Words from the (investment) wise for the week that was (August 10 – 16, 2009)

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During the week marking the second anniversary of the start of the credit crunch, stocks, copper, nickel, zinc and sugar recorded fresh 2009 highs. But the celebrations came to an abrupt end as caution crept back into investors’ vocabulary on Friday when it dawned upon pundits that markets were running away from economic reality. On top of that, Chinese equities – a leading stock market on the way up – saw a reversal of fortune and declined to a five-week low.

This is where the Ecclesiastes-based lyrics of the Byrds’s classic, Turn, Turn, Turn, started resounding in my head: “To everything (turn, turn, turn), There is a season (turn, turn, turn), And a time for every purpose, under heaven, A time to gain, a time to lose”  (Click here for audio.)

16-08-09-01

Source: Mike Keefe (hat tip: The Big Picture)

Paul Kasriel, chief economist of Northern Trust, reports that the meeting statement of the Federal Open Market Committee (FOMC), released on Wednesday, was a bit more optimistic about the near-term economic environment, changing its language from “the pace of economic contraction is slowing” at the June 24 meeting to “economic activity is leveling out”. However, the communiqué also said that household spending would be constrained by “sluggish income growth”, in addition to the other constraining factors mentioned in the June 24 statement – “ongoing job losses, lower household wealth, and tight credit”.

“Given our current view that the recovery is going to be subdued and uneven over the next several quarters, we do not expect any federal funds rate increases from the FOMC until June 2010, at the earliest,” said Kasriel.

Shorter-dated US, UK and other government bond yields – securities that are sensitive to interest rate movements – declined on indications that benchmark interest rates would remain at low levels for an extended period of time. Longer-dated US yields also fell after the Fed announced that its Treasury purchase program would be extended until October. “The point is the Fed said it would keep the punch bowl open an extra month but it would not increase the punch that is already in the bowl. It will just dole it out in smaller increments over an extra month,” remarked Bill King (The King Report).

To James Grant (Grant’s Interest Rate Observer) the level of Treasury yields spells danger. He said: “Vacation-time thought experiment: With the knowledge that the US government will be borrowing as much as $3.5 trillion from the public in fiscal years 2009, 2010 and 2011, approximately matching the Treasury’s cumulative borrowing between 1789 and 1994, would you have guessed that the yield on the 10-year Note would today be hovering in the neighborhood of only 3.7%? If ‘yes’ is your answer, you must not go away on vacation this month. You have too hot a hand to stay away from the office.”

The past week’s performance of the major asset classes is summarized by the chart below, showing risky assets starting to take a breather.

16-08-09-02

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

The MSCI World Index (+0.1%) and MSCI Emerging Markets Index (unchanged) marked time last week, but are still showing solid year-to-date gains of +15.6% and +50.4% respectively. As weakness crept in towards the close of the week, the US and a number of other markets snapped a winning streak of four straight weeks. Emerging markets underperformed developed markets for the second week running since the beginning of May, indicating signs of risk appetite abating somewhat.

Click here or on the table below for a larger image.

16-08-09-03

Top performers in the stock markets this week were Bulgaria (+9.4%), Lithuania (+6.7%), Estonia (+6.5%), Vietnam (+5.5%) and Venezuela (+4.5%). The top three positions were again occupied by countries from Eastern Europe that are still playing catch-up as the scare of a banking collapse in the region dissipates. At the bottom end of the performance rankings, countries included China (‑6.6%, last week -4.4%), Nigeria (-4.5%), Luxembourg (-3.6%), Cyprus (-3.2%) and Israel (-2.8%).

After surging by 90.7% since the beginning of the year and notching up seven straight weeks of gains, the Chinese Shanghai Composite Index has now declined by 12.2% since its peak of August 4, taking the Index back to its early-July level. On Friday, the Index (3,047) dropped to below its 50-day moving average (3,103), but it is still comfortably trading above its 200-day line (2,420). The Rate-of-Change Indicator (black line in the bottom section of the chart) has broken below the zero line, thereby flashing a sell signal.

16-08-09-04

Source: StockCharts.com

Of the 94 stock markets I keep on my radar screen, a majority of 63% (last week 74%) recorded gains, 33% (21%) showed losses and 4% (5%) remained unchanged. (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 Vanguard Extended Duration Treasury (EDV) (+5.2%), iShares MSCI Austria (EWO) (+4.4%) and WisdomTree Japan SmallCap Dividend (DFJ) (+3.8%).

At the bottom end of the performance rankings, ETFs included Market Vectors Solar Energy (KWT) (-5.8%), SPDR KBW Regional Banking (KRE) (‑5.1%) and iShares Cohen & Steers Realty Majors (ICF) (-4.9%).

On the credit front, an 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 (albeit not to the extent to restore the ratio to pre-crisis levels). As to be expected, there is also a close relationship between the Index and the movement of the benchmark US stock market indices.

16-08-09-05

Source: I-Net Bridge

Economists of the ilk of John Mauldin (Thoughts from the Frontline) and Nouriel Roubini (RGE Monitor) warn that the coming “recovery” may be anemic and not much more than a “statistical recovery”. In this regard, the quote du jour this week comes from Lawrence Mishel, president of the Economic Policy Institute, who described the situation as follows in The Washington Post: “Economists are using one concept of recession that is at total variance with how a normal human being thinks of it. A normal human being thinks of a recession as: You fell into a hole, and as long as you’re in a hole, you’re in a recession. Economists think of [a recession's end] as … when the economy stops shrinking.”

Other news is that the Federal Deposit Insurance Corp (FDIC) seized Colonial Bank on Friday – the sixth largest bank failure in US history. Additionally, regulators closed four more banks, bringing the tally of US bank failures in 2009 to 77, including 32 since July 1.

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”, “economy”, “bank”, “prices” and “China” featured prominently. Interestingly, “recovery” also moved up the ranks as the global economy seems to have turned the corner.

16-08-09-06

The key moving-average levels for the major US indices, the BRIC countries and South Africa (where home is) are given in the table below. With the exception of the Chinese Shanghai Composite Index, which fell below its 50-day moving average on Friday, all the indices are trading above their respective 50- and 200-day moving averages. The 50-day lines are also in all instances above the 200-day lines and therefore not threatening the bullish “golden crosses” established when the 50-day averages broke upwards through the 200-day averages.

