Words from the (investment) wise for the week that was (April 27 – May 3, 2009)
“Goodbye safe havens, hello risky assets.” This was the refrain of investors’ theme song during the past week. Safe-haven assets were out of favor as better-than-feared corporate earnings and signs of a budding economic recovery emboldened investors’ appetite for reflation trades such as equities and commodities.
Investors’ sentiment improved notwithstanding a number of influences that could potentially disturb financial markets. These included a three-day delay in the release of the stress test results of the 19 biggest US banks until May 7, the plight of the beleaguered US automakers with General Motors (GM) proposing a sweeping debt-for-equity restructuring and Chrysler filing for Chapter 11 bankruptcy protection, and fears of an escalation in the number of swine flu (H1N1) cases.
As to be expected given the countless catalysts, the past week’s trading was bumpy, but the major global stock market indices nevertheless managed to resume their eight-week rally. Further testimony of investors’ zest for risky assets came from the following:
• a solid performance by crude oil, base metal and agricultural commodities (with the exception of pork bellies and lean hogs – despite the fact that humans cannot contract swine flu by eating pig meat)
• tighter credit spreads (especially high-yield corporate bonds)
• a jump in Treasury Note yields to levels last seen in November
• a decline in the US dollar and Japanese yen as traders switched to high-yielding currencies such as the Australian dollar, New Zealand dollar and South African rand (all resource-linked currencies)
The performance of the major asset classes is summarized by the chart below, expanded to now also include Treasury inflation-protected securities (TIP) and investment grade (LQD) and high-yield corporate bonds (HYG).
Marking eight straight weeks of gains, the MSCI World Index advanced by 1.6% (YTD -2.6%) on the week, the MSCI Emerging Markets Index by 2.3% (YTD +16.9%) and the Nasdaq Composite Index by 1.5% (YTD +9.0%) – the Nasdaq’s longest advance since December 1999. After recording declines during the prior week, the Dow Jones Industrial Average (+1.7%; YTD -6.4%) and the S&P 500 Index (+1.3%; YTD -2.8%) also added to the gains notched up since the rally commenced off the March 9 lows.
Global indices also celebrated solid gains for calendar month April, with the MSCI World Index (+10.9%) recording its top monthly advance since January 1987 and the MSCI Emerging Markets Index (+16.3%) its strongest monthly showing since December 1993. The S&P 500 (+9.4%) had its best month since March 2000, placing the Index in the middle of its top 20 monthly gains since 1950.
Click on the table below for a larger image.
Using four-day performances for markets that were closed for the May Day (International Workers’ Day) holiday on Friday, returns around the world ranged from top performers Indonesia (+8.7%), Ireland (+8.4%), Greece (+8.1%), the Czech Republic (+6.9%) and Turkey (+6.7%) to Luxembourg (-4.7%), Bulgaria (-4.0%), Malta (-2.7%), Macedonia (-2.6%) and Oman (-2.5%), which experienced selling pressure. The Mexican Bolsa Index surprised by only declining 3.0% amid swine flu fears. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)
By the end of last week, more than 70% of the companies in the S&P 500 Index had reported first-quarter earnings. According to Bespoke, the Index’s annual decline in earnings (Q1 ’09 versus Q1 ’08) on Friday was of 32.3%. This compares with analysts’ estimates of -37.4% at the start of the earnings season. Also, as shown in the graph below, the percentage of companies beating earnings estimates has been rising steadily during the reporting period to 62% on Friday. ”With three quarters of companies having already reported, this earnings season is shaping up to be one of the best in years,” said Bespoke.
John Nyaradi (Wall Street Sector Selector) reports that the strongest exchange-traded funds (ETFs) on the week were the Market Vectors Coal (KOL) (+15.1%), iShares MSCI Taiwan Index (EWT) (+13.8%) and Claymore US-1-The Capital Markets Index (UEM) (+11.4%). On the other end of the performance scale the SPDR KBW Bank (KBE) (-6.1%), PowerShares Active US Real Estate (PSR) (-5.8%) and Vanguard Extended Duration Treasury Index (EDV) (-5.7%) performed poorly.
For April, the “ETF of the Month” was the iShares Dow Jones Real Estate Fund (IYR) that gained +22.6%. Click here for a chart.
An interesting analysis on country ETFs was published by Bespoke last week, specifically indicating that markets around the world are extended into overbought levels from their normal trading ranges. Click here for the study.
On the credit front, the cost of buying credit insurance for US and European companies eased during the past week, as shown by the narrower spreads for both the CDX (North American, investment grade) Index (down from 175 to 163) and the Markit iTraxx Europe Index (down from 153 to 139).
Another indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.
Source: I-Net Bridge
The quote du jour relates to the stress test and belongs to Bill King (The King Report), who said: “A major problem with the ‘stress test’ is it depends on modeling and it’s the precise practice responsible for much of this economic and financial mess. It’s extraordinary that so many people believe that the Fed and Treasury, after missing the financial disaster, housing debacle, recession and derivative implosion, can now extrapolate economic conditions and resultant financial effects from its models. How did all that rocket-science modeling for subprime defaults and securitization workout? Yet many people already forget or ignore this reality.”
Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “market”, “stock”, “economic”, “economy”, “bank” and “financial” again featured prominently. Let’s hope “flu” does not stake its claim among the dominant words over the next few weeks.
But back to the stock market. In order to gather some perspective on the current stock market rally, Chart of the Day highlighted the duration (calendar days) and magnitude (percentage gain) of all significant Dow rallies that occurred during the 1929-1932 bear market (solid blue dots). By means of illustration, the bear market rally that began in October 1931 lasted 35 calendar days and resulted in a gain of 35%. “… the current Dow rally (hollow blue dot labeled ‘You are here’) is slightly below average in both duration and magnitude relative to the average 1929-1932 bear market rally (hollow red dot),” said Chart of the Day.
Source: Chart of the Day, May 1, 2009.
As shown in the table below, the 50-day moving averages have been cleared comfortably by all the major US indices and the early January highs are the next important targets. As a matter of fact, the Nasdaq Composite Index is already above this level. It has to rise by a further 2.1% in order to reach the key 200-day moving average – an indicator often used to distinguish between primary bull and bear markets. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to remain intact.
Two S&P 500 sectors – Consumer Discretionary (XLY) and Technology (XLK) – have actually just broken above their 200-day moving averages. Bespoke said: “This … signals the end to a long-term downtrend and the confirmation of an uptrend. It’s also a positive for the overall market that two cyclical sectors (one that is extremely tied to the consumer) are the first ones to break above their 200-days.”
Still talking technical analysis, Kevin Lane of Fusion IQ said: “The S&P 500 Index had stalled at the 878 level on three separate occasions over the past five months. However, prices then subsequently gave way to profit-taking and closed back below that level. Only a close above that level would open the way to higher prices.
“On the sentiment front, the CBOE Equity Put/Call Ratio, the AAII Bearish Sentiment Survey and the VIX’s deviation from its 50-day moving average have all moderated from constructive levels to more neutral levels. … these indicators are not at levels that would suggest sentiment is overly bullish yet, but their deterioration is enough cause for concern that a corrective wave may occur.”
“All the things are in place for the bear market to have ended,” Anthony Bolton, president of investments at Fidelity International in London, said in an interview with Bloomberg Television. “When there’s a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I’d like to bet against that.”
Remaining across the pond, David Fuller (Fullermoney) put matters in context as follows: “Base formations, confirming not only the ending of a bear market but the beginning of a new bull market, come in all shapes and sizes. The leading stock markets, which generally have better fundamentals, usually form smaller bases before commencing their uptrends, as we have seen with China and a number of other emerging markets from Asia to South America. Fundamentally weaker markets, such as the US and most of Europe, require a longer convalescence before a significant recovery occurs. This explains the new lows in late February and early March.
“This impressive rally is overextended in the short term, so we can expect it to spill over into a reaction and consolidation before long. The recent uptrend consistency will be followed by some choppy action as legitimate fundamental concerns remain.”
The last (cautionary) word goes to Richard Russell, writer of the Dow Theory Letters newsletter: “On the bear market decline, we never saw the great values that usually appear at major bear market bottoms. The ‘great value’ area is the place where I would normally suggest that investors load up with blue-chip stocks. For this reason, I would prefer waiting out this rally or making a limited trade with DIAs [Dow Diamonds ETF] with stops. I continue to believe this is an upward correction in an ongoing primary bear market. I note that many observers are saying that ‘this is a market that won’t go down’. Believe me, all markets go up – and all markets go down.”
And here is the venerable R man taking the bull by the horns!
For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Investors “look past the valley“, “Sell in May and go away: Fact or fallacy?” and “Donald Coxe – Investment recommendations (April 2009)” (And also make a point of listening to Coxe’s webcast of May 1, which can be accessed from the sidebar of the Investment Postcards site.)
Although it is premature to conclude that the global recession is ending, a number of indicators, compiled by US Global Funds, could signal better times ahead.
• The inflation-adjusted inventory component of US GDP dropped by more than $100 billion in the first quarter of 2009. This figure represents nearly 1% of GDP. Such drops in the past have been associated with the end of recessions. At the least, it raises the chances of GDP growth in the current quarter.
• The latest industrial production (IP) numbers coming from Asia are positive. South Korea’s IP was up 5.2% from February, while Thailand’s IP improved by 2.5% and Japan’s gained 1.6%. Manufacturing inventories in South Korea and Japan continued their decline in March after peaking in late 2008.
• In China, the Purchasing Managers Index (PMI) rose for the fifth straight month in April (see blue line in chart below). The latest PMI figure is 53.5 – any reading over 50 indicates that the manufacturing sector is growing. The last time the PMI was this high was in May 2008. Another promising PMI figure, the employment sub-index, is also over 50, meaning that job growth in manufacturing is under way.
Source: Kevin, Sinolise.com, May 1, 2009.
The April update of the ISM Manufacturing Index shows that the US manufacturing sector failed to grow for the fifteenth straight month, but the April reading of 40.1 was significantly higher than the 36.3 figure for March. The index has been improving for four straight months.
Rebecca Wilder (News N Economics) summarized the global economic picture as follows: “Overall, hope that key economies are no longer in free fall is emerging; however, the economic decline is ongoing.”
In an interview with The Washington Post, Nouriel Roubini said: “I don’t believe we are going to end up in a near-depression. Six months ago I was more worried about an L-shaped near-depression. Today, after the very aggressive policy actions taken by the US and other countries … we are, instead, in the middle of a U.”
Turning specifically to the US, a snapshot of the week’s economic data is provided below. (Click on the dates to see Northern Trust‘s assessment of the various data releases.)
The FOMC announced no change to monetary policy on Wednesday following the conclusion of its meeting. The communiqué said the Committee expected to keep the Fed funds rate target in the 0-0.25% range “for an extended period”. Moody’s Economy.com reported as follows: “The remarks on current economic conditions were less pessimistic than in recent months; the statement said that the pace of economic contraction ‘appears to be somewhat slower’ and that ‘the economic outlook has improved modestly’ since March.”
The FOMC included the following paragraph in the statement regarding its programs to buy agency debt, mortgage-backed securities and Treasuries: “The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.”
The dire tone of GDP growth in the last two quarters has invariably caused analysts to draw comparisons with the Great Depression. The table below, courtesy of Asha Bangalore (Northern Trust) compares the behavior of real GDP, unemployment, inflation and stock prices during the early-1930s with the current situation.
Click the table below for a larger image.
On the eve of the Berkshire Hathaway annual shareholders’ meeting in Omaha, Warren Buffett told CNBC that September’s “strike against the heart of the American system” was behind us, and that we have moved past the “economic Pearl Harbor”.
Source: Yahoo Finance, May 1, 2009.
In addition to Fed Chairman Ben Bernanke’s testimony before the Joint Economic Committee in Washington (Tuesday, May 5) and interest rate announcements by the bank of England and the European Central Bank (both on Thursday, May 7), the US economic highlights for the week, courtesy of Northern Trust, include the following:
Click here for a summary of Wachovia’s weekly economic and financial commentary.
Source: Wall Street Journal Online, May 1, 2009.
J. Kenfield Morley said: “In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well.” Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers in properly assessing risks before making investment decisions.
Our thoughts are with those affected by the swine flu virus, and we pray that the spreading is contained. By the way, an interesting way of tracking the occurrences of the virus is by means of Google Maps (click on “Satellite” along the horizontal menu bar for the best image).
That’s the way it looks from Cape Town (yes, I’m actually back home for a change!).
Source: Mike Keefe, The Denver Post.
Financial Times: Bank objections delay stress tests
“Citi, one of the biggest victims of the crisis that has already been bailed out three times by the government, is believed to have been told by regulators that it needs more than $5 billion in fresh capital, while BofA might need to convert $45 billion in government preferred shares into common equity.
“Both companies are still contesting the findings and might still persuade the government they need less, or no capital, according to people close to the situation. Citi’s own projections are believed to show the company will have hundreds of millions of dollars in excess capital.
“After a week of tense talks between regulators and the banks, government sources said the Treasury and the Federal Reserve were set to unveil the outcome of the tests after the market closes on May 7 – three days later than anticipated.
“The authorities’ decision to let the original timetable slip also reflects the widespread belief that, after months of speculation since the tests were first announced in February, their outcome has the potential to disturb the markets.
“Government sources said regulators were likely to release both aggregate and individual data for each of the 19 banks, detailing their losses and capital needs under adverse economic scenarios.
“Some of the banks will then supplement those data with regulatory filings and analysts’ calls. Bankers said a number of lenders had pleaded with regulators for more time to lay out plans to plug any capital shortfall identified in the stress tests, by raising equity from either the government or from the stock market.”
Source: Francesco Guerrera and Sarah O’Connor, Financial Times, May 1, 2009.
Option Armageddon: Stress test – tangible common equity
“A recent Reuters report said ‘US regulators want the top 19 banks being stress-tested to have at least 3% [TCE].’ In other words, regulators want leverage ratios below 33x.* Surreal, no? That the banking system has grown so bloated that 33x leverage can be considered ‘healthy?’
“Anyway, using the 3% Test, the results for the nation’s nine largest banks are mixed … four pass, five fail. And by the way, this is before ‘stressing’ the balance sheet per future ‘adverse’ scenarios. As you can see, most banks fail the test before they even sit for it …
“To be clear, this is not a prediction of the government’s verdict. As Jack Ciesielski of The Analyst’s Accounting Observer points out: “there is no iconic definition of TCE. Treasury may come up with one of their own that takes into account ‘questionable items’ so that all the banks pass. That would be totally consistent with early reports …”
Source: Rolfe Winkler, Option Armageddon, April 24, 2009.
Financial Times: US taxpayers to take majority GM stake
“Under the plan, GM said it would shut 13 of 47 plants by the end of next year, resulting in an additional 7,000 job losses. The latest job cuts would reduce GM’s US workforce from 61,000 last year to about 40,000 by the end of 2010.
“The carmaker, which lost its crown as the world’s biggest carmaker to Toyota last year, said it would give up its 83-year-old Pontiac brand and cut its dealership network from 6,200 to 3,600 by the end of 2010.
“Fritz Henderson, chief executive, said: ‘The objective here is not to survive. The objective is to develop an operating plan that allows us to win.’
“The Obama administration has set a June 1 deadline for GM to produce a viable turnaround plan in exchange for further government aid, or face bankruptcy. The carmaker has received $15.4 billion in emergency loans and expects the total to rise to about $20 billion by the end of next month.
“GM warned in a letter to bondholders that if the debt-for-equity swap failed to go through by June 1 it would ‘expect to seek relief through the US bankruptcy code’. In such circumstances, GM said bondholders might receive no ‘consideration at all’. GM set a May 26 deadline for bondholders to respond.
“Calling the proposal ‘neither reasonable nor adequate’, an ad hoc committee of GM bondholders said it believed ‘the offer to be a blatant disregard of fairness for the bondholders who have funded this company, and amounts to using taxpayer money to show political favouritism of one creditor over another’.”
Source: John Reed and Bernard Simon, Financial Times, April 27, 2009.
Financial Times: Chrysler files for Chapter 11 protection
“The Obama administration said the owner of Jeep and Dodge would emerge from a ‘surgical’ bankruptcy process with more government aid and new shareholders, including Italy’s Fiat and the United Auto Workers union. Bob Nardelli, Chrysler chief executive, will step aside as part of the deal.
“Mr Obama praised JPMorgan Chase and other large banks for accepting the terms of the proposed restructuring plan. He laid blame for the bankruptcy filing on ‘a small group of speculators’ who refused to buy into an offer to swap Chrysler’s debt for $2.25 billion in cash.
“They were hoping that everybody else would make sacrifices and they would have to make none,” he said. “Some demanded twice the return that other lenders were getting. I don’t stand with them.”
“Under the plan outlined on Thursday, Chrysler will face 30-60 days in Chapter 11, which enables businesses to restructure and reorganize under court supervision. During that period, Chrysler will close most of its North American plants, idling tens of thousands of workers.
“When Chrysler emerges from bankruptcy it will be 55% owned by the UAW and a separate workers’ healthcare trust. Fiat will take an initial 20% stake with the option of increasing it over time.”
Source: Tom Braithwaite and John Reed, Financial Times, April 30, 2009.
Charlie Rose: A discussion about Chrysler’s bankruptcy plan
Source: Charlie Rose, April 30, 2009.
The Big Money: Dow Jones says it can measure economic sentiment by reading the press
“The news, it seems, is a moderately reliable economic compass. And today, Dow is quantifying that assertion with the release of its newly minted Economic Sentiment Indicator, a monthly assessment of the ‘tone’ of content in 15 metropolitan dailies. The ESI, informally known as the Optimism Index, is a simple barometer based on a scale of zero to 100 – the higher the number, the more upbeat the news and, by extension, the stronger the economy. Dow Jones back-tested the indicator to 1990 and found that it could signal critical turning points in the economy, sometimes a bit earlier than other economic measures.”
Source: Nancy Miler, The Big Money, April 30, 2009.
Bespoke: Tracking the business cycle through Google trends
Source: Bespoke, April 30, 2009.
Charlie Rose: A conversation about the economy
Source: Charlie Rose, April 24, 2009.
CNBC: Buffett – “economic Pearl Harbor” is over
Source: CNBC, May 1, 2009.
CNBC: Munger on Berkshire’s off year
Source: CNBC, May 1, 2009.
The Washington Post: Roubini – “I am not Dr. Doom”
“Q. You are the economist known for predicting the economic downturn in 2008. What do you believe is happening to the economy today?
“A. The consensus among economists is that they see the economy that was contracting for the last two quarters at 6% going into positive economic growth by the second half of this year … I believe that the rate of economic contraction is going to slow from negative 6% in the last two quarters to negative 2% by the fourth quarter.
“Next year, I believe that the growth rate is going to be low – 0.5% for the US, compared to the consensus view of [plus] 2%. I believe the unemployment rate this year is going to go well above 10% and will be well above 11% next year, so even if we are technically out of a recession, we are going to feel like we are in a recession.
“I do agree that there is an improvement in the sense that the rate of contraction is not going to be as much as it has been in the last couple of quarters, but I still believe that the bottom of the economy [will be seen] toward the beginning or middle of next year. So my views are more bearish than the consensus.
“I believe things are going to be very mediocre throughout the world; in particular, in Europe and in Japan. They will only get out of their recession toward the end of next year.
“So you are still Dr. Doom?
“No, I am not Dr. Doom. I am Dr. Realist. I don’t believe we are going to end up in a near-depression. Six months ago I was more worried about an L-shaped near-depression. Today, after the very aggressive policy actions taken by the US and other countries … we are, instead, in the middle of a U.”
Click here for the full article.
Source: Lally Weymouth, The Washington Post, April 27, 2009.
Paul Kasriel (Northern Trust): Coming out of the downturn
Source: Paul Kasriel, Northern Trust, April 30, 2009.
CNBC: Sheila Bair – the economy & financial crisis
Source: CNBC, April 27, 2009.
CEP News: Fed keeps target rate and asset purchases unchanged
“The Fed said it will evaluate the timing and amount of future asset purchases over time, and that the vote to keep the program as is was unanimous.
“In the monetary policy statement, the central bank said there are some signs that the economic outlook is improving, including stabilization in consumer spending and a slower pace of economic contraction.
“‘Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time,’ the statement read.
“Nevertheless, the Fed said the US will eventually resume a sustainable economic growth path.
“The Fed said it will employ all available tools to promote a recovery. As of the last meeting, the Fed plans to spend up to $1.25 trillion on agency mortgage-backed securities, up to $2,900 billion in agency debt and up to $300 billion in Treasury securities.”
Source: CEP News, April 29, 2009.
Asha Bangalore (Northern Trust): Another quarter of deep and wide contraction in economic activity
“A decline in real GDP, albeit more modest, is projected for the second quarter. GM’s plans to cut production should translate into another noticeably weak third quarter headline for real GDP, followed by a stronger than previously expected fourth quarter. The annual decline in real GDP is now projected to be roughly 3.5% in 2009, which is a tad higher than the 3.3% decline assumed in the alternative adverse scenario of the stress test of the 19 major banks under the Treasury’s Capital Assistance Program.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 28, 2009.
Asha Bangalore (Northern Trust): ISM Manufacturing Survey points to imminent economic recovery, possibly in 2009
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, May 1, 2009.
Standard & Poor’s: S&P/Case-Shiller – home prices still declining
“The chart above depicts the annual returns of the 10-City Composite and the 20-City Composite Home Price Indices. The 10-City and 20-City Composites recorded annual declines of 18.8% and 18.6%, respectively. This is a slight improvement from their returns reported for January, where they fell by 19.4% and 19.0%, respectively.
“‘While the declines in residential real estate continued into February, we witnessed some deceleration in the rate of decline in some of the markets,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s.”
Click here for the full report.
Source: Standard & Poor’s, April 28, 2009.
Asha Bangalore (Northern Trust): Consumer spending and income decline
“Consumer spending, after adjusting for inflation, fell 0.2% in March after upwardly revised gains of 0.9% and 0.1% in January and February, respectively. In light of the absence of support from income, a setback to consumer spending in the near term is almost certain. In the meanwhile, personal saving as a percent of disposable income increased to 4.2% in March from 4.0% in February, putting the quarterly average at 4.2%, the largest average seen since the third quarter of 1998.”
Source: Asha Bangalore: Northern Trust – Daily Global Commentary, April 30, 2009.
Asha Bangalore (Northern Trust): Initial jobless claims declined but continuing claims advanced
“Continuing claims, which lag initial claims by one week, rose 133,000 to a new record high of 6.271 million and the insured unemployment rate advanced to 4.7% from 4.6% in the prior week.”
Source: Asha Bangalore: Northern Trust – Daily Global Commentary, April 30, 2009.
Asha Bangalore (Northern Trust): Consumer Confidence Index improves mostly on surge in expectations index
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 28, 2009.
The American Banker: Credit card losses
Source: The American Banker, April 29, 2009.
Rasmussen Reports: 26% say US already has partially socialist economy
“A new Rasmussen Reports national telephone survey found that 26% believe the United States generally has a free market economy and that 41% say the country has a partially free market economy.
“Seventy-seven percent (77%) of all voters say they prefer a free market economy over a government-managed one. That’s up seven points since December.
“But only 53% of American adults believe capitalism is better than socialism. This clearly suggest that many Americans draw a sharp distinction between capitalism and a free market economy.
“Belief that the United States has a free market economy generally rises with income level. Those who earn the most are most confident that the market is at least partially free.”
Source: Rasmussen Reports, April 28, 2009,
Financial Times: Commercial mortgages at risk
“Special servicers, companies that collect payments from borrowers in distress on behalf of mortgage bond investors, reported $23.7 billion of mortgages under their care at the end of the first quarter, according to Fitch Ratings.
“That was five times higher than the $4.6 billion of mortgages needing special servicing at the end of 2007. Servicers experienced an almost 50% increase in the volume of distressed commercial mortgages in the first quarter alone.
“Mortgages for multi-family residential properties suffering from the housing downturn represented the largest share of the troubled loans at 31%, said Fitch. However, mortgages for shops and businesses were catching up, with retail loans at 28% of the distressed pools.
“Fitch analysts said they expect commercial mortgage defaults to continue to increase this year. At the end of the first quarter, defaults and payments more than 60 days late were at 1.53% of outstanding mortgages. Fitch said they could reach 4% by the end of 2010.”
Source: Saskia Scholtes, Financial Times, April 28, 2009.
Asha Bangalore (Northern Trust): 10-year Treasury Note yield and mortgage rates after March 18, 2009
‘To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by 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, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.’
“The 10-year Treasury note yield closed at 2.51% on March 18, reflecting a 51 bps rally compared with the close on March 17, 2009, and has since held above the March 18 reading. The 10-year Treasury note yield on April 24 was 3.03% and as of this writing it was trading around 2.97%.
“The Fed has purchased $73.742 billion of Treasury securities between March 23, 2009 and April 27, 2009. The chart below indicates the Fed has not succeeded in guiding Treasury securities lower after the announcement. The goal of the purchase program is to buy $300 billion of longer-term Treasury securities over a six-month period. Effectively, the Fed has roughly $226 billion of Treasury securities more to purchase under this program.
“The good news is that mortgage rates have declined further after the Fed expanded the purchase of mortgage-backed securities ($1.25 billion, up from prior announcement of $750 billion) and agency debt ($200 billion, up from earlier plan of $100 billion) as per the March 18 announcement. The 30-year mortgage rate stood at 5.03% during the week ended March 20 and was quoted at 4.80% as of April 24.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 27, 2009.
Bespoke: Treasuries and high-yield bonds converge
Source: Bespoke, April 30, 2009.
Barron’s: Big money poll – the long view
“Nearly 60% of our respondents call themselves bullish or very bullish about the stock market’s prospects through the end of 2009, a significant increase from the 50% who proclaimed themselves bulls last fall. Yet, signs of unease abound. For one, just 56% of today’s poll participants think the stock market is undervalued, down from 62% last fall. Thirteen percent say stocks are overvalued, up from a prior 7%. And an alarming 58% say the market hasn’t bottomed yet, even though the Dow Jones industrials hit a low of 6,469 in March, before recovering to a recent 8,100.
“The managers are similarly wary about the outlook for the economy, at least through the end of this year. And they are downright doubtful that the government’s first stimulus package, announced with fanfare shortly after the Obama administration moved into the White House, will be the last.
“Given these and other concerns, only 26% of the Big Money men and women expect to be net buyers of stocks in the next six months, although 66% say they will be putting more money to work in the 12-month span. But don’t look for fresh dough to flow solely to US equities. Just 44% of our respondents think the US will be the strongest market in the next year; 42% expect emerging markets to take the baton and lead. As Keith Wibel, a money manager at Foothills Asset Management in Scottsdale, Ariz., put it, ‘Confidence has been fractured. The psyche is slow to heal.’
“The market isn’t much faster. Big Money’s bullish cohort expects the Dow to end 2009 at 8,676, about 7% above current levels but flat for the year. Things, or at least stocks, will pick up thereafter, with the blue chips rising another 10% or so, to 9,488, by mid-2010. In concert with their short-term-skittish, long-term-sunny stance, more than 40% of bulls predict the Dow industrials will reach or breach 10,000 by the middle of next year.
“The optimists see the Standard & Poor’s 500 jogging to 906 by December 30, en route to 1,003 next June. The popular benchmark closed Friday at 866. Their mean predictions for the Nasdaq Composite: 1,683 by year end, and 1,841 by mid-2010, up from last week’s 1,694.
“Some big money managers are notably upbeat even – or especially – after a global financial meltdown has cut most stock indexes in half. ‘They don’t ring a bell when they announce a sale on Wall Street, but prices are as good as I’ve seen them in my entire career,’ says David Corbin, president of Corbin & Co. in Fort Worth, Texas.”
Source: Jack Willoughby, Barron’s, April 27, 2009.
Bespoke: Sector earnings growth in the first quarter
“As shown, the S&P 500 is currently seeing earnings decline by 32.3% in the first quarter. At the start of earnings season, this number was estimated at -37.4%, so it’s coming in a little better than expected. Consumer Discretionary looks the best when comparing actual versus estimates, but earnings have still declined by 52.5% in the sector. The only two sectors that are coming in weaker than expected are Financials and Energy.
“We also provide the price performance of the sectors since April 2nd. Interestingly, most of the sectors that are up the most are the worst in terms of actual earnings versus estimates.”
Source: Bespoke, May 1, 2009.
David Fuller (Fullermoney): Will stock markets stay above March lows
“At Fullermoney, we maintain that the S&P 500 Index will most likely hold above its March low, as it continues to develop a base formation. The main reason, previously stated, is that we are witnessing the greatest attempt at asset reflation in human history. In comparison, it makes Greenspan look, well … almost Austrian and the USA is certainly not the only country engaged in a record reflation. The secondary reason is the record levels of cash held by institutional investors.
“Let us now consider three scripts for Wall Street and its implications for other stock markets: 1) the S&P keeps on rallying, surprising even the bulls; 2) the S&P ranges in extended base formation development for many more months; 3) the S&P rolls over and resumes its bear market by moving well beneath the March low.
1) In this event, the stock markets and sectors that are already considerably outperforming the S&P – mainly Fullermoney themes, including China-led emerging Asia, South American-led resources markets and technology – will continue to do much better than the S&P. Other OECD stock markets, (tech & telecom weighted Sweden excepted), will track the S&P, albeit usually with a slightly higher beta.
2) The Fullermoney themes in (1) above outperform, extending their ranging upward trends. Most OECD stock markets track Wall Street.
3) Fullermoney themes fall back and extend their base formations. Most OECD stock markets track Wall Street, with Sweden being the most likely exception.
“What do I expect? I think it will be (2) above, although possibly in combination with (1). I will not worry too much about (3), provided the S&P can maintain approximately half of its gains from the March low during the next reaction phase.”
Source: David Fuller, Fullermoney, April 29, 2009.
David Fuller (Fullermoney): Global stock markets leaders – what are they saying?
“Which are the leaders and what are they indicating today?
“China is one of the few stock markets capable of providing a leash effect. Among bigger capitalisation markets, it has led on the upside since its October 2008 low. We pointed out China’s downside key day reversal on April 22 and it is experiencing downside follow through, indicating susceptibility to a further pullback. This will probably create another buying opportunity and I would only be concerned if the last reaction low near 2,040 was exceeded. Meanwhile, it will take an upward dynamic to check this reaction beyond a brief pause.
“Taiwan is a China satellite, strong on tech, which has once again been a leading sector. Consequently Taiwan has been an outstanding performer, that is until its downside key day reversal on April 17. This occurred near the psychological 6,000 level and we saw another downward dynamic today. A close above 6,100 is currently required to offset scope for an additional reaction.
“Brazil has been South America’s comparatively big-cap leader among these resources markets, often cited by Fullermoney. It shows none of the downside keys or other bearish dynamics and actually reached a new high on Friday, although that gain was not maintained today. A close under 44,270 would confirm an upside failure and susceptibility to an additional short-term reaction.
“Conclusion – Fullermoney anticipated the impressive global stock market rally, not least with the help of indices shown above, plus other regional leaders such as Sweden, which is still appreciating, albeit approaching lateral and psychological resistance near 800. We remain medium-term bullish but would be cautious in the short term.
“We have always spoken of a lengthy convalescence in response to the financial crisis. Consequently we have favoured accumulating equities on easing within this base building phase and early stage uptrends among the leaders.
“Meanwhile, there is still more than enough worrying news, in terms of corporate disappointments, to frighten buyers from time to time. Conversely, there is more than enough cash on the sidelines to cushion downside risk during the inevitable reactions and consolidations. For OECD laggards which experienced March lows, I would be concerned if they gave up more than half of their gains from those lows during a reaction.”
Source: David Fuller, Fullermoney, April 27, 2009.
Richard Russell (Dow Theory Letters): Lowry’s statistics do not favor a new bull market
“The fact – since the March 9 low, Lowry’s Buying Power Index has gained 57 points, but their Selling Pressure Index has only dropped 20 points. This is at sharp variance with all other bull market starts in the Lowry’s history.
“Basically, when a new bull market starts, the background is that the urge to sell has been exhausted. The pressure to press that market down further has disappeared. Thus, the market is left in the hands of those who wish to buy. In the current case, there is still a potential supply of stocks to be sold. In other words, the situation is not correct for the start of a new bull market, based on 76 years of the Lowry’s data.”
Source: Richard Russell, The Dow Theory Letters, March 31, 2009.
Bespoke: Mid-April short interest
“At first glance, it is somewhat surprising that short interest has only declined by a marginal amount. Given the 25%+ rally in the S&P 500, one would expect to see short interest decline by a much larger amount. Digging into these numbers, however, the headline short interest numbers are somewhat misleading due to the extraordinarily large short interest in Citigroup (C). Due to the arbitrage taking place over the upcoming conversion of the preferred into common shares, Citi’s short interest represents 12.1% of the total short interest for the S&P 500. If one were to back Citi out of the calculations, short interest would be about 5.4% of the average stock’s float.
“Even though short interest has declined, there are still plenty of stocks investors are heavily betting against. For example, 82 stocks in the S&P 500 currently have over 10% of their float sold short, and 12 have more than 20% shorted. Given the state of the Financials, one would think most of the names would come from that sector, but the reality is that Citigroup (C) and Avalon (AVB) are the only two names from that sector to make the list. The Consumer Discretionary sector is currently the most popular on the “least popular” list (more than 20% sold short), as six of the 12 names are from the sector.”
Source: Bespoke, April 27, 2009.
Bespoke: Largest companies in the world
Source: Bespoke, April 27, 2009.
Bespoke: Country ETFs overbought
Source: Bespoke, April 30, 2009.
The Wall Street Journal: The IMF’s gold gambit
“The International Monetary Fund (IMF) deserves credit, figuratively speaking, for cleverly manipulating the financial troubles of emerging and low-income nations to procure a fresh infusion of capital for itself. But its tactics at this month’s G-20 summit in London – where President Barack Obama signed off on tripling the IMF’s lending resources – should not hoodwink anyone, least of all American taxpayers who pay the largest share of IMF expenses.
“Lost in the lofty talk about putting the IMF in the center of world economic recovery is the fact that the organization has been quietly attempting to ensure its own survival by seeking permission to engage in gold sales …
“The US should not replenish the coffers of a multilateral bureaucracy that quite literally lost its reason for being on August 15, 1971 – the day President Richard Nixon ‘closed the gold window’ and brought an end to the Bretton Woods agreement, which allowed countries to convert their dollar holdings, via the IMF, into gold at a fixed price. Instead, Congress should call for the IMF’s dismantlement and restitution of its assets.
“The most solid asset owned by the IMF, purely as a legacy of its original incarnation, is gold. The IMF holds 3,217 metric tons (103.4 million ounces) of gold, which makes it the world’s third largest official holder. Actually, it’s a misnomer to say the IMF ‘owns’ the gold since the bullion belongs, according to the IMF articles of agreement adopted at Bretton Woods in 1944, to its member nations.”
Source: Judy Shelton, The Wall Street Journal, April 28, 2009.
Julian Jessop (Capital Economics): China’s gold reserves jump
“But the news may be less significant than some people think, says Julian Jessop, chief international economist at Capital Economics.
“‘Gold was in a bull market from 2002 to 2008, so it is no great surprise that China was buying over this period. The reported amounts are also small compared to the production from China’s own mines, official sales by other central banks, and the record purchases by private investors via exchange traded funds,’ he notes.
“‘What’s more, the fact that China has already increased its gold holdings by 75% does not necessarily mean further purchases and higher prices in the future. It would make more sense to announce an increase in gold holdings once a buying programme has been completed, rather than part way through.
“‘We are also sceptical that the increase in gold holdings tells us anything about the plans for purchases of other assets. Even if all of the additional gold were bought last year at the average 2008 price of $872 an ounce, the total cost would only be around $12.6 billion. This is just a drop in the ocean compared with the total increase in China’s official reserve assets last year of $419 billion.’”
Source: Julian Jessop, Capital Economics (via Financial Times), April 27, 2009.
The Wall Street Journal: Understanding swine flu
“Unfortunately, conditions in many countries are conducive to the emergence of such new infectious agents, especially flu viruses, which mutate rapidly and inventively. Intensive animal husbandry procedures that place poultry and swine in close proximity to humans, combined with unsanitary conditions, poverty and grossly inadequate public-health infrastructure of all kinds – all of which exist in Mexico, as well as much of Asia and Africa – make it unlikely that a pandemic can be prevented or contained at the source …
“Pigs are uniquely susceptible to infection with flu viruses of mammalian and avian origin. This is of concern for a couple of reasons. First, pigs can serve as intermediaries in the transmission of flu viruses from birds to people. And when avian viruses infect pigs, they adapt and become more efficient at infecting mammals – which makes them more easily transmitted and dangerous to humans.
“Second, pigs can serve as hosts in which two (or more) influenza viruses infecting an animal simultaneously can undergo ‘genetic reassortment’, a process in which pieces of viral RNA (the virus’s genetic material, similar to DNA) are shuffled and exchanged, creating a new organism. The influenza viruses responsible for the world-wide 1957 and 1968 flu pandemics – which killed about 70,000 and 34,000, respectively, in the US – were such viruses, containing genes from both human and avian viruses …
“Because they have been stockpiled for use in the event of an avian flu pandemic, large amounts of the antiflu drugs Tamiflu and Relenza are available. However, they must be administered during the first couple of days after symptoms begin to be an effective treatment. They can also prevent the onset of the disease if administered in adequate doses prior to exposure. The danger of using antiflu drugs in poor countries with inadequate public-health facilities such as Mexico is that they may be administered improperly and in suboptimal doses, which would promote viral resistance and intensify an outbreak.
“If the swine flu outbreak becomes a pandemic with a high rate of severe complications (such as pneumonia) and death, we will need to be smart, nimble and flexible. That will involve triage on many levels – including decisions about which patients are likely to benefit from scarce commodities such as drugs and ventilators – as well as ‘social engineering’ determinations about issues such as mandatory quarantine, the canceling of public events, shutting airports and closing our southern border. Let’s hope it doesn’t come to that.”
Source: Dr Henry Miller, The Wall Street Journal, April 29, 2009.
John Authers (Financial Times): Swine flu
Click here for the article.
Source: John Authers, Financial Times, April 30, 2009.
ETF Trends: Three ETF sectors that could feel impact from swine flu
“Many are worried about the economic effects of swine flu as it interrupts day-to-day living, travel and purchases. Some countries are already warning their citizens against travel to Mexico and the United States.
“Drug Makers. One beneficiary could be the pharmaceutical industry, though. Certain makers of drugs and vaccines may be caught off guard to the recent epidemic of swine flu, because of commercial orders getting impacted by government stockpile orders from the late avian flu threat.
“Retail & Consumer. Sam Stoval talked to Steve Chiotakis on MarketPlace and reports that the broader economic drawbacks of the swine flu hit upon trade and travel as well as day-to-day purchases. A short-term situation aside, if the outbreak were to remain out of control, consumers are likely to stay at home, which would effect gasoline, oil and energy consumption. Purchases on food and leisure items would dwindle, as well.
“Airlines. In an effort to secure borders and keep the swine flu contained, the United States is now screening for the swine flu at the Mexican border, and Europe’s Health Commissioner urged Europeans to avoid traveling to the United States or Mexico. Could people hold off on travel altogether because of this? According to Richard Aboulafia on MarketPlace, at least a half dozen airlines, including American, United and Continental, are waiving penalties for changing flights to or from Mexico.
“Upon arrival into the United States from an international flight, expect to be screened in customs, including having your temperature taken. Russia, Taiwan and China are all preparing to quarantine anyone with flu-like symptoms.”
Source: Tom Lydon, ETF Trends, April 27, 2009.
CEP News: UK consumer confidence up for the third straight month
“According to the report, consumer confidence in the UK improved slightly more than expected in April rising three points to -27. Economists had been expecting a -28 reading.
“The UK consumer confidence survey results were compiled from the responses of approximately 2,000 individuals over the age of 16. The survey was conducted on behalf of the European Commission.”
Source: Erik Kevin Franco, CEP News, April 29, 2009.
CEP News: UK Hometrack Housing Survey moderates slightly in April
“On a monthly basis, the survey declined by 0.3%. This was less severe than march’s level, which fell an unrevised 0.6%. Hometrack announced that this was the slowest rate of month-over-monthly declines in a year.
“Similarly, the survey’s 10.1% annualized fall was slightly less severe than the prior month’s decline of 10.3%, a level that was also unrevised.”
Source: CEP News, April 26, 2009.
CEP News: Japan‘s economy to contract 3.1% in 2009, BOJ says
“In its semi-annual economic outlook published on Thursday, the BOJ said it expects the economy to contract 3.1% in the 2009 fiscal year, down from the 2.0% decline previously forecast.
“Earlier in the day, the BOJ’s Policy Board voted unanimously to keep the overnight call rate targeted at 0.1%.
“According to the central bank, domestic private consumption will continue to deteriorate. However, the pace in export and production declines will ease as inventories are adjusted both domestically and abroad.
“‘Therefore, the pace of deterioration in economic conditions will likely moderate gradually and start to level out,’ the central bank said.
“The BOJ also noted that corporate financing conditions had begun to loosen compared to the latter part of 2008 due to improved issuing conditions in both the corporate bond and commercial paper markets.
“‘However, given the deterioration in corporate profits, the situation as a whole remains severe as an increasing number of firms are reporting that their financial positions are weak and lending attitudes of financial institutions are tight,’ the bank added.
“Looking ahead to the 2010 fiscal year, which begins on April 1, 2010, the BOJ projects that the economy will recover to a growth rate of 1.2%, with estimates out of the Policy Board ranging from +0.8% to +1.5%.”
Source: Todd Wailoo, CEP News, April 30, 2009.
CEP News: Japanese manufacturing PMI jumps in April
“According to a report, the country’s manufacturing PMI advanced to 41.4 from 33.8 in March.
“Although the index remains below the 50 level, which indicates a contracting industrial sector, the figure is well above the 29.6 reading recorded in January.”
Source: Erik Kevin Franco, CEP News, April 29, 2009.
James Pressler (Northern Trust): Japan – deeper into the red
“In the government’s latest biannual economic outlook, the fiscal year just ended in March experienced a 3.1% contraction in GDP, while the current FY2009-2010 will experience a sharper slide of 3.3%. The latter figure is a dramatic revision from October’s forecast of 0% growth, and is somewhat more pessimistic than recent statements from Tokyo suggesting a recovery starting in Q1 2010.
“Expectations for exports and business investment were also slashed across the board, with the only positive figure coming from minor growth in public consumption – courtesy of the fiscal stimulus package that came into effect at the beginning of the month. In short, the government has conceded that it will not be able to export its way out of this recession, and eight quarters of contracting GDP (starting in Q2 2008) might even be a little optimistic.
“However, something good may yet come out of all of this – at least for the ruling LDP. PM Taro Aso and his party have not surprisingly taken a beating in the opinion polls over the past six months, and with general elections due this year there was every likelihood that this icon of Japan’s government would be run out of Tokyo entirely. But, a scandal within the opposition Democratic Party (DP) has offered a brief window of opportunity and it appears Aso is pouncing on it. To counter the particularly negative themes of this latest outlook, Aso’s Cabinet is proposing another fiscal stimulus package for FY2010-11. Furthermore, his government submitted a supplementary stimulus package worth ¥15.4 trillion ($159 billion) and all but challenged the opposition-controlled upper house to stall the legislation and force him to call an early election. After being hobbled by scandal, Aso’s dare forces the DP to either roll the dice at the ballot box or cede the economic momentum back to the LDP.”
Source: James Pressler, Northern Trust – Daily Global Commentary, April 27, 2009.
Financial Times: Swiss seek tax treaty trade-off
“The talks were announced earlier this month.
“Tim Geithner, US Treasury secretary, this weekend met with Hans-Rudolf Merz, Swiss finance minister and head of state this year under the country’s rotating presidency.
“Mr Merz told Mr Geithner that an aggressive investigation by US tax authorities into accounts at UBS could make it very difficult to secure approval for a new tax treaty in the Swiss parliament and in a referendum.
“‘US officials told the Financial Times that Mr Geithner did not dismiss the importance of appropriately resolving the matter,’ one said.
“However, the official added: ‘Tax treaty negotiations will be conducted by the Treasury Department with input from the Department of Justice and the Internal Revenue Service. All pending enforcement decisions will be made by the Department of Justice and the IRS.’
“The US response suggests it might be possible for the two sides to strike a deal, though the official added: ‘Both President Obama and Secretary Geithner have made very clear their commitment to tackling tax shelters and other efforts to abuse US tax laws.’”
Source: Haig Simonian and Krishna Guha, Financial Times, April 26, 2009.
3 comments to Words from the (investment) wise for the week that was (April 27 – May 3, 2009)
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