize. But the Fed is certain to continue fueling the fire with cheap money until recovery signs appear.”
Source: Casey’s Charts, April 21, 2009.
Bloomberg: Zero percent on Treasury Bills as China, Fed converge
“Rates on three-month bills turned negative in December for the first time since the government began selling them in 1929 as investors sacrificed returns to preserve principal. After increasing at the start of the year, rates have dropped 0.20 percentage point since the beginning of February to 0.13%.
“Demand for bills is rising again because investors including foreign central banks are snapping up the shortest-term US securities as the Federal Reserve buys Treasuries to drive down borrowing costs in a policy of so-called quantitative easing. China, the largest US creditor, with $744 billion of debt, has questioned the practice and shifted purchases to bills from longer-maturity securities.
“‘There’s a group of investors out there who are looking at what the Fed is doing and the policy action they’ve taken and the asset purchases, and saying ultimately this is inflationary,’ said Stuart Spodek, co-head of US bonds in New York at BlackRock. ‘You’re going to invest in very short-term bills because you absolutely need not just the quality but also the absolute liquidity.’
“China bought $5.6 billion in bills and sold $964 million in US notes and bonds in February, according to Treasury data released April 15. It was first time since November that China purchased more bills than longer-maturity debt.”
“While Treasury depends on China to fund the deficit, exports account for about 40% of gross domestic product for the world’s most populous nation. China’s exports to the US jumped 40% in March after slumping for five consecutive months.
“‘China and the US have a symbiotic relationship,’ said Win Thin, a senior currency strategist in New York at Brown Brothers Harriman & Co. ‘We need each other.'”
Source: Daniel Kruger, Bloomberg, April 20, 2009.
SmartMoney: Could municipal bonds really default?
“Traditionally, muni bonds offered lower yields – usually about 20% less – than Treasury bonds, since their income isn’t taxed. But the group was crushed last year, sending prices down and yields up. Now bargain hunters have started to emerge, attracted by yields that are as much as 70 basis points, or 0.7%, more than similar 10-year Treasurys, for example. As a result, the S&P Muni Index has climbed 7% this year, compared with the nearly 6% decline in the broader stock market.
“These low prices reflect investor concerns about possible downgrades, says Daniel Solender, director of municipal bond management at Lord Abbett. The Federal Reserve’s buying spree in other areas of the bond market is also depressing yields of Treasury bonds and making municipal bonds all that more attractive. And then there is the $100 billion fiscal stimulus headed toward the states that should help offset the shortfall in tax revenue, says TD Ameritrade Chief Investment Strategist Stephanie Giroux, who adds that historically there has only been a 1% default rate for muni bonds.”
Source: Reshma Kapadia, SmartMoney, April 23, 2009.
Bespoke: Muni Bond ETF makes a comeback
Source: Bespoke, April 24, 2009.
David Fuller (Fullermoney): Clues to stock market outlook
“However, there are many technical clues along the way. The first, specific to Western stock markets, is that tech-weighted indices such as Sweden’s OMX and the USA’s Nasdaq 100 did not break to new lows in February and March. Tech is often a lead indicator. The second clue is the number of downside failures which occurred with weaker indices. Third is the orderly and persistent six-week rally which tested the previous rally high in some although not all of these indices – Germany’s DAX, for instance and the S&P 500 got close to that 880 level which we have often mentioned in the past.
“There were enough downward dynamics yesterday [Monday] to suggest that reactions and consolidations were commencing in response to the short-term overbought conditions previously mentioned. If so, and if Western stock market indices hold at least half of their gains since the March lows during this pause, which could last for a number of weeks, and then move to new recovery highs, the bear market pattern of lower rally highs followed by new lows will have been broken. There is also a possibility that indices only hover near current levels for a short while before extending their rallies. If so, many would break their previous rally highs, providing a fourth clue by these indices that their bear market was over.
“I remain reasonably optimistic because we have already seen a bullish lead from many favoured Fullermoney themes, led by China and Brazil among the bigger capitalisation emerging markets, as mentioned so often in recent months.
“Meanwhile, all stock market indices show varying degrees of the ranging, base building reversion to the mean (the latter is represented by the 200-day MAs) which this service has been forecasting since the selling climax in late October and November. Consequently, downside risk, even for the weakest stock markets, currently looks to be no worse than base formation extension, consistent with the long convalescence also forecast.”
Source: David Fuller, Fullermoney, April 21, 2009.
Richard Russell (Dow Theory Letters): Are we in a bear market rally or a new bull market?
“(2) At the March lows, we did not see the ‘great values’ that usually accompany major bear market bottoms (i.e. P/E’s in the 5-8 area, average dividend yields of 5-6%).
“(3) The market was severely oversold at the March lows, a condition that often sets off a ‘relief’ (‘let off the pressure’) rally. The advance was probably triggered by the severely oversold condition of the market.
“(4) The one thing a money-manager cannot afford to do is be on the sidelines during ‘what could be’ a major rally. Once the market started up from the March 9 low, many money managers leaped in. The big short positions were immediately squeezed. The rise became a momentum advance. Retail buyers moved in, many trying to retrieve some of their brutal losses.
“(5) The rally moved up ‘too fast’ – action more typical of a bear market rally than the slow, plodding rise that is characteristic of the advance in a new bull market.
“(6) Two groups that led the rally were Financials and Consumer Cyclicals. Interestingly, these two groups contained respectively 5 billion and 2.7 billion shares sold short. This suggests strongly that a significant part of the rally was fired up by short-covering in these two groups (thanks Alan Abelson for this information).
“(7) Many investors and analysts turned optimistic after the market had rallied for only a few weeks. At true bear market bottoms, investors remain stubbornly sceptical or bearish for months after the bottom. Remembering 1974, people were actually angry when I turned bullish at the bottom. I was receiving hate letters and subscription cancellations.
“All of the above have kept me skeptical and cautious about this rally.”
Source: Richard Russell, The Dow Theory Letters, April 20, 2009.
Eoin Treacy (Fullermoney): Stock markets are vulnerable to a pullback
“Markets such as the Dow Jones Industrial or the FTSE 100 rallied well over the last six weeks but only managed to push partly back into their previous ranges. Taking the performance of leading global stock indices into account, we can probably deduce that they are in the bottoming process. However, the case that they have hit their absolute lows is much less clear than for the leading markets.
“‘Buy and hold’ is a suitable strategy for when relatively consistent uptrends have been established. These are not present in the lagging markets and it is too early to say with the leading markets. The conditions will be more suitable for such a strategy when the 200-day moving average has turned upwards and indices find support near it on downward reactions within their uptrends. However, let us not forget that the conditioning process of the bear market will influence or ability to stay with uptrends once they get going.
“… the Dow Jones World Stock Index has not reverted to its mean in the same way that some of the leading markets have. This supports the lengthy convalescence hypothesis for lagging markets. This index is capitalization weighted and heavily influenced by US shares, particularly in the oil and banking sectors. Neither of these is currently leading.
“As for the S&P 500, one could have argued that the rally from the November low was a failed break. However, the index was unable to sustain the initial rally and the progression of lower highs remained in place. It broke downwards again in February and made a new low. On this occasion, the rally has been larger and the Index is pressuring the progression of lower highs so an argument can again be made for a failed downside break. However, we have quoted 880 as an important level for the S&P for a number of months. It continues to need a sustained push above this level to reaffirm support from the lows.”
Source: Eoin Treacy, Fullermoney, April 20, 2009.
Bloomberg: S&P 500 will rise to 1,100 this year, Leuthold says
“Leuthold, 71, who helps manage $3.2 billion as founder of Minneapolis-based Leuthold Weeden Capital Management, said most investors should have 65% of their assets in stocks.
“‘This market was about as cheap as I’ve seen in my 45 years in this business,’ Leuthold said in a Bloomberg Television interview today. ‘We’re probably going to see the economy start turning upward, not now but toward the end of the year. The market is a lead economic indicator, so the time clock is about right for the market to turn up.’
“Leuthold also said that financial shares won’t be the stock market’s leaders. He favors technology and biotechnology companies and advised investors to avoid ‘defensive’ consumer shares and utilities.
“‘Investors should start buying gold over the next year or so because of the threat of inflation,’ Leuthold said. He started buying the precious metal three weeks ago.”
Source: Rita Nazareth and Erik Schatzker, Bloomberg, April 14, 2009.
Bespoke: Q1 earnings growth better than expected so far
“On the downside, the Industrial sector is the only one where actual earnings have come in weaker than expected. Earnings season still has a long way to go, but the fact that growth has come in better than expected thus far has been one factor driving the market higher.”
Source: Bespoke, April 22, 2009.
Bespoke: Earnings season beat and miss rates
“At the start of earnings season, more companies were missing estimates than beating, however, this trend has changed significantly as the bulk of reports have come in this week. At the end of last week, 50% of US companies had beaten estimates, and this number has increased every day this week to its current level of 57%. Last quarter only 55% of companies beat estimates, so if we begin to see the ‘beat rate’ increase quarter over quarter instead of decrease, it will be a positive sign for the market.
“And stocks within the S&P 500 are reporting even better numbers. Again, after a slow start, the current ‘beat rate’ for the 156 S&P 500 companies stands at 67%. Earnings season still has a long way to go, but the current trend has investors optimistic.”
Source: Bespoke, April 23, 2009.
Bespoke: Retail stocks show relative strength
Source: Bespoke, April 21, 2009.
Casey’s Charts: SPDR Gold Shares growing rapidly
Source: Casey’s Charts, April 23, 2009.
Vitaliy Katsenelson (Contrarian Edge): Who’s going to buy gold?
“Gold is one of those weird assets where nobody knows what it is really worth. You cannot run discounted cash flow analysis to value it – it has no cash flows. It is an asset where perception and reality are deeply intertwined.
“Investors buying the gold ETF (GLD) are influencing the price of gold which is fair for the most part as otherwise they’d be buying the real thing. Though of course the ease of buying GLD creates a slightly higher artificial demand, but still it is fair game.
“The violent sell off in GLD will drive the prices of gold down dramatically unless a real buyer steps in (like another government sick of owning the US debt for instance) and the gold price could get cut in half overnight. Suddenly perception of not being a store of value will create a reality of gold not being a store of value. The gold game will be over.”
Source: Vitaliy Katsenelson, Contrarian Edge, April 18, 2009.
Guardian: Zimbabwe’s central bank raided private accounts to prop up ministries
“In a statement that would be unthinkable coming from most central banks, the governor of the Reserve Bank, Gideon Gono, appeared to be issuing a plea to keep his job in the face of growing criticism.
“Gono said it was time ‘to let bygones be bygones’ now that Zimbabwe has a new coalition government dedicated to reversing its economic decline.
“The central banker said he gave the money he took from the hard currency accounts as loans to various ministries, and the private accounts would be reimbursed when the ministries repaid the loans. He said the bank’s efforts ‘sustained the country’ in its hour of need.
“Gono’s statement showed the practice was widespread. It was first hinted at last year, when the international aid agency Global Fund threatened to cut off funds to Zimbabwe for fighting Aids, tuberculosis and malaria unless money taken from its account was returned. The central bank returned $7.3 million to Global Fund.
“The raiding of foreign currency accounts is just one of the highly questionable actions for which Gono has been sharply criticised.
“In the last two years, Gono has slashed 25 zeros from the local currency, printed more local money without backup reserves or assets and distributed agricultural equipment to many in President Robert Mugabe’s party who were given farms seized from white people.”
Source: Guardian, April 20, 2009.
Barron’s: Jim Rogers isn’t buying a US stock recovery
Q: When you last did a lengthy interview with Barron’s magazine a year ago you were lightening up on emerging markets investments. Well, you called that one right. But now that many of those markets have fallen from their highs of recent years, are you more optimistic?
A: No. I’ve sold all emerging markets stock except the ones in China. I bought more Chinese shares in October and November during the panic, but I have not bought China or any other stock markets including the US since then. I’m not buying anything in China right now because the Chinese market ran up maybe 50% since last November. It’s been the strongest market in the world in the past six months and I don’t like jumping into something that has been that run up. Still, I’m not thinking of selling these stocks either. I think if it goes down I’ll buy more. I think you will find that it’s the single strongest market in the world since last fall.
Q: That being said, you currently think Chinese stocks are bid-up now, so you’re not buying at these levels. So what have you been buying lately?
A: I have been buying commodities through the Rogers commodity indexes I developed because my lawyer won’t let me buy individual commodities. I recently bought all four Rogers indexes – the Elements Rogers International Commodities Index (ticker:RJI) as well as the three specialty indexes, the International Metals (RJZ), the International Energy (RJN), and the International Agriculture (RJA.) That’s how I invest in commodities and that’s what I bought last week. I have been buying these shares since last fall and up to last week.
Q: Now despite the recent stock-market rally that started in March, many US stocks are trading well off their 2007 highs. How come you see no value to this market?
A: I am not buying US companies mainly because I think we may have seen a bottom but I don’t think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.
Q: Can you summarize the reasons for your bullishness about commodities?
A: It depends on the supply and demand. And we have had a dearth of supply. Nobody has invested in productive capacity for 25 or 30 years now. The inventories of food are the lowest they have been in 50 years and you have a shortage of farmers even right now because most farmers are old men because it has been such a horrible business for 30 years. And as for metals, nobody can get a loan to open a mine as you know. Who is going to give you money to open a zinc mine? It takes at least 10 years to open a mine so it’s going to be 15 or 20 years before we see new mines come on. Nobody has been opening mines for 30 years and they are not going to. And in the meantime reserves are declining. As for oil, the International Energy Agency came out recently with a study showing that oil reserves worldwide were declining at the rate of 6% or 7% a year.
That does not mean that if suddenly the US goes bankrupt that everything won’t collapse in price. But I would rather be in commodities because it’s the only thing I know where the fundamentals are improving. They are not improving for Citibank or General Motors but the supply situation in commodities is such that when demand comes back, then commodities are going to be the best place to be in my view.”
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Source: Barron’s, April 20, 2009.
Bespoke: Baltic Dry Index on 9-day winning streak
Source: Bespoke, April 24, 2009.
Bespoke: Bespoke’s commodity snapshot
“As shown, after reaching overbought territory a few weeks ago, oil has pulled back to just above the middle of its trading range. After trending higher since last October, gold and silver have recently moved to the bottom of their trading ranges, but they bounced nicely off of oversold territory a couple days ago. Platinum has held up better than gold and silver and is closer to the top of its trading range than the bottom.
“Not shown, copper continues to trend higher, along with orange juice, while corn, wheat, and coffee are in a sideways trading pattern.”
Source: Bespoke, April 23, 2009.
Financial Times: China reveals big rise in gold reserves
“Gold rose to a three-week high of more than $910 an ounce after Hu Xiaolian, head of the secretive State Administration of Foreign Exchange, which manages the country’s $1,954 billion in foreign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.
“The news could spark interest in gold among other central banks. ‘When the largest holder of foreign exchange reserves discloses an increase in gold holdings, other countries may decide to think more carefully about underweight gold positions,’ said John Reade, a precious metals strategist at UBS.
“The increase in China’s gold reserves has come primarily from domestic production and refining. However, the news raises questions about the future of Beijing’s foreign reserves policy.
“Ahead of the G20 summit in London this month, China suggested global reliance on the US dollar as a reserve currency should be reduced.
“China has been diversifying away from the dollar since 2005, when it broke the renminbi’s peg to the US currency and officially marked it to a basket of currencies, but it still holds more than two-thirds in US dollar-denominated assets by most estimates.
“As its trade surplus and forex reserves ballooned in recent years, Beijing continued to buy huge amounts of US Treasury bonds while raising the proportion of purchases it allotted to other currencies and to gold.
“‘China’s announcement signals a broader shift in central banks’ attitude towards gold,’ said Philip Klapwijk, chairman of GFMS, the precious metal consultancy.”
Source: Jamil Anderlini and Javier Blas, Financial Times, April 24, 2009.
Eugen Weinberg (Commerzbank): Copper rallies too soon
“He notes three main points put forward by market bulls.
“First, signs of a stabilising economic environment justify a cyclical recovery in base metal prices; second, purchases by China’s State Reserve Bureau will prevent a strong decline in demand; third, London Metal Exchange copper inventories have declined sharply, and falling inventory levels normally point to a market tightening.
“But Mr Weinberg believes an improvement in the economic situation is still uncertain. ‘And even if sentiment indicators have sustainably turned round, previous economic cycles have not seen a recovery in base metal prices right after sentiment has bottomed.’
“He also believes that the purchases by the SRB in China can only support prices in the short term. ‘Given that its strategic stockpiling effort is at an advanced stage, the SRB will gradually withdraw from the market during the coming weeks. The shrinking LME inventories, especially in warehouses in Asia, reflect the strong Chinese import-driven pull.
“‘We therefore expect a significant correction in the copper price during coming weeks – although this might be delayed by rising interest from financial investors.'”
Source: Eugen Weinberg, Commerzbank (via Financial Times), April 23, 2009.
Reuters: Boone Pickens sees oil at $75/bbl at end-year
“Pickens said about OPEC producers: ‘They told you they want $75 by the end of the year, I would count on that, I believe them.’
“OPEC has scaled back output to help support crude prices, which have dropped from record highs over $147 a barrel in July to around $47 a barrel on Monday.
“‘I think you are going to clean up the stocks because the people who have the oil are cutting supply,’ Pickens said at an alternative fuels and vehicles conference, referring to the nearly 19-year high on US inventories of crude oil reported last week by the federal government.
“The United States would likely burn through its supply overhang in three months, he told reporters.”
Source: Reuters, April 20, 2009.
CEP News: Euro zone PMIs hit six-month highs, suggesting economic stabilization may be in sight
“According to advance estimates, the euro zone manufacturing purchasing managers index hit a six-month high of 36.7 in April, beating expectations of a 34.7 print.
“The services PMI also reached its highest level in six months, rising to 43.1 in April, up 1.7 points from the forecasted figure and up 2.2 points from March’s level.
“Taking both the manufacturing and services PMIs together, Markit noted that the composite PMI jumped by a record 2.2 points to a six-month high of 40.5 in April, up from both the 38.9 print expected and the previous month’s 38.3 reading.
“The improvements were widespread in the month, Markit said, noting that declines in new business and backlogs of work had eased sharply. Furthermore, the ratio of new orders to stocks rose to its highest level since August, hinting at good news to come regarding future output, Markit said.
“However, employment levels continued to contract, falling at record speeds as companies adjusted to weakening demand, the report said.
“Despite the strong gain in the PMI figures, Markit senior economist Chris Williamson warned against being overly optimistic.
“‘The ongoing severity of the situation should not be underestimated,’ he said ‘The latest numbers are still consistent with a double-digit annual rate of decline of manufacturing output and a quarterly rate of contraction of GDP of at least 0.5%.'”
Source: CEP News, April 23, 2009.
CEP News: ZEW headline figure rises to 2-year high on strong German investor optimism
“According to the ZEW, the German economic sentiment indicator rose to +13.0, overshadowing both the +2.0 reading expected and March’s -3.5 level. However, the research firm was quick to add that the headline figure still remains significantly below its long-term average of 26.1 points.
“In a report issued on Tuesday, the ZEW noted that sentiment likely benefited from recent government stimulus packages, as well as easing inflationary pressures and the improving economic outlook in both the US and China
“‘Along with other indicators, the ZEW sentiment indicator reveals that there are well-founded expectations that the downward dynamics of the business cycle are bottoming out,’ ZEW President Dr. Wolfgang Franz said. ‘It is even becoming more likely that the economy will slowly recover in the second half of this year.'”
Source: CEP News, April 21, 2009.
Ifo: Rise in the Ifo Business Climate Index
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Source: Ifo, April 24, 2009.
Financial Times: Darling “flying on a wing and a prayer”
Source: Financial Times, April 23, 2009.
CEP News: UK plans to borrow £703 billion over five years to fight recession
“Presenting the fiscal 2009 budget on Wednesday, UK Chancellor of the Exchequer Alistair Darling said the UK economy is expected to contract 3.5% in 2009 and grow 1.25% in 2010.
“To counteract large declines in employment, the UK is proposing to spend an additional £1.7 billion to create jobs and provide guarantees for the unemployed over a period of 12 months. The initiative applies to persons under the age of 25 and is expected to support 250,000 jobs.
“On housing, the UK plans to guarantee asset-backed securities and extend mortgage support to people who lost their jobs, and extend the stamp tax duty holiday on homes worth up to £175,000 until the end of the year. The budget also allots £500 million in aid to homebuilders.
“Also included is an automobile scrapping agreement that will offer a £2,000 discount to those trading in used cars for new ones. The initiative will be in place until March 2010.
“The budget also allots £750 million to set up a strategic investment fund.
“The UK’s Debt Management Office will issue £220 billion in gilts over the 2009-2010 fiscal year to finance £175 billion in public borrowing. Total borrowing is projected to decline to £97 billion by 2013-2014.
“Public borrowing will total 11.9% of GDP in 2010, said Darling, who wants to cut the current budget deficit in half over the next four years.”
Source: Erik Kevin Franco, CEP News, April 22, 2009.
CEP News: UK house prices post three-month winning streak
“House prices climbed 1.8% in April to an average price of £222,077. A month earlier, house prices had increased 0.9% to an average price of £218,081.
“On an annual basis, house prices are down 7.3% in April, better than March’s 9.0% decline.
“Although the news bodes well for the Island Nation who’s housing sector was hard-hit by the financial crisis, house prices in London plunged 3.2% month-over-month in April, reversing a 3.1% gain the month prior. This resulted in an annual decline of 4.1% versus the 1.8% contraction seen in March.”
Source: CEP News, April 19, 2009.
Financial Times: Japan to issue $110 billion bonds for stimulus
“The bonds will fund the bulk of the government’s $154 billion stimulus plan and will bring its expected total new issuance for the fiscal year starting this month to a record Y44,100 billion, a 33% rise on last year.
“This comes as governments around the globe are taking on record debt levels to bail out loss-making banks and bolster economies as they attempt to spend their way out of the downturn.
“The US is expected to issue about $2,000 billion in the fiscal year starting last October, more than double last year. The eurozone governments are set to raise €800 billion ($1,050 billion) this calendar year, 23% up on 2008.
“The UK government in Wednesday’s annual Budget statement is expected to announce plans to issue £180 billion ($270 billion) in the 2009/10 financial year, a 25% rise on last year’s record levels.
Source: Lindsay Whipp, David Oakley and Michael Mackenzie, Financial Times, April 21, 2009.
2 comments to Words from the (investment) wise for the week that was (April 20 – 26, 2009)
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