The steepening uptrend of a number of indices has become frothy and some degree of reversion to mean is probably overdue. I believe this process – which could take the form of either a pullback or a consolidation (i.e. ranging) pattern – might have commenced with the declines in China and elsewhere. The July lows are also given in the table, as these levels may offer support for a number of the indices.

Click here or on the table below for a larger image.

16-08-09-07

Long-timer Richard Russell (Dow Theory Letters) said: “Some of the smartest and most successful men and women in the world disagree as to whether we are dealing with a correction in an ongoing bear market – or whether we are dealing with a new bull market. Nobody on the planet possesses the final, ultimate answer. I happen to believe we’re dealing with an upward correction in an ongoing bear market, and that opinion is what keeps me on the edge of my seat. I’m worried about the economy, I’m worried about the future, and I’m worried about the market itself.

“Because this correction, so far, has been impressive, many analysts are calling it a ‘cyclical bull market’ instead of a bear market rally. I don’t care what you call it, if I’m correct, if, indeed, we are in a rally in a bear market, I want to be on my guard. I went through a number of these ‘cyclical bull markets’ during the 1966 to 1980 bear market, and I saw a lot of investors lose their shirts when those various bear market rallies unexpectedly topped out.”

Doug Kass (TheStreet.com), who accurately called the March bottom, is now outright bearish, saying: “The market optimism we are now experiencing in the expectation of a clean hand-over of the baton of stimulation from the consumer (2000-2006) to the government (2008-??) might be more short-lived than many believe, as the price of stimulation, regardless of whether its source is the private or public sector, holds the promise of being more of a growth retardant. With the debt supercycle continuing apace (but in a public sector context), the fragility and inherently unstable ‘balance of financial terror’ argue for a not-so-benign and extremely volatile stock market future.

“… the margin of safety is becoming ever more thin as the enemy of the rational buyer, namely optimism, reaches new heights. … since a self-sustaining economic recovery appears doubtful, I do not believe we have started a new bull market. Rather, it is more than likely that economic growth will disappoint in late 2009/early 2010 as the domestic economy confronts many of the emerging secular challenges.”

On Friday, I published a short post on Chinese equities and said: “… it looks if more downside is in store for the Shanghai Composite Index and it would not come as a surprise if lower Chinese equities serve as the catalyst for a well-deserved pullback in global stock markets.” With world markets coming off the boil by the close of the week, China may already have started leading world markets lower. A much-needed pullback/consolidation of frothy markets looks likely – be cautious out there!

For more discussion on the direction of financial markets, see my recent posts “Stock markets disconnected from economy“, “All eyes on Chinese equities“, “Bob Prechter  – ‘Step aside’ from long positions“, “When will the rally end?“, “Revisiting Bob Farrell’s rule #9” and “More on Bob Farrell’s rule #8. (And do make a point of listening to Donald Coxe’s webcast of August 13, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
The Recession Status Map below, courtesy of Dismal Scientist Economy.com, aggregates growth statistics from around the world and allows one to see at a glance which economies are in recession, at risk or beginning to recover. Click on the map to link to the interactive version.

16-08-09-08

Source: Dismal Scientist

Although the recessionary conditions still dominate, global business confidence turned positive last week for the first time since early last October. (The chart below uses a four-week moving average and is therefore not yet reflecting the break above the zero line.) “The gains in sentiment are evident across the entire global economy and all industries,” said the latest Survey of Business Confidence of the World by Moody’s Economy.com. Businesses’ broad assessment of the current economic environment and the outlook into early 2010 are particularly upbeat. However, despite the steady improvement in confidence, the Survey results remain consistent with a global economy that is still in recession.

16-08-09-09

Source: Moody’s Economy.com

The German and French economies unexpectedly bounced back in the second quarter – both grew at 0.3% in the three months to the end of June after having suffered four straight quarters of negative growth. This resulted in GDP in the Eurozone falling by only 0.1% in the last quarter. Meanwhile, the UK’s GDP lags the OECD economies with a second-quarter decline of 0.8%.”

A snapshot of the week’s US economic reports is provided below. (Click on the dates to see Northern Trust‘s assessment of the various data releases.)

Friday, August 14
• The factory sector has turned the corner
• Inflation remains contained
• Consumer Sentiment Index dips again

Thursday, August 13
• Gasoline prices bring down total retail sales in July
• Jobless claims report – sum of continuing claims and special programs advances for second consecutive week

Wednesday, August 12
• FOMC meeting statement – the Fed defines “autumn”
• Trade gap widens while exports also advance

Tuesday, August 11
• Q2 productivity surge is temporary
• Small business optimism dips slightly in July

Also, Zillow.com reported (via Bloomberg) that almost one-quarter of US mortgage holders owed more than their homes were worth in the second quarter, expecting the figure to rise to as much as 30% by mid-2010 as job losses and foreclosures climb.

George Soros said in an interview with Reuters that the US economy had hit bottom and the current quarter would see positive growth due to the government’s stimulus spending. He said he did not believe the economy needed further stimulus money, notwithstanding calls for a second round of spending [from the likes of Nobel laureate Paul Krugman].

Meanwhile, a survey by The Wall Street Journal among 52 economists (with 47 respondents) reported that 27 participants said the recession had ended and 11 expected a trough this month or next. “Only six economists expect the Fed to raise the federal funds rate, now between 0% and 0.25%, this year. Most expect an increase at some point in 2010, but more than a quarter of respondents don’t see the rate moving until 2011 or later.”

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Source: The Wall Street Journal, August 11, 2009.

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Date

Time (ET)

StatisticFor

Actual

Briefing Forecast

Market Expects

Prior

Aug 11

8:30 AM

Productivity-PreliminaryQ2

6.4%

5.2%

5.5%

0.3%

Aug 11

8:30 AM

Unit Labor CostsQ2

-5.8%

-2.2%

-2.5%

-2.7%

Aug 11

10:00 AM

Wholesale InventoriesJun

-1.7%

-0.9%

-0.9%

-1.2%

Aug 12

8:30 AM

Trade BalanceJun

-$27.0B

-$31.0B

-$28.7B

-$26.0B

Aug 12

10:30 AM

Crude Inventories08/07

+2.52M

NA

NA

+1.67M

Aug 12

2:00 PM

Treasury BudgetJul

-$180.7B

NA

-$180.0B

-$102.8B

Aug 12

2:15 PM

FOMC Rate Decision-

0.00%-0.25%

-

-

0.00%-0.25%

Aug 13

8:30 AM

Export Prices ex-agricultureJul

0.2%

NA

NA

0.7%

Aug 13

8:30 AM

Import Prices ex-oilJul

-0.2%

NA

NA

0.2%

Aug 13

8:30 AM

Initial Claims08/08

558K

540K

545K

554K

Aug 13

8:30 AM

Retail SalesJul

-0.1%

0.9%

0.8%

0.8%

Aug 13

8:30 AM

Retail Sales ex-autoJul

-0.6%

0.3%

0.1%

0.5%

Aug 13

10:00 AM

Business InventoriesJun

-1.1%

-0.9%

-0.9%

-1.2%

Aug 14

8:30 AM

Core CPIJul

0.1%

0.1%

0.1%

0.2%

Aug 14

8:30 AM

CPIJul

0.0%

0.0%

0.0%

0.7%

Aug 14

9:15 AM

Capacity UtilizationJul

68.5%

68.5%

68.3%

68.1%

Aug 14

9:15 AM

Industrial ProductionJul

0.5%

0.5%

0.4%

-0.4%

Aug 14

9:55 AM

Mich Sentiment-PreliminaryAug

63.2

70.0

69.0

66.0

Source: Yahoo Finance, August 14, 2009.

Click here for a summary of Wells Fargo Securities’ weekly economic and financial commentary.

The US economic data reports for the week include the following:

Monday, August 17
Empire manufacturing
Net long-term TIC flows

Tuesday, August 18
Building permits
Housing starts
PPI

Wednesday, August 19
None

Thursday, August 20
Initial jobless claims
Leading economic indicators
Philadelphia Fed

Friday, August 21
Existing home sales

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global financial markets performed during the past week.

16-08-09-11

Source: Wall Street Journal Online, August 14, 2009.

“Listening to the market, maximizing the bets that turn out and minimizing those that don’t, are the essence of how portfolio management works. Because nobody is right all the time, that discipline is the oft-overlooked secret of how real fortunes are made,” said Jonathan Hoenig (hat tip: Charles Kirk). Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist Investment Postcards readers in making those fortunes.

For short comments – maximum 140 characters – on topical economic and market issues, web links and graphs, you can also follow me on Twitter by clicking here.

That’s the way it looks from Cape Town. (Our entire household is down with flu, but fortunately a less harmful strain than H1N1, which is rife in the neighborhood. I guess this too will “turn, turn, turn”, as the Byrds sang.)

16-08-09-12

Hat tip: Leo Kolivakis, Pension Pulse

Charlie Rose: A conversation with Kurt Andersen about his book “Reset: How This Crisis Can Restore Our Values and Renew America”

Source: Charlie Rose, August 10, 2009.

Financial Times: Eurozone data raise hopes for recovery
“The German and French economies unexpectedly bounced back in the second quarter, raising hopes that the worst of the economic crisis is coming to an end in the eurozone.

“The region’s two biggest economies, which had each suffered four consecutive quarters of negative growth, both grew 0.3% in the three months to the end of June, figures showed on Thursday.

“The figures confounded economists who had predicted contractions in each country again after German gross domestic product plummeted 3.5% and French GDP shrank by 1.3% in the first quarter.

“As a result, GDP in the 16-nation currency bloc fell only 0.1% in the last quarter, the European statistics office said, cheering economists who had expected a decline of 0.5% after a drop of 2.5% in the previous quarter.

“The better than expected performance echoed that of the US economy, which shrank only 0.3% in the second quarter on a quarterly basis. But the UK saw its GDP shrink 0.8%, prompting criticism of the government’s handling of the economy.

“Erik Nielsen, chief economist for Europe at Goldman Sachs in London, said: ‘If you look at the US and Europe, pretty much everyone had a better second quarter than expected a few months ago – with the exception of the UK.'”

Source: Gerrit Wiesmann and Ben Hall, Financial Times, August 13, 2009.

Ifo: Improvement in economic climate for euro area
“The Ifo World Economic Climate for the euro area improved in the third quarter of 2009 for the second time in succession. The increase in the Ifo indicator was solely the result of more favourable expectations for the coming six months; the assessments of the current economic situation, in contrast, still remain at an historical low.

“The current economic situation is still assessed as definitely unfavourable in almost all countries of the euro area. The expectations for the coming six months, however, have brightened in the euro area. Especially in Germany, Austria, France and the Netherlands, the World Economic Survey (WES) experts anticipate a clear improvement, and in Italy, Portugal, Slovenia, Slovakia, Belgium, Spain and Finland they foresee at least a stabilisation of the economic situation in the coming six months. A continued pessimistic view, albeit somewhat weaker than in the previous quarter, prevails among WES experts in Ireland and Greece.”

15-08-09-01

Source: IFO, August 12, 2009.

Alexander Redman (Credit Suisse): Food price inflation
“A fresh spike in food prices due to supply and demand imbalances could have serious implications for central bank policy, says Alexander Redman, strategist at Credit Suisse.

“He notes the sugar price is at its highest for more than two decades, rice trades at a large premium to its two-decade real average and wheat is close to the 20-year (constant 2009 dollar) average price.

“Mr Redman says a major factor behind the elevated sugar price is the poor Indian monsoon rainfall – which led to the country’s driest June for 50 years.

“‘This has clear implications for global food production volume and hence food price inflation, he says. ‘India accounts for 22% of global rice production, 13% of sugar and 12% of wheat. This is important as global food supply is already very tight.’

“He says Emerging Europe, the Middle East and Africa are the regions most vulnerable to rising food prices, with food and agriculture net imports accounting for 0.6% of GDP. Asia collectively is able to feed itself while Latin America is a net exporter of food.

“‘Russia, Turkey, Egypt and South Africa, among the EMEA region’s principal economies, have inflation basket weightings of food in excess of 25%. Ultimately, central banks may be faced with the spectre of having to tighten monetary policy much earlier than would have been preferable in the current global economic environment.'”

Source: Alexander Redman, Financial Times, August 13, 2009.

MoneyNews: Faber – central banks blowing huge new bubble
“Investing guru and publisher of the Gloom, Boom and Doom Report Marc Faber remains a bear, predicting a stronger dollar, tightening in global liquidity and another correction in asset prices.

“When the S&P bottomed in March, the dollar was weak, notes Faber, who expects the next few months will be a period of dollar recovery and ‘a correction time in asset markets’ as the dollar strengthens.

“‘The strong dollar means global liquidity tightening,’ Faber told CNBC.

“‘In a scenario where growth will be disappointing, I think emerging markets will be kind of vulnerable.’

“The worse the global economy, the more stocks could go up, Faber says, because the world’s central bankers have become nothing more than money printers.

“‘They’re dangerous to the health of the global economy,’ Faber says.

“‘They created the Nasdaq bubble, the housing bubble, and now they want to create another bubble to bail them out.’

“Financial crises, Faber points out, usually lead to some fundamental change that purges the excesses that went before.

“But, he says, the Obama administration chose instead to bail out financial firms at the taxpayers’ expense, leaving the country vulnerable to a bigger crisis in the next few years.”

Source: Julie Crawshaw, MoneyNews, August 13, 2009.

Paul Kasriel (Northern Trust): FOMC statement – the Fed defines “autumn”
“We suppose the biggest news from today’s FOMC meeting statement is that it put a time (sort of) certain on the end of its Treasury coupon buying binge – October. In the June 24 policy statement, the FOMC said that the Treasury coupon purchase program would wrap-up in the ‘autumn’. In effect, the Fed is stretching out the ‘weaning’ period before it makes the market fend completely for itself in finding buyers for Treasury coupons in as much as the current pace of Fed purchases would have exhausted its allotment prior to October.

“One might argue that the longer the Fed keeps the buying program in place, the more latitude it might have in increasing the size of the program. Along with the consensus view (did you expect anything different from the Fed?), the FOMC is a bit more optimistic about the near-term economic environment, changing its language to ‘economic activity is leveling out’ from the June 24 meeting’s ‘the pace of economic contraction is slowing’. But not to get too exuberant about the outlook, the FOMC commented that household spending would be constrained by ‘sluggish income growth’, in addition to the other constraining factors mentioned in the June 24 statement – ‘ongoing job losses, lower household wealth, and tight credit’.

“With the FOMC expecting ‘that inflation will remain subdued for some time’ and anticipating that ‘economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period’, it is obvious that it has no intention of hiking the federal funds rate target between now and September 22-23, the next scheduled Committee meeting. Given our current view that the recovery is going to be subdued and uneven over the next several quarters, we do not expect any funds rate increases from the FOMC until June 2010, at the earliest.”

Source: Paul Kasriel, Northern Trust – Daily Global Commentary, August 12, 2009.

The Wall Street Journal: Economists call for Bernanke to stay, say recession is over
“Economists are nearly unanimous that Ben Bernanke should be reappointed to another term as Federal Reserve chairman, and they said there is a 71% chance that President Barack Obama will ask him to stay on, according to a survey.

“Meanwhile, the majority of the economists The Wall Street Journal surveyed during the past few days said the recession that began in December 2007 is now over. Battling the downturn defined most of Mr. Bernanke’s term, which began in early 2006 and expires in January, and economists say his handling of the crisis has earned him four more years as Fed chief.

“‘He deserves a lot of credit for stabilizing the financial markets,’ said Joseph Carson of Alliance Bernstein. ‘Confidence in recovery would be damaged if he was not reappointed.’

“The Journal surveyed 52 economists; 47 responded.

“After months of uncertainty, economists are finally seeing a break in the clouds. Forecasts were revised upward for every period, with 27 economists saying the recession had ended and 11 seeing a trough this month or next. Gross domestic product in the third quarter is now expected to show 2.4% growth at a seasonally adjusted annual rate amid signs of life in the manufacturing sector, partly spurred by inventory adjustments and strong demand for the ‘cash for clunkers’ car-rebate program.

“Many of the economists said there is little to be gained by changing the Fed chairman, especially considering the massive task at hand for the central bank as the economy emerges from the recession.

“‘Continuity is critical as we emerge from this crisis. Otherwise we could slip back in again,’ said Diane Swonk of Mesirow Financial. ‘Bernanke is the best suited to undo what has been done when the time comes.'”

15-08-09-02

Source: Phil Izzo, The Wall Street Journal, August 11, 2009.

Chief Executive: CEO confidence shows marked decline
“Chief Executive magazine’s CEO Index, the nation’s only monthly CEO Index, dropped to 63 in July, after showing gradual improvement. All components of the index are down, with Employment Confidence taking the largest hit.

“February saw the lowest ebb of the overall CEO Confidence Index at 39.2 increasing to a peak in May of 75.7. Almost nine in ten leaders (88.8%) rated the Current Conditions Index as bad, an increase from June (86.3%) and May (81.6%).

“What’s worse is that pessimism over employment is reaching new heights. The Employment Confidence Index declined 25% with 57% of CEOs expecting continued decrease in employment next quarter. Over 95% rate the current employment environment as bad – the highest level for 2009. Less than 5% think employment conditions are normal and virtually no one (0.4%) thinks they are good.

“The Capital Spending Index shows a majority of business leaders think capital spending will hold over the next quarter while a sizeable minority (39%) expect capital spending to drop. ‘We’re currently treading water’, commented one respondent. ‘Once the federal stimulus dollars stop (our life preserver), we’ll sink to the bottom from exhaustion. It would happen anyway. The government is only delaying the inevitable. We need to go through the pain before we can get on the road to recovery.’

“CEOs sentiment is mixed on where we are in the slowdown. 33% believe the worst is yet to come, 35% believe the worst is happening now, and 29% believe the worst is behind us.

“The cause of renewed CEO pessimism has many sources. One respondent remarked, “Healthcare Reform, especially should President Obama’s plan be approved will have devastating effects on the economy. Also, the Climate Bill [Waxman-Markey], if approved will have a significant negative impact on the economy.’ Another commented, ‘The foolish and politically motivated decisions of the Obama administration is having a permanent and profound effect on all business decisions people are making. There will be no ‘rally’.’ ‘The current direction of the administration will deepen the downturn and strangle the private sector with increased taxation, unemployment and socialization of business in the US’, observed a third CEO.”

15-08-09-03

Source: Chief Executive, May/June 2009.

Reuters: George Soros – US economy has bottomed
“The US economy has hit bottom and the current quarter will see positive growth due to the government’s stimulus spending, billionaire financier George Soros said on Tuesday.

“‘I think it (the stimulus) has made a difference, the economy has actually bottomed and I think we are facing a positive quarter, and I think that is largely due to the stimulus,’ he said in an interview with Reuters Television in New York.

“Soros said he did not believe the economy needed more stimulus money, despite calls for a second round of spending.”

Source: Edward Krudy, Reuters, August 11, 2009.

The Washington Post: “A recovery only a statistician can love”
“The pile of economic data indicating that the worst of the recession is over just keeps growing. In the past few weeks, the government has reported that businesses last month shed the smallest number of jobs in nearly a year. The savings rate, after rising rapidly, held steady at levels not seen in at least five years. And from April to June, productivity surged to a six-year high.

“But the same data also explain why any recovery isn’t going to feel like one anytime soon for millions of Americans. Its existence will be confirmed by statistics, but, over at least the next year, the benefits are unlikely to materialize in the form of higher wages or tax receipts or more jobs.

“‘It’s going to be a recovery only a statistician can love,’ Wells Fargo senior economist Mark Vitner said.

“‘Economists are using one concept of recession that is at total variance of how a normal human being thinks of it. A normal human being thinks of a recession as: You fell into a hole, and as long as you’re in a hole, you’re in a recession,’ said Lawrence Mishel, president of the Economic Policy Institute. ‘Economists think of [a recession's end] as … when the economy stops shrinking.'”

Source: Annys Shin, The Washington Post, August 12, 2009.

Nouriel Roubini (Forbes): A “jobless” and “wageless” recovery?
“After severe job losses in early 2009, the pace of job losses slowed starting in April, and the July numbers have brought more respite. Non-farm payroll job losses were 247,000 in July. However, the private sector lost 254,000 jobs. This is considerably better than analysts expected (around 325,000) but not good enough to claim that we are in the middle of a strong and sustainable recovery.

“Looking at the recessions of the post-war period, average monthly job losses ranged between 150,000 and 260,000. Average monthly losses in this recession are still at 350,000. For the first four months of the year, the average was at 648,000. The improvement with respect to the first part of the year is clear. The improvement with respect to what we are used to seeing in recessionary periods is much less clear cut. The latest numbers are not exactly what you’d call good news, at least not in absolute terms. In relative terms, however – after skirting a near-depression – markets seem to consider 247,000 payroll losses a breath of fresh air.

“The increase in average weekly labor hours in July is certainly a positive sign. But it also shows that, when economic conditions begin improving, companies will increase labor hours and temporary workers and move workers from part time to full time. Only after that do they begin hiring new workers. So hiring is still a long way ahead. The decline in the unemployment rate from 9.5% in June to 9.4% in July was not due to an improvement in the employment situation but is explained by the large decline in the labor force (-422,000). Workers facing hiring freezes, fewer full-time jobs and jobs at lower wages are leaving the labor force.

“The economy has lost over 6.6 million jobs since the recession began, which is way above the job losses that we are used to seeing in recessionary periods when job losses have ranged between 1.5 million and 2.5 million. The large job losses of the past months and longer unemployment duration will continue to weigh on the economy in the coming months. The unemployment duration improved slightly in July from the record high witnessed in June, which is positive news.

“Unemployed workers are falling behind their debt payments, raising defaults on loans and making government mortgage modification programs ineffective. Default rates on various loans have already surpassed the unemployment rate. According to the Moody’s credit card index report, published in May 2009, the credit card charge-off rate crossed 10% in May 2009 and is expected to reach a peak of 12% by the second quarter of 2010.

“For the labor market to stabilize, job losses need to slow to 100,000 to 150,000 per month, and jobless claims need to fall to around 400,000. Payrolls alone don’t reflect the strength of the household sector. Labor compensation and work hours also function as indicators, and both of these have slowed sharply in recent months. Even as borrowing conditions remain tight and home prices continue to fall, the dip in labor compensation will continue to constrain consumer spending, notwithstanding any fiscal stimulus.

“In a severe, consumer-led recession like this one, the labor market is a leading (rather than lagging) indicator of economic recovery, and the consumer still drives the US economy (private consumption still makes up over 70% of GDP). A slowdown in the pace of job losses from 650,000 to 250,000 is welcome, but in no way offers comfort about a prompt comeback of the US consumer. This raises concerns about the strength and sustainability of any economic recovery that most people are expecting in the second half of 2009, and beyond.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, August 13, 2009.

MoneyNews: Rogoff – US may face second recession
“The United States faces a prolonged period of sluggish growth and perhaps another recession in the next five years, Harvard University economist Kenneth Rogoff said on Tuesday.

“The US recession that began in December 2007 is close to an end, and economic growth will hover near a sluggish 2% for the next five to seven years, he said.

“‘We’re going to be Japan-light,’ he said in an interview, referring to Japan’s years of sub-par growth after its financial crisis of the 1990s. ‘We won’t have a lost decade, but we will face some of the same challenges.’

“Rogoff, a former International Monetary Fund chief economist and an expert on banking crises, said the United States faces a 50-50 chance of a second recession in the next five years.

“Moreover, the commercial real estate market crisis remains a potential drag on growth.

“‘Commercial real estate is a tsunami coming that’s going to wipe out a lot of the small banks,’ he said. ‘It’s unclear if any big players will be stressed out by it, which will depend on how the economy is doing.’

“Rogoff also said the United States will need to raise taxes soon as debt levels swell and interest rates rise. He expects to see a national sales tax in three years.

“‘People just don’t understand how much taxes are going to have to go up on the current trajectory we’re on,’ he said. ‘People are still on the high that the government can back everything and not seeing what the costs are.'”

Source: MoneyNews, August 11, 2009.

CNBC: The Black Swan squawks
“Nassim Taleb, principal of Universa Investments and author of ‘The Black Swan’, discusses, the markets, the economy and whether Fed Chairman Ben Bernanke should be reappointed.”

Source: CNBC, August 12, 2009.

CNBC: Krugman – more stimulus and investment drivers needed
“More stimulus measures and drivers for investment are needed to jolt the recovery process for the economy, says Paul Krugman, nobel laureate and professor of economics at Princeton University. He assesses the likelihood of an economic recovery with CNBC’s Martin Soong.”

Source: CNBC, August 10, 2009.

Asha Bangalore (Northern Trust): Gasoline prices bring down total retail sales
“Retail sales fell 0.1% in July after an upwardly revised 0.8% in June. In July, a significant decline in gasoline prices accounted for the decline of the headline number. Excluding gasoline, retail sales rose 0.1%, marking the third consecutive monthly increase of this component.

“The cash-for-clunkers program led to a 2.4% increase in auto sales reflecting the increase in unit auto sales (11.2 million units in July from 9.7 million units in June). The cash-for-clunkers program has borrowed auto sales from the future and has come at the expense of non-auto retail sales in July.

“Among the other major components of retail sales, sales of clothing (+0.6%) and health and personal care (+0.7%) increased, eating and drinking establishments recorded gains (+0.4%), while purchases of furniture (-0.9%), general merchandise (-0.8%) and building materials (-2.1%) fell in July.

“Arithmetically, the fact that the July level of retail sales exceeds the second quarter average is a plus for the third quarter performance. Consumer spending is most likely to add to real GDP in the third quarter after a 1.2% annualized decline in the second quarter.”

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Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 13, 2009.

Barry Ritholtz (The Big Picture): Temporary help is less bad
“Students of economic and employment data know that many of the components of the employment situation are leading economic indicators.

“I like to look specifically at Temp Help for some insight as to the demand for labor and employer confidence. My go to guy for all things Temp Help is Bruce Steinberg. His monthly analysis on Temp Hiring makes for a sober and clear eyed assessment following the NFP release.

“You can see both year-over-year and monthly data charted below. As you might imagine, Y-Y is down substantially – about 26%. The monthly data, while volatile, seems to be moderating, falling about half a percent (0.56%).”

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Source: Barry Ritoltz, The Big Picture, August 10, 2009.

Bloomberg: US foreclosure filings set third record high in five months
“Foreclosure filings in the US climbed to a record for the third time in five months in July as falling home prices and the recession left more homeowners unable to keep up payments or refinance.

“A total of 360,149 properties received a default or auction notice or were seized last month, according to data seller RealtyTrac. One in 355 households got a filing, the highest monthly rate in RealtyTrac records dating to January 2005, the Irvine, California-based company said in a statement.

“‘We’re in a deep hole,’ Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc., said in an interview. ‘There is a whole new wave of foreclosures tied to the cyclical dynamics of the economy.’

“Foreclosures increased as the US recorded another 247,000 job losses in July and home prices fell, leaving an increasing number of mortgage holders owing more than their properties were worth. The median price of an existing single-family house dropped 15.6% to $174,100 in the second quarter, the most in records dating to 1979, the National Association of Realtors said yesterday. Almost one-quarter of US mortgage holders are underwater, property data firm Zillow.com said August 11.

“‘There are a slew of factors showing fundamental weakness on the demand side: tighter underwriting, job loss, investors who’ve been badly burned,’ said Stuart Gabriel, director of the UCLA Ziman Center for Real Estate in Los Angeles. ‘We have not seen the bottom of the housing market.'”

Clusterstock: Foreclosures still concentrated in the bubble states
“There are some signs that the foreclosure crisis is spreading across the country. Kansas foreclosures doubled, for example. But in the meantime, they still reside in four huge, bubble states – California, Arizona, Nevada and Florida, though they are only now starting to show signs of flattening.”

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Source: Joe Weisenthal and Kamelia Angelova, Clusterstock – Business Insider, August 13, 2009.

Bloomberg: US underwater mortgages may reach 30%, Zillow says
“Almost one-quarter of US mortgage holders owed more than their homes were worth in the second quarter and that figure may rise to as much as 30% by mid-2010 as job losses and foreclosures climb, Zillow.com said.

“‘The negative-equity rate will rise and spin off more foreclosures,’ Stan Humphries, Zillow’s chief economist, said in an interview. ‘I see a substantial downside risk to prices and don’t think we’ll see a bottom until the middle of next year.’

“The percentage of people owing more than their properties are worth may increase to almost half of US mortgage holders before the housing recession ends, Deutsche Bank AG said August 5.

“About 25 million homes, or 48% of mortgaged properties, will be underwater as prices drop through the first quarter of 2011, Karen Weaver and Ying Shen, analysts in New York at Deutsche Bank, wrote in the report.”

Source: Dan Levy, Bloomberg, August 11, 2009.

Clusterstock: Home prices collapsing even faster
“The Case-Shiller Index has been signalling an improvement in the second derivative of housing prices for a few months, and in the latest report it even showed a sequential increase. But check out the NAR’s numbers for all of Q2. The year-over-year drop in the median sales price of single family homes showed its worst decline ever. They didn’t even have a second derivative gain improvement.”

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Source: Joe Weisenthal and Kamelia Angelova, Clusterstock – Business Insider, August 12, 2009.

Asha Bangalore (Northern Trust): The factory sector has turned the corner
“Industrial production increased 0.5% in July after a 0.4% drop in June. Factory production advanced 1.0% in July, following a 0.6% decline in the prior month. Production at the nation’s factories has fallen every month between January 2008 and June 2009, with the exception of an increase in October 2008. In addition to the 20.1% rebound in auto production, which helped to raise the headline, factory production excluding autos rose 0.2%.

“Factory production has recorded the bottom for this recession. The most important conclusion from history is that factory production turns the corner at the end of a recession.”

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Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 14, 2009.

Asha Bangalore (Northern Trust): Trade gap widens, while exports also advance
“The trade deficit of the US economy widened to $27 billion in June from nearly $26 billion in the prior month. A 7.0% increase in inflation-adjusted imports accounted for a widening of the trade gap; imports of non-petroleum items fell 1.2% in June. Overall imports of goods, after adjusting for inflation, rose 0.1%. Nominal imports of goods and services rose 2.3%, the first increase since July 2008.

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“Exports of goods and services increased 2.0% in June; exports have risen in three out of the last six months. Inflation-adjusted exports of goods increased 0.6% – also in three out of the six months ended June. The trade deficit of goods in real terms narrowed slightly to $35.9 billion from $36.3 billion in the prior month. The overall real trade deficit is likely to be smaller in the second quarter vs. the first quarter. The net impact of the drop in inventories and trade deficit will be confirmed after the inventories data are published on August 13.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 12, 2009.

Asha Bangalore (Northern Trust): Small Business Optimism Index dips slightly in July
“The Small Business Optimism Index fell 1.3 points to 86.5 in July. The index is largely a coincident indicator. Therefore, a significant improvement of the index is necessary to conclude that the recession has ended.”

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Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 11, 2009.

Asha Bangalore (Northern Trust): Inflation remains contained
“The Consumer Price Index (CPI) held steady in July after a 0.7% surge in June. On a year-to-year basis, the CPI has fallen 2.1%. In July, the energy price index fell 0.4% and the food price index dropped 0.3%. Energy prices have retraced a part of the July decline in the early weeks of August.

“The core CPI, which excludes food and energy, moved up 0.1% in July vs. a 0.2% gain in the prior month. The July core CPI has risen 1.56% from a year ago. The peak for the core CPI is 2.93% in September 2006.”

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Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 14, 2009.

Asha Bangalore (Northern Trust): Q2 productivity surge is temporary
“Productivity of the US economy rose 6.4% in the second quarter after a 0.3% increase in the prior quarter. Although output declined, hours worked fell more sharply and led to an increase in productivity. Productivity gains toward the end of a recession and the beginning of recovery are typical and they reflect cost cutting strategies of firms. The surge in productivity registered in the second quarter is not representative of the long-term trend; the long-term productivity of the US economy is roughly 2.5%.

“The sharp increase in productivity and a mild gain in compensation (+0.2%) translated to a 5.8% drop in unit labor costs. The decline in unit labor costs is a big positive because it implies the absence of inflationary pressures.”

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Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 11, 2009.

Clusterstock: Companies don’t need to borrow because they don’t want to spend
“The financing gap is the difference between capital expenditures and cash flow. Another way of putting it is that it measures the dependence of business on financing for growth.

“The financing gap turned sharply negative at the end of last year. This negative financing gap indicates that the business sector as a whole is generating enough cash to purchase capital expenditures without borrowing. This supports the claims of banks that demand for business loans has declined. But that isn’t necessarily good news for the economy.

“We’ve overlaid this with the unemployment rate to indicate that the negativity of the financing gap doesn’t tell us much about underlying economic conditions. The gap turned sharply negative in late 2005 as unemployment was falling, indicating a booming economy that generated a large cushion of liquid assets for companies to spend on capital expenditures. This time around the negative financing gap, is very different – most likely generated by a decline in expenditures rather than excess cash flow. In short, this is a recessionary negative finance gap.

“We’ve actually never seen anything like this in recent memory: a growing negative financing gap coupled with growing unemployment.

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Source: John Carney and Kamelia Angelova, Clusterstock – Business Insider, August 10, 2009.

Clusterstock: Fiscal meltdown!
“Hopefully deficits don’t matter, because if they do, then boy are we screwed. Today’s chart was put together by Diapason Securities analyst Sean Corrigan (via Alphaville), and it shows the stunning rise of outlays and similar collapse in receipts. The blue line is the real killer, though, as it shows just how meager our tax revenue is compared to outlays.”

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Source: Joe Weisenthal and Kamelia Angelova, Clusterstock – Business Insider, August 11, 2009.

Bloomberg: Toxic loans topping 5% may push 150 banks to point of no return
“More than 150 publicly traded US lenders own nonperforming loans that equal 5% or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

“The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3% or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.

“The biggest banks with nonperforming loans of at least 5% include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10%, the biggest in the 50 US states was Michigan’s Flagstar Bancorp. All said in second-quarter filings they’re ‘well-capitalized’ by regulatory standards, which means they’re considered financially sound.

“‘At a 3% level, I’d be concerned that there’s some underlying issue, and if they’re at 5%, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.

“Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential US list of ‘problem banks’, which stood at 305 in the first quarter.”

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Source: Ari Levy, Bloomberg, August 14, 2009.

CNBC: TARP takes on toxic assets
“The underlying problem of troubled assets on the balance sheets of banks still remains unresolved, according to a new report by the Congressional Oversight Panel. Elizabeth Warren, the panel’s chair, discusses the report.”

Source: CNBC, August 11, 2009.

American Banker: Revenge of the accounting authorities?
“The Financial Accounting Standards Board took plenty of heat in April for loosening mark-to-market guidelines, a move that critics assailed as a gift to the financial industry and a nod to political pressures.

“The FASB’s latest idea, however, if seen to completion, would go a long way toward silencing accusations that the rulemakers have gone soft on banks.

“Under consideration: an unprecedented proposal to vastly widen the use of mark-to-market accounting, so that it becomes the default method for valuing financial instruments, including loans that banks plan to hold to maturity. If adopted, the rule could set off a new wave of writedowns at a time when investor confidence in banks is fragile at best.

“Proponents say that stricter use of mark-to-market would simplify accounting rules and give investors a clearer picture of companies’ financial health. The opposition, led by the bank lobby, says it is unfair to make companies absorb the blow of falling market values for loans they have no intention of selling. And they say that new questions would be raised as to how to value specialty loans and other assets for which there are no ready markets.

“The American Bankers Association is trying a nip-it-in-the-bud approach, publishing a position paper earlier this month and sending a letter to accounting standards-setters in advance of an official public comment period.”

Source: Heather Landy, American Banker, August 11, 2009.

Barron’s: Next real estate shoe is not dropping
“As recently as last month, stories were being written about how the next shoe to drop on the economy would be in the commercial real estate sector. It did not take much of a Web search to find warnings going as far back as early 2008.

“The talk was that hundreds of billions of dollars of commercial mortgages would default.

“Yet, prices of commercial real estate investment trusts (REITs) have been soaring over the past few weeks and the technicals have not looked this good in a long time.

“Mr. Market does not quite agree with the talking heads.

“While the sector is quite overbought in the short-term based on traditional measures, long-term investors can finally feel better about adding them to the universe of potential purchases.

“To be sure, a rising market tide does indeed raise most boats. The ones that do not rise, to continue the analogy, are leaky boats heading for further trouble. Commercial REITs not only rose but also outperformed the market the during the current summer rally.

“In round numbers, the iShares Trust Dow Jones US Real Estate Index Fund (ticker: IYR), which measures a cross section of REIT types, beat the Standard & Poor’s 500 20% to 15% since early July.

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“The real estate sector will not be immune to any major market pullback. However, many technicals have lined up to make me think something deep down has changed for the better.

“That would suggest that a price dip in the commercial real-estate patch is something to cheer, not fear.”

Source: Michael Kahn, Barron’s, August 10, 2009.

Bloomberg: Pimco’s Gross reduces mortgage holdings, adds to cash
“Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., reduced holdings of mortgage debt to the lowest level in more than two years and added to cash and equivalent securities.

“Gross cut the $169 billion Total Return Fund’s investment in mortgage bonds to 47% of assets in July, the least since April 2007, from 54% in June, according to Pimco’s website. Cash comprised negative 1%, the most in 2009, rising from negative 6%.

“In an August investment outlook, Gross said investors in riskier assets will get ‘haircuts’ because US economic growth will be closer to 3% than the range of 5% to 7% for the past 15 years. The US economy will begin to recover in the second half of 2009, he wrote in the outlook posted on Pimco’s website. The Newport Beach, California-based firm doesn’t comment on changes in holdings.

“‘There is no investment potion for this new environment other than steady income-producing bond and equity investments in companies with strong balance sheets and high dividend yields,’ Gross wrote. ‘A journey to 3% nominal GDP means default/haircuts for assets on the upper end of the risk spectrum, as well as extremely low-yielding returns for government and government-guaranteed assets at the bottom end.’

“The Total Return Fund returned 12.3% in the past year, beating 96% of its peers, according to data compiled by Bloomberg. The one-month return is 1.15%, outpacing 34 percent of its competitors.”

Source: Susanne Walker, Bloomberg, August 12, 2009.

MoneyNews: Schiff – Rising stocks not a sign of recovery
“Rising US stock prices – particularly following a 50% decline – say nothing about the health of the US economy or the prospects for a recovery, says Euro Pacific CEO Peter Schiff.

“‘In fact, relative to the meteoric rise of foreign stock markets over the past six months, US stocks are standing still.’

“‘If anything, it is the strength in overseas markets that is dragging US stocks along for the ride.’

“There is an inexplicable but widely held belief that stock market movements are predictive of economic conditions, Schiff writes at GoldSeek.com.

“The current rally in US stock prices has caused many, including President Obama, to conclude that the recession is nearing an end, Schiff notes.

“‘Reality is clearly at odds with these optimistic assumptions,’ he says.

“‘In the current cycle, neither the market nor its cheerleaders saw this recession coming, so why should anyone believe that these fonts of wisdom have suddenly become clairvoyant?’

“Schiff points out that through most of 2008, even as the economy was contracting academic economists and stock market strategists were still confident that a recession would be avoided.

“‘If they could not even forecast a recession that had already started, how can they possibly predict when it will end?’ he asks.”

Source: Julie Crawshaw, MoneyNews, August 10, 2009.

Nicholas Colas (BNY Convergex): Mixed messages from Q2 results
“The US second-quarter reporting season has left investors with a mixed outlook for the rest of 2009, says Nicholas Colas, chief market strategist at BNY Convergex.

“He points out that while earnings generally met or exceeded forecasts – following decisive cost-cutting measures in the first half – many companies chronically missed their revenue expectations in the second quarter.

“‘The market overall looked through these misses, much to the chagrin of the bears,’ Mr Colas says.

“But he says that having had a chance to reflect on the quarter’s results, analysts generally remain cautious with regard to revenue growth for the second half.

“‘Analysts are raising revenue estimates a tad more than they are lowering them. But the idea that the fourth quarter would be the inflection point of the current recession, where revenues turn positive year over year, now looks to be at risk.

“‘When we contrast this caution with the positive stock price returns of recent weeks, it is easy to dismiss the market’s enthusiasm as misplaced optimism.

“‘But we would offer a different slant. The market expects revenue expectations to rise in coming weeks, due to the recent spate of better than expected economic data. The greater number of positive revisions is a good start in that direction.'”

Source: Nicholas Colas, BNY Convergex (via Financial Times), August 11, 2009.

Bespoke: S&P 500 P/E ratio nearly doubles
“A P/E ratio rising from 10 to 18.35 is what happens when the S&P 500 rallies 50% (the P) while earnings (E) continue to decline. Below we provide a chart of the S&P 500 price to earnings ratio since the start of the 2002 bull market using trailing 12-month diluted earnings per share from continuing operations.

“The S&P’s P/E ratio reached its highest level since the end of 2004 earlier this week. While P/E expansion is not unusual during bull markets, investors will remember that the S&P 500’s P/E actually declined from the start to the finish of the ’02-’07 bull. This is because earnings grew even faster than stock prices.

“When looking at the chart below, you can see that the P/E did expand in the early days of the ’02-’07 bull before earnings finally started to grow again in late 2003 and early 2004. Obviously if the current bull is going to have any sustainability at all, earnings will have to start growing again. But for now, as evidenced by the skyrocketing P/E ratio, investors are paying up on the hopes of future earnings growth.”

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Source: Bespoke, August 14, 2009.

Bill King (The King Report): Stock market driven by funny money
“The dilemma for bulls & solons: Can the US economy & financial system survive without the govie umbilical cