Words from the (investment) wise for the week that was (June 29 – July 5, 2009)
“Words from the Wise” this week again comes to you in a shortened format as I am still on the road in Europe (also see my post “Gone A.W.O.L. – to Slovenia and Switzerland“) and do not have access to my normal research resources. Although only brief commentary is provided, a full dose of excerpts from interesting news items and quotes from market commentators is included.
The holiday-shortened week saw pundits pondering the depth of the economic rabbit hole as the curtain closed on the second quarter. As investors vacillated, most financial markets were characterized by a roller-coaster ride. Friday’s worse-than-expected US jobs data left no doubt that the economy was in recession.
Given the economic malaise, it is safe to say that there have probably been better fourth of July celebrations than this weekend’s …
Looking at the quarterly performance of the same asset classes, the picture is quite different from the chart above, with risky assets putting in a phenomenal performance to the detriment of the traditional safe havens such as the US dollar and government bonds.
A summary of the movements of major stock markets for the past week, as well as various other measurement periods, is given below. The weekly gains/losses camouflage the fact that many indices experienced a rather bumpy ride during the course of the week.
Click here or on the table below for a larger image.
Stock market returns for the week ranged from top performers Egypt (+8.9%), Uganda (+7.9%), Bangladesh (+6.3%), Pakistan (+6.1%) and China (+5.5%) to Slovakia (-9.3%), Croatia (-8.7%), Vietnam (-5.6%), Mauritius (-4.0%) and Hungary (-3.6%) at the other end of the scale. Emerging markets make up all ten of the best-performing stock indices so far in 2009, led by Peru, Sri Lanka and China. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)
John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included iShares MSCI Turkey Index (TUR) (+5.4%), iShares MSCI South Africa Index (EZA) (+4.5%) and PowerShares Private Equity Portfolio (PSP) (+4.4%). On the other side of the performance spectrum, laggards were centered in the broader commodity category, including US Natural Gas (UNG) (-6.8%), iShares Silver Trust (SLV) (-3.9%) and PowerShares DB Commodity (DBC) (‑3.7%).
The quote du jour this week comes from Bill King, writer of The King Report, and is related to Wall Street pay approaching 2007’s record levels, as reported by The Wall Street Journal. King remarked: “Will Ben, Hank, Little Timmy and Congressional leaders explain to the American people how it is possible for Wall Street to have near-record remuneration AFTER the US taxpayers were put on the hook for about $12 trillion of guarantees to The Street? And will they explain to Americans that while Street insiders ‘earn’ record pay they must suffer a severe recession or depression, possibly record future inflation, collapsing home values, job losses and an income contraction?”
Next, a quick textual analysis of my week’s reading. No surprises here, with all the usual suspects such as “market”, “banks”, “economy” and “financial” featuring prominently. Interestingly, “China” also moved up the ranks as its economy seems to be on a strong growth path.
Back to the stock markets: the key moving average levels for the major US indices are given in the table below. With the exception of the Nasdaq Composite Index, the indices are all trading marginally below the 50-day moving average. Whereas the S&P 500 Index, Nasdaq Composite Index and Russell 2000 Index are trading above their respective 200-day lines, the Dow Jones Industrial Average and the Dow Jones Transportation Index are a notch below this key line. In order for a major uptrend to manifest itself, an upturn in the 200-day average itself also needs to take place.
Click here or on the table below for a larger image.
For more about key levels and the most likely short-term direction of the S&P 500 Index, Adam Hewison of INO.com prepared another of his popular technical analyses, arguing that one should be on the sidelines in this market. Click here to access the short presentation. (The analysis was done on Tuesday, but is still as relevant today as it was a few days ago.)
Richard Russell, veteran publisher of the 50-year-old Dow Theory Letters, remains in the bearish camp, saying: “Lowry’s Buying Power Index as of yesterday [Wednesday] was only 6 points above its level of March 9. That puts the market on very thin ice. It means that the desire to buy stocks has been steadily fading. All that’s needed now is a rise in selling pressure, and this market will unravel.
“Every day I compute the span between Lowry’s Buying Power Index and their Selling Pressure Index. The wider the span, the more bearish the situation. Yesterday the span closed at 872, the widest since March 9. This is the weakest reading of the entire rally. Extreme caution is warranted.”
Over in London, David Fuller (Fullermoney) commented as follows: “In terms of timing, now that we have seen big rallies off the lows, I would wait until investors are clearly fearful once again before adding further capital to stock markets. … if one was unprepared to ride out a stock market correction, then it was time to take some money off the table while prices were still firm.
“Meanwhile, I remain cautious, regarding a further stock market reaction and consolidation in response to the 14-week surge from the March lows as at least a 50/50 possibility. Moreover, this could easily develop into a correction, including base formation extension for lagging OECD country markets.”
In my opinion, US stock markets are mapping out a base development formation, whereas a number of emerging markets have already bottomed out and subsequently confirmed primary uptrends. However, in the short term it is quite likely that markets could consolidate further and possibly retrace more of the prior gains.
For more discussion on the direction of stock markets, see my recent posts “Video-o-rama: Roller-coaster ride into the long weekend“, “Barron’s Confidence Index points to bottoming of equities“, “Job losses in perspective“, “Monthly performance round-up: Road to recovery (June 30, 2009)“, “Stock market performance during economic cycles” and “Consider the components of equity returns“.
Source: Moody’s Economy.com
Moving to the Far East, the Japanese Tankan Survey’s index of current conditions among large manufacturers improved to -48 in the second quarter from -58 in the first quarter. The rise of 10 percentage points is the first improvement since the fourth quarter of 2007 and follows the worst reading on record during the first quarter.
In Europe, the European Central Bank (ECB) left its monetary policy unchanged as expected. It has kept its key policy interest rate at a historical low of 1% since May. However, the Swedish central bank, the Riksbank, reduced its repo rate from 0.5% to 0.25% and also cut the deposit rate to -0.25%, effectively charging savers interest on deposits.
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.)
Thursday, July 2
Wednesday, July 1
Tuesday, June 30
Also, according to Bloomberg, delinquency rates on the least risky mortgages more than doubled in the first quarter from a year earlier, climbing to 2.9% through March 31 from 1.1% at the same point in 2008.
Summarizing the US economic outlook, BCA Research said: “All eyes will be on the US consumer sector in the coming months. We are cautiously optimistic that a sub-par economic recovery will get under way in the second half of the year, allowing the riskier asset classes such as stocks, corporate bonds and commodities to outperform Treasuries and cash. However, there will be plenty of volatility and the main risk is that the mild consumer recovery we expect is delayed, serving to reinforce cost-cutting pressures in the business sector.”
Source: Yahoo Finance, July 3, 2009.
Across the pond, the Bank of England (BoE) will make an interest rate announcement on Thursday (July 9), while in the US economic highlights for the week include the following:
Monday, July 6
Wednesday, July 8
Thursday, July 9
Friday, July 10
Click here for a summary of Wachovia’s weekly economic and financial commentary.
Source: Wall Street Journal Online, July 3, 2009.
Who is to blame for the financial mess the world finds itself in? There are many possible culprits, ranging from Alan Greenspan and the Federal Reserve to the rating agencies, the big Wall Street firms, structured investment vehicles, and so on. Dan Quayle offered one of the most original (and inconveniently true) suggestions: “Bank failures are caused by depositors who don’t deposit enough money to cover losses due to mismanagement.” (Hat tip: Tim Price.) Hopefully the news items and quotes from market commentators included in the “Words from the Wise” review will keep Investment Postcard readers on track in these crazy times.
For my American friends (the bulk of my readers), I hope you have had happy and safe fourth of July celebrations and enjoyed the fireworks.
That’s the way it looks from Veysonnaz, a quaint Alpine village in the south-western part of Switzerland where I will be spending the next week. (For short comments – maximum 140 characters – on topical economic and market issues, web links and graphs, you can follow me on Twitter by clicking here.)
Source: Larry Wright, July 3, 2009.
Barry Ritholtz (The Big Picture): Who is to blame
“In Bailout Nation (Chapter 19) my list went something like this:
1. Federal Reserve Chairman Alan Greenspan
“Several names were omitted for reasons of avoiding repetition: CEOs of major banks and investment firms, the crony boards, the AWOL mutual funds. While the list in chapter 19 is somewhat incomplete, the book as whole is not.”
Source: Barry Ritholtz, The Big Picture, June 29, 2009.
CNN Money: Lawmakers attack Fed for being too secretive
“‘It’s time to yank the shroud off the Fed and shine some light on these events,’ said US House Committee on Oversight and Government Reform Chairman Edolphus Towns, D-NY, who in an opening statement repeatedly described the Fed as being ‘shrouded in secrecy’.
“‘I believe that before Congress acts on the president’s financial services reform proposal, we need to have a thorough understanding of what caused the current financial crisis and how the federal government responded.’
“The heated congressional hearing got under way Thursday with Federal Reserve Chairman Ben Bernanke defending the central bank’s role in negotiations with Bank of America (BAC) and with members of the House Government Reform committee expressing skepticism of the Fed’s decisions.
“Usually, the Fed chief goes to Capitol Hill to take questions on monetary policy and the economy. But the economy was barely touched on at Thursday’s hearing.
“Instead, lawmakers criticized the Fed as an agency that has too much power and yet too little transparency and questioned whether the Fed should become the uber regulator of the financial system envisioned by the Obama administration.
“Bernanke, in his first congressional appearance since the administration rolled out its controversial regulatory-revamp proposal, defended the planned overhaul of US financial rules. It’s clear something has to be done to prevent firms from growing so big that they pose a risk to the financial system, Bernanke said.
“‘Too big to fail is not a policy. It’s a major problem,’ he said. ‘I hope the system will be changed.’
“Lawmakers are reluctant to boost the Fed’s powers. Even though it could help prevent companies from becoming too-big-to-fail, critics have argued that the central bank didn’t do enough before the crisis began to protect consumers and discourage firms from taking on riskier strategies that led to the credit crunch.
“Bernanke, however, said the administration’s plan for overhauling US financial rules won’t greatly boost the central bank’s authorities.”
Source: Maya Jackson Randall, CNN Money, June 25, 2009.
Fox News: Mr. Sunshine? Ron Paul wins support to audit Fed Reserve
“The feisty congressman from Texas, whose insurgent ‘Ron Paul Revolution’ presidential campaign rankled Republican leaders last year, now has the GOP House leadership on his side – backing a measure that generated paltry support when he first introduced it 26 years ago.
“Paul, as of Tuesday, has won 245 co-sponsors to a bill that would require a full-fledged audit of the Federal Reserve by the end of 2010.
“Paul attracted just 18 co-sponsors when he authored a similar bill, which died, in 1983. While the impact Fed policies have on inflation is once again a concern, fears about loose monetary policy and excessive federal spending appear even more widespread in 2009.
“‘In the past, I never got much support, but I think it’s the financial crisis obviously that’s drawing so much attention to it, and people want to know more about the Federal Reserve,’ Paul told FOXNews.com.
“With the Federal Reserve holding interest rates at rock-bottom levels, pumping trillions into the economy and now poised to have new powers to oversee the financial system under President Obama’s proposed regulatory overhaul, Paul said lawmakers want transparency.
“‘If they give them a lot more power and there’s no more transparency, that’ll be a disaster,’ he said.
“The bill would call for the comptroller general in the Government Accountability Office to audit the Fed and report those findings to Congress. The GAO’s ability to conduct such audits now is severely restricted.”
Source: Judson Berger, Fox News, June 30, 2009.
Telegraph: China’s banks are an accident waiting to happen to every one of us
“Money is leaking instead into Shanghai’s stock casino, or being used to keep bankrupt builders on life support. It is doing very little to help lift the world economy out of slump.
“Fitch Ratings has been warning for some time that China’s lenders are wading into dangerous waters, but its latest report is even grimmer than bears had suspected.
“‘With much of the world immersed in crisis, China appears to be one of the few countries where the financial system continues to function largely without a glitch, but Fitch is growing increasingly wary,’ it said.
“‘Future losses on stimulus could turn out to be larger than expected, and it is unclear what share the central and/or local governments ultimately will be willing or able to bear.’
“The regime is so hellbent on meeting its growth target of 8% that it has given banks an implicit guarantee for what Fitch calls a ‘massive lending spree’.
“Bank exposure to corporate debt has reached $4,200 billion. It is rising at a 30% rate, even as profits contract at a 35% rate.
“Two facts stand out about China’s green shoots. While the Shanghai composite index is up 70% since November, Chinese imports are down 25% from a year ago. China is still draining real stimulus from the global economy.
“If the world’s biggest surplus state ($400 billion) is too structurally deformed to help offset the demand shock as Western debtors retrench, we are trapped in a long deflation slump.”
Source: Ambrose Evans-Pritchard, Telegraph, June 28, 2009.
Financial Times: Putin urges banks to boost lending
“The prime minister called on state banks to boost lending by up to $16 billion in fresh loans to shore up the economy, which has been battered by plunging commodity prices and the lack of international credit and is forecast to contract by 8.5% this year.
“‘I am asking the heads of financial institutions to control this situation and not to plan any summer holidays until the moment that this has been dealt with as it should,’ Mr Putin told officials at a government meeting.
“VTB, the state-controlled second-biggest lender, said bad loans had already surged three times this year to 6% of the total, and gave warning that it would face losses in 2009.
“The Russian government has already pledged more than 1,000 billion roubles to boost the capital of the biggest state banks.
“The government is locked in discussions about a new bail-out plan for the banking system that would see the government issue banks with Treasury bills in exchange for preferred shares in order to boost capital.”
Source: Catherine Belton, Financial Times, June 29, 2009.
MoneyNews: JPMorgan CEO – over regulation will cost the country
“While praising President Barack Obama’s efforts to reform the US financial system, Dimon said the emphasis should be on strengthening existing regulators over creating new ones.
“‘Any regulatory overhaul should ensure that governmental oversight of the financial system is efficient,’ wrote Dimon, who is widely regarded as the top banker to have been least tarnished by the financial crisis. ‘We should avoid the temptation to have multiple regulators just for the sake of having them.
“‘Three or four different regulators all looking at (and fighting over) the same issue is not a wise use of taxpayer money,’ he said. ‘Companies can’t operate that way. Neither should the government.’
“Obama last week unveiled a sweeping package of reforms to rewrite the rules for banks and capital markets in response to a severe financial crisis that has dragged down economies worldwide for more than a year.
“Dimon said he supports the creation of a single bank regulator, a move he said was long overdue.”
Source: MoneyNews, June 29, 2009.
MoneyNews: FDIC seeks deeper pockets for rising bank failures
“The FDIC wants to attract a new class of private equity fund buyers for banks that collapse during the financial crisis, but must provide more transparency than some of those potential investors are accustomed to.
“One proposal would require investors to keep the banks they acquire well capitalized at a 15% leverage ratio – or the bank’s capital divided by assets – for at least three years.
“Investors also would face limits on their ability to sell assets and lend from the banks they acquire. Investors that operate so-called ‘silo’ organizations where it’s hard to determine ownership of the group would not qualify as potential buyers
“FDIC Chairman Sheila Bair said some of the proposals likely will be ‘contentious’, especially the one on capital requirements. But she said the FDIC wants to attract more potential investors to auctions for failed banks.
“‘We want nontraditional investors,’ she said at an FDIC board meeting. ‘There is a significant need for capital and there is capital out there.'”
Source: MoneyNews, July 2, 2009.
Financial Times: Data give signs of global recovery
“The welcome news comes after nine months of the sharpest contraction in global manufacturing output since the second world war and a dramatic plunge in world trade as buyers of capital goods and consumer durables effectively went on strike
“Stuart Green, global economist with HSBC, said the signs from around the world indicated that ‘a spell in the financial wilderness now looks less likely for the major economies … with a slowly improving cyclical picture factored in for the rest of 2009 and 2010 across many regions’.
“But he and policymakers around the world fear that the coming upturn will be neither durable nor strong.
“The recovery in global manufacturing has come primarily because companies have sold off much of their accumulated stocks and are re-starting mothballed production lines. Once this temporary boost is completed, serious questions remain about the source of longer-term demand to maintain the current momentum.
“The June data on Wednesday came from a series of surveys of purchasing managers in the manufacturing sector, the area of the global economy hardest hit by the recession. Although the headline figures were positive only in China, the manufacturing output element of the data was positive in the US, the UK and Japan as well.
“The speed of contraction in continental European economies has also decreased substantially since the start of the year, when pessimism was at its height, registering the most positive signs from industry in the past 10 months.
“Chris Williamson, the chief economist of Markit economics, said: ‘The global manufacturing economy is being led out of recession by China, which registered a third consecutive monthly rise in output and the largest increase for a year.'”
Source: Chris Giles, Financial Times, July 1, 2009.
MoneyNews: Romer – US economy nearly stable
“‘We are going to get some serious oomph from the stimulus,’ Romer told the Financial Times. ‘The big impact starts to hit from about now onwards. It should make a material contribution to growth in the third quarter.’
“Romer, who has warned against tightening monetary and fiscal policy before a recovery is well established, said she’s now ‘more optimistic’ the economy is close to stabilizing.
“‘It is important to think about it now but policymakers should not start acting until we are really recovering well and are approaching full employment,’ she said.
“Romer said stimulus money was being disbursed at almost exactly the rate projected by the US Office of Management and Budget.
“An expert on monetary policy, she thinks the risk of inflation is ‘very low’.
“‘With unemployment and unused capacity high, it is not as if inflation is going to creep up on us,’ she said. ‘We will have a long period of time to figure out what to do.'”
Source: Julie Crawshaw, MoneyNews, July 1, 2009.
MoneyNews: Roubini – recession for another nine months
“‘This recession … is going to last another six to nine months,’ he told Bloomberg TV.
“‘People are talking a lot about these green shoots. But if I look at macroeconomic data for employment conditions, sales and consumption, about industrial production, housing, I see more yellow weeds than green shoots,’ Roubini said.
“By next year, oil prices will move toward $100, the economist said. In addition, the budget deficit will surge, and ‘therefore pressure on central banks to monetize is very significant, because otherwise long-term rates are going to spike much higher’.
“When recovery finally occurs, it will be ‘anemic and subpar’, with US growth registering 1% to 1.5% over the next couple years thanks to ‘fundamental imbalances in the housing sector, financial system, corporate sector and now the rising budget deficit’, he told CNBC.
“Unemployment might reach 11%, he said.
“Roubini sees the risk of a double-dip recession, with negative economic growth late next year.
“The effect on financial markets: ‘I believe there’s going to be a significant market correction for equities, for commodities and even for credit,’ he said.”
Source: MoneyNews, June 30, 2009.
Reuters: Soros predicts “stop-go” economy and higher rates
“Soros, one of the world’s most successful hedge fund managers who was speaking at a breakfast hosted by the Wall Street Journal, said borrowing costs are the major headwinds for the economy.
“‘As markets revive, fear of inflation will drive up interest rates, which will choke off recovery,’ he said.
“Rising US Treasury yields have driven mortgage rates back up, threatening a recovery in the housing market and a refinancing boom that has helped preserve the still-fragile health of recession-weary households and the banks that lend to them.
“The rise in bond yields and mortgage rates may also act to check the huge recent rally in global stock markets of the past three months, with the Federal Reserve trying to end an 18-month recession and yet not spur inflation.
“Soros went back into retirement earlier this year after leading his self-named firm through the 2008 crisis. He made about $1.1 billion last year, according to Institutional Investor’s Alpha Magazine.”
“‘The idea of self-correcting markets is a misconception,’ he said. What governments need to do, he said, is recognize they cannot prevent bubbles but instead try to control them from getting bigger.”
Source : Joseph Giannone and Jennifer Ablan, Reuters, June 30, 2009.
CNN Video: Krugman versus Taylor
Source: CNN Video, June 28, 2009.
MoneyNews: CBO report – US deficit to balloon
“That was the cautionary statement from the Congressional Budget Office in its latest long-term budget forecast, reported recently in The Wall Street Journal Real Time Economics blog.
“Government deficits will increase substantially, according to the CBO report, hitting more than 5.5% of Gross Domestic Product in 2035, 8% in 2050, and a whopping 19% in 2084.
“As a consequence of these potentially crippling deficits, the government would have to borrow more money and wages would be depressed.
“The obvious solution: The administration must put a lid on spending and boost taxes, according to the report.”
Source: MoneyNews, June 30, 2009.
Asha Bangalore (Northern Trust): ISM Factory Survey – improving at a gradual pace
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, July 1, 2009.
Asha Bangalore (Northern Trust): Auto sales fell slightly in June, but Q2 sales rose
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, July 1, 2009.
The Wall Street Journal: Car makers see end to sales slide
“New-vehicle sales in June fell 28% from a year earlier to 860,000 cars and light trucks, according to the market-research firm Autodata Corp. That would be the smallest decline in any month this year.
“‘We believe the industry is moving beyond the bottom,’ said Bob Carter, group vice president of Toyota Motor Co. in the US. ‘The weak economy’s grip on the auto industry appears to be lessening.'”
Source: The Wall Street Journal, July 2, 2009.
Standard & Poor’s: Case-Shiller Home Price Indices – pace of home price declines moderate
“The chart below depicts the annual returns of the 10-City Composite and the 20-City Composite Home Price Indices. The 10-City and 20-City Composites declined 18.0% and 18.1%, respectively, in April compared to the same month in 2008. These are improvements over their returns reported for March, down 18.7% for both indices. For the past three months, the 10-City and 20-City Composites have recorded an improvement in annual returns. Record annual declines were reported for both indices with their respective January data, -19.4% for the 10-City Composite and -19.0% for the 20-City Composite.
“‘The pace of decline in residential real estate slowed in April,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s. ‘In addition to the 10-City and 20-City Composites, 13 of the 20 metro areas also saw improvement in their annual return compared to that of March.'”
Source: Standard & Poor’s, June 30, 2009.
Barry Ritholtz (The Big Picture): Case-Shiller – 100-year chart
Source: Barry Ritholtz, The Big Picture, July 1, 2009.
Asha Bangalore (Northern Trust): Pending Home Sales Index advances for fourth straight month
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, July 1, 2009.
Bloomberg: Delinquencies double on least-risky loans
“Prime mortgages 60 days or more past due climbed to 2.9% of such loans through March 31 from 1.1% at the same point in 2008, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said today in a report. First-time foreclosure filings on the loans rose 22% from the fourth quarter, the report said.
“‘I’m very concerned about the rise in delinquent mortgages and foreclosure actions,’ Comptroller of the Currency John Dugan said in a statement with the report. President Barack Obama’s plan to create ‘sustainable, payment-reducing modifications is a positive step that should show significant benefits in the coming months,’ Dugan said.
“Obama’s program, unveiled February 18, aims to help as many as 4 million homeowners by modifying loans and calls for Fannie Mae and Freddie Mac to refinance mortgages for as many as 5 million borrowers who owe more than their houses are worth. Foreclosure filings surpassed 300,000 for a third straight month in May, according to RealtyTrac., and the US economy has shed about 6 million jobs since the recession began in 2007.”
Source: Margaret Chadbourn, Bloomberg, June 30, 2009.
Asha Bangalore (Northern Trust): Labor market report – details less bearish than headlines
“Establishment Survey: Nonfarm payrolls fell 467,000 in May after an upwardly revised 322,000 decline in May. The April and May revisions of payroll employment led to a net increase of 8,000 jobs. The headline number includes a loss 49,000 government jobs related to the 2010 Census.
“The path of economic recovery is not a straight line; ups and downs in hiring are part and parcel of the expected trajectory of employment. Stepping back in time, payroll employment showed a firm trend only in 1993 (+2.1 million jobs) although the 1990-1991 recession ended in March 1991. Payroll jobs declined in 1991 (-1.106 million) and rose only 338,000 in 1992, reflecting tepid quarterly gains. After the 2001 recession, hiring gathered momentum only in the fourth quarter of 2003.
“Therefore, it is important to note that payroll growth occurs well after a recession has ended. At the present time, the recession has not ended yet and it follows that it is premature to see significant gains in employment in the near term. In fact, it is noteworthy that on a quarterly average basis, payroll employment fell 1.551 million in the second quarter compared with a loss of 2.065 million jobs in the first quarter of 2009.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, July 2, 2009.
CNBC: Mounting jobless claims force states to borrow funds
“A record 30 of the country’s 50 states are expected to have to borrow up to $17 billion by next year, said Rick McHugh of the National Employment Law Project, a nonpartisan advocacy group.
“‘We are setting the stage for big pressures for states to restrict eligibility and benefit levels,’ McHugh said. ‘Those type of restrictive actions undercut the (Depression-era program’s) economic and social stability purposes.’
“The state-run unemployment insurance programs are normally financed with payroll taxes paid by employers on each worker. But the funds’ tax revenues are falling at the same time as benefit demands are rising.
“Nine million Americans are receiving jobless benefits, triple the number who got checks at the beginning of the year. Experts predict the number of recipients will peak sometime this summer as long-term unemployed run out of benefits, which were recently extended and last for 59 weeks in most cases.”
Source: CNBC, June 26, 2009.
Asha Bangalore (Northern Trust): Consumer Confidence Index slips in June
“The outlook about the job market turned pessimistic with a larger percentage of respondents indicating that it is hard to find jobs in June versus May (44.8 versus 43.9 in May) and a fewer percentage of respondents noting that jobs are plentiful (4.5 versus 5.8 in May).”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, June 30, 2009.
BCA Research: Jump in US income bodes well for spending
“Personal spending rose 0.3% in May, as households saved most of a 1.4% boost to income from government social payments and tax cuts (the saving rate rose to almost 7%). The ability of the equity market to advance hinges importantly on consumer spending. A modest upturn in spending would provide investors with greater confidence that the economy will not lapse back into recession in 2010.
“It is always difficult to see how consumers will boost spending when payrolls are shrinking, especially given the tremendous loss of wealth. However, in a typical recovery consumers become more upbeat on the outlook and spending edges higher. This generates increased income and sets off an inventory restocking phase, which then feeds back into stronger consumer confidence and spending. With a lag, payrolls begin to expand again.
“The chart compares the current recession with the average of past cycles, each aligned with the end of the recession. One difference this time is that real disposable growth income has accelerated before the upturn in consumer spending. The contraction in wages and salaries has been more than offset by lower taxes and government transfer payments. This year’s tax cut has a greater chance of being spent than the one-off rebate checks mailed out last year. The jump in income provides some leeway to increase spending without resorting to credit cards.
“Bottom line: there are good odds that the equity market will benefit in the coming months from better news from the consumer sector.”
Source: BCA Research – Daily Insights, June 29, 2009.
Charlie Rose: A conversation about the sentencing of Bernie Madoff
Source: Charlie Rose, June 29, 2009.
Bespoke: Equities – a wild ride so far
“And while the S&P 500 is up as a whole, only three of the index’s ten major sectors are positive in 2009. Technology has been the big winner so far with a gain of 24.08%. Materials is up the second most at 12.28%, and Consumer Discretionary ranks third at 7.52%. And even though sectors like Industrials and Financials have been going up for months now, both are still down for the year. The Industrials sector is down the most at -7.68%, while Financials are down 4.76%.
“While the year started off horribly for the market, it is heading into July in a nice uptrend even though it has been floundering for a few weeks now. While some investors are getting frustrated with the market’s inability to break to new highs, they easily forget how bad things were just a few months ago. Up 1.78% in ’09 with everything that has happened – we’ll take it!
Source: Bespoke, June 30, 2009.
TimesOnline: Ten top investment tips from Mark Mobius
“Here Dr Mobius draws on his years of experience to offer ten investment tips to Money Central readers.
1. Keep an eye on value
2. Don’t follow the herd
3. Be patient
4. Dripfeed your money into the market
5. Examine your own situation and your appetite for risk
6. Diversify your portfolio
7. Don’t listen to your friends or neighbours when it comes to making investment decisions
8. Don’t believe everything you read in newspapers, because things tend to be exaggerated
9. Go into emerging markets because that is where the growth is
10. Look at countries where populations are relatively young
Source: TimesOnline, June 30, 2009.
Gareth Williams (ING): Peak seen in profit warnings
“‘As the first half of the year draws to a close, the tally of profit warnings so far in 2009 stands at 65,’ he says.
“‘This is less than half of the 142 total recorded in the second half of 2008 and is also lower than the comparable first half figures for both 2007 and 2008.’
“But the improvement needs to be placed in the context of a number of companies abandoning profit guidance altogether, as well as greatly reduced expectations.
“‘Twelve-month forward earnings forecasts have been cut by around 40% over the last year.’
“Even so, current warnings trends point to a shorter downturn than in 2001-03, he says.
“At the rate implied by the first half, the number of warnings in the whole of 2009 looks set to come in at 138, 35% lower than in 2008 and back to pre-crisis levels.
“Mr Williams says an analysis of warnings by size reveals that mid-cap stocks are still suffering, in contrast to an improving picture for large and small caps. “‘We would attribute this to a greater degree of domestic cyclicality within mid-caps.’
“Profit warnings are addictive, he says. ‘Nearly half of the large-cap stocks warning this year warned last year too.'”
Source: Gareth Williams, ING (via Financial Times), June 29, 2009.
Bespoke: Q2 EPS growth expectations are ugly, but getting less ugly
Source: Bespoke, June 29, 2009.
Financial Times: Record fundraising buoys banks’ earnings
“With two days to go before the end of the quarter and a fortnight before banks begin reporting results, executives said the strong performance in trading and underwriting in the first quarter was exceeded in the three months to June.
“The completion of the US government’s stress tests set off a flurry of activity on Wall Street, with financial institutions reaping large fees for helping rivals raise equity to plug capital shortfalls and repay federal aid.
“Banks and other financial groups raised $89 billion in equity via 92 deals in the second quarter, the highest number of deals on record and the highest dollar volume for a year.
“US groups’ second-quarter equity issuance of $259 billion was more than three times the $71.3 billion raised in the first quarter, according to Dealogic.
“A rebound in high-yield bond activity and unusually high margins in fixed income trading also contributed to what one Wall Street executive called a ‘perfect storm for investment banking businesses’.
“The boom in securities’ markets has benefited banks such as Goldman Sachs and Morgan Stanley, whose business models had been called into question at the turmoil’s height due to fears over their ability to fund themselves without retail deposits.”
Source: Francesco Guerrera, Saskia Scholtes and Michael MacKenzie, Financial Times, June 28, 2009.
Bespoke: Percentage of stocks above 50-day moving averages
Source: Bespoke, July 2, 2009.
Richard Russell (Dow Theory Letters): Stock market forming head-and-shoulders
“Remember, and this is crucial, the Obama government is doing everything it can to create asset inflation. If the Dow breaks down here, I think the market will be saying that the government has failed and deflation is the winner. I’ve said that Bernanke will stay on the inflation path until the bonds say they must stop their spending. Wait, it may be the Dow that will say, ‘You’ve failed, and the forces of deflation are stronger than the government’s attempt to inflate’.
“The primary trend of the market remains bearish. The primary trend is more powerful than the Fed and the Treasury and Congress and the president taken together.”
Source: Richard Russell, Dow Theory Letters, June 30, 2009.
Richard Russell (Dow Theory Letters): Lowry’s statistics behaving bearishly
“Let’s look at the actual Lowry’s figures:
March 9 – Buying Power Index at 96.
Source: Richard Russell, Dow Theory Letters, June 29, 2009.
David Fuller (Fullermoney): Equities – probable bumps in the road
“First among the probable bumps is a an extension of the reactions to date, which have affected all important stock markets recently except for China. This is likely to be triggered by Wall Street and / or China – by far the two most important markets in terms of global investor sentiment.
“In some respects, the next reaction or correction by China could be the most important trigger, even though the USA’s stock market capitalisation is still much larger. The difference is narrowing and China is the ascendant power. Global investors have poured money into China and other leading emerging markets in recent months – wisely in my view, but these remain high-beta markets.
“The higher China moves in the short term, and it is currently accelerating, the sharper the reaction is likely to be. I think we are close to the commencement of a medium-term correction. Some may wish to sell in anticipation of this move or on the first downward dynamic shown on the Shanghai Composite Index. Certainly that would be preferable to selling after a reaction or correction.
“I personally will hold on to my long-term investment positions in China, provided the mild acceleration to date does not become extreme, because I think it most unlikely that China will end a bull trend in one sustained, reaction-free advance. I would regard either a ranging reaction or a sharper correction as buying opportunity.
“Meanwhile, the Wall Street leash effect, which was positive from early March into early May, and no worse than neutral subsequently, is in danger of turning negative once again. This would be signalled by a break beneath the current narrow range, the first evidence of which would be a close beneath 885 for the S&P 500 Index.
“Of course there are many other stock markets of interest to all of us but these are the two which really count in terms of leash effect, thus my focus on them. A reaction by China combined with a downward break by the S&P would have an immediate bearish effect on global stock market sentiment. Moreover, Wall Street would quickly become the bigger concern because whereas China leads in terms of bullish expectations, the US’s economic problems remain shocking.
“Technically, while the Shanghai Composite Index confirmed its bull market status months ago, the S&P 500 Index has yet to complete a base formation. Until it does by sustaining a break above 1,000, many investors will understandably remain nervous.
“The other big bump in the road to recovery is the price of crude oil. This has probably commenced at least a reaction. However a sustained move above $75 will introduce a headwind, increasing in strength with each additional dollar to the upside. It will happen and almost certainly before we have evidence of a synchronised global economic recovery, which I suspect will be modest in terms of OECD countries.
“Other bumps will include the next rise in long-dated government bond yields. Currently these are in retreat and therefore not a near-term concern. Also, the next decline in the USD, should it gather pace, would weigh on sentiment.
“Last but certainly not least in terms of the medium to longer-term outlook for stock markets will be monetary policy. Monetary policy tightening will eventually kill off the current bull market, such as it is. This is not a near-term risk for the US market or that of any other OECD country. My guess is that monetary tightening will eventually be led by China, as we saw in the last bull market cycle. When that occurs, and I expect it to be a leading indicator, we should plan our exit strategies.”
Source: David Fuller, Fullermoney, July 2, 2009.
Bloomberg: Emerging markets outlook is “optimistic”, Faber says
“‘We are living through major changes in the world,’ said Faber, the publisher of the Gloom, Boom and Doom report. Emerging markets such as China are becoming more significant to the global economy, and ‘I don’t think this will be reversed’, he said today at an Asian Investor magazine forum in Seoul.
“The MSCI Emerging Markets Index has jumped 35% since the end of March, headed for a record quarter after inflows from investors surged and stimulus plans from China to Brazil bolstered confidence. That compares with a 21% increase in the developed-market MSCI World Index.
“‘I agree that emerging markets’ fundamentals are improving, as some leading indicators show,’ said Christian Jin, a global-equity fund manager at HI Asset Management Co. in Seoul, which oversees the equivalent of $7.6 billion in assets. ‘The developed nations are still saddled with the problems in their financial sectors and housing markets caused by subprime.’
“No developed markets rank among this year’s 10 best performers out of 89 global indexes, according to data compiled by Bloomberg. Peru and China have led gains.”
Source: Kyung Bok Cho, Bloomberg, June 30, 2009.
Bloomberg: Mobius says Russian stocks to “pick up nicely”
“The Russian Micex Index’s 13% decline this month is ‘just a correction’ and prospects for the market ‘remain good’, Mobius said at a meeting with investors and the media during a visit to the Warsaw Stock Exchange today.
“‘A new bull market has already started,’ said Mobius, who helps oversee about $24 billion of emerging-market assets as executive chairman of Templeton. ‘The overall trend on commodities is upward.’
“Russia’s Micex has rallied 91% since a four-year low on October 24, as investors returned after oil more than doubled and the nation’s currency, the ruble, recovered from a 19% slide against the dollar last year.
“Mobius expects oil prices to continue rising because of demand from China and India, and as investors use commodities to hedge against a weakening dollar.
“‘The reason why we’ve been so bullish on commodities is of course this demand-supply issue and also because commodities are denominated in dollars,’ Mobius said.”
Source: Pawel Kozlowski, Bloomberg, June 29, 2009.
MoneyNews: Rogers – dollar on shaky ground
“He expects to sell US dollars soon and remains enamored with commodities.
“‘I have no shorts for one of the first times in my life,’ Rogers told Reuters TV. ‘On the other hand I don’t see much to buy.’
“The massive fiscal and monetary stimulus around the globe, and the debt burdens it will create, means trouble ahead for most major currencies, he said.
“Rogers likes the Canadian dollar, one of the ‘soundest’ currencies, whose fate is closely tied to commodities.
“‘I’ve got out of my pounds. I will be getting out of my (US) dollars soon,’ Rogers said.
“Commodities are his real favorite.
“‘I’d rather be a farmer than a stockbroker for the next couple of years,’ he said. ‘No one you went to school with became a farmer … so we have a shortage of farmers.’
“Rogers also still favors Asia over competing economies.”
“Asked if he still sees the economy in ‘shambles’, Buffett said, ‘I’m afraid that’s true.'”
Source: Dan Weil, MoneyNews, June 30, 2009.
Reuters: China requests reserve currency debate at G8
“One G8 source who was involved in the negotiations said China made the request during preparatory talks about a joint statement to be issued on the second day of the summit in L’Aquila by the G8 plus the G5 (Brazil, India, China, Mexico and South Africa) and also Egypt.
“This forum, the so-called ‘G14′, meets on July 9 to discuss the financial crisis, trade and climate change and for the first time a G8 summit will also produce a joint G14 statement.
“A European source with knowledge of preparations for the summit also said China had raised the subject of a reserve currency debate and that it might be mentioned during the meeting, though the source added: ‘Any country at the meeting can raise issues they see fit.’
“The debate centres on proposals by some emerging powers that an alternative should be found to the US dollar as the global reserve currency, to reflect the shifting balance of power in the globalised economy.
“China’s central bank governor said in March the world should consider using the International Monetary Fund’s Special Drawing Rights (SDRs) as a super-sovereign currency. The SDR is an international reserve asset allocated to IMF members and its exchange rate is determined by a basket of dollars, euros, sterling and yen.”
Source: Reuters, July 1, 2009.
Richard Russell (Dow Theory Letters): Gold is getting interesting
“Does gold have the strength to attack the 1004 resistance level again? That’s what we’re going to find out in this fateful month of July. The red arrow points to the juncture where the 10-week MA bullishly crossed above the 40-week MA.”
Source: Richard Russell, Dow Theory Letters, July 2, 2009.
Bespoke: Baltic Dry Index stuck in a holding pattern
Source: Bespoke, June 30, 2009.
Financial Times: Japan past worst of slump, says minister
“The comments by Mr Yosano, who is also minister for economic and fiscal policy, came just before a quarterly Bank of Japan survey showed that business confidence had risen for the first time in two and a half years.
“In an interview with the FT, Mr Yosano cited industries such as automaking, steel and electrical machinery as leading the rebound after an ‘unthinkably bad’ first quarter of 2009.
“‘Previously, economic conditions were akin to diving head-first off the Eiffel Tower, but since April indicators for all sectors have shown gradual improvement,’ the finance minister said.
“He said the government was likely to announce an economic growth forecast of 0.5% or 0.6% for the year from April 2010, compared with an expected 3% decline for the current fiscal year.
“‘This year will be a year Japan must endure. But I’m convinced that next year there will be positive growth,’ he said.
“Optimism about Japan’s prospects has been fuelled in recent weeks by rising industrial output and the end of an export rout, with further cheer offered on Tuesday by the news that household spending in May was up 0.3% year-on-year.
“However, economists said spending had been supported by the short-term effect of the government’s Y2,000 billion ($20.8 billion) cash handout. Data released on Tuesday showed unemployment rising to a half-decade high of 5.2%.
“Mr Yosano warned that the recovery could still be hit by ‘many kinds’ of possible negative factors, citing in particular uncertainty about whether the US and Europe had truly resolved the problems in their financial sectors.”
Source: Mure Dickie, Financial Times, June 30, 2009.
James Pressler (Northern Trust): Japan – is the worst truly over?
“The Tankan survey focuses on manufacturers, thus providing an excellent look into the export sector. Not surprisingly, the headline index has hit all-time lows of late, but the Q2 reading rose just a touch – to -48 from -58 in Q1 and from +5 in Q2 2008. Not a huge gain in itself, but compared with the economy’s trajectory of late, any good news is appreciated.
“More importantly perhaps, this rise between Q1 and Q2 signals a brief respite for the manufacturing sector and for the economy in general, even though the figure came in below the consensus forecast of -43. It appears that this slight recovery had something to do with companies replenishing some of their inventories last quarter, perhaps related to fiscal stimulus measures implemented in the new fiscal year that started in April, and perhaps spurred by some of the talk about ‘the worst is over for the global economy’ and ‘green shoots of recovery.’
“Whatever the reason, analysts are now forecasting that Japan’s Q2 GDP on a quarter-on-quarter basis grew by 0.4%. And as surprising as that may sound, we generally agree with the consensus. A reading of -48 still suggests a manufacturing sector truly in dire straits, but viewed in isolation the difference between quarters is still +10, and that difference tracks quite nicely with the quarterly change in GDP.
“Looking past this brief burst of growth, however, we are definitely not as bullish as Japanese manufacturers. The Tankan’s forecast index suggests that in Q3, business conditions will rise another 20+ points, furthering the gains already witnessed last quarter, and we just do not see it. Last quarter, economies across the globe felt the rush of huge fiscal stimulus packages being initiated and dramatic monetary easing, and they showed up in plenty of indicators. However, most of the effects were sharp, one-off jolts rather than the resumption of economic activity, and of late analysts are recognizing that the burst of fiscal energy is being replaced with a sobering recognition that even if the worst is over, any type of self-sustaining recovery is still a long way away.”
Source: James Pressler, Northern Trust – Daily Global Commentary, July 1, 2009.
Financial Times: UK economy shrinks most in 50 years
“The figures showed a 2.4% quarter-on-quarter fall in gross domestic product for the first three months of 2009 – much sharper than the 1.9% initially calculated.
“Not since the time of Harold Macmillan have we ‘had it so bad’. It was the worst quarterly performance since the second quarter of 1958. The 4.9% drop compared with a year earlier was the largest since records began in 1948.
“Macmillan told Britain in 1957 it had ‘never had it so good’. The economy nosedived the next year. But the 2.7% fall in output in the second quarter of 1958 was a blip between two periods of rapid growth.
“This year’s disastrous start underscores the depth of the current recession, following three consecutive quarters of shrinking output. Come the election, Gordon Brown, the prime minister, will struggle to paint as rosy a picture as Mr Macmillan did.
“Even if the economy recovers in the second quarter to its normal 2.5% annual growth rate, something economists think is highly unlikely, it is likely to take until 2011 before output returns to its pre-recession levels.
“More worrying for the Treasury was the sharp downward revision in the cash value of the economy, since this will depress tax revenues and add to government borrowing. Nominal GDP fell 3% in the first quarter, even faster than inflation-adjusted output, because prices had fallen, said the Office for National Statistics.
“‘You’ve never had it so bad’ seems the most apt summary of the state of the UK economy in the first quarter,’ said Ross Walker, economist at RBS. ‘Although to some extent this is ‘old news’, it does serve to emphasise the size of the hole out of which the UK must climb.’
“Since the end of March, there have been signs the economy is stabilising. Manufacturing output grew in March and April, while survey data suggest the economy has returned to growth.
“The National Institute for Economic and Social Research, a respected forecaster, said it thought the economy began to grow again in April.”
Source: Daniel Pimlott, Financial Times, June 30, 2009.
Nationwide: UK house prices – a significant improvement
“Following five consecutive quarter-on-quarter declines, house prices in Greater London rose by a seasonally adjusted 4.8% in the second quarter of 2009. This increase pushed the annual rate of change up from -18.2% in the first three months of the year to -10.2% in the second quarter.
“Although the fall in employment and incomes in the City of London remains a headwind for the capital’s property market, the substantial fall in the value of the pound against major currencies does appear to have attracted some significant interest from foreign buyers, especially in prime locations. A limited supply of good quality homes also appears to have underpinned prices over the spring months.”
Source: Nationwide, June 30, 2009.
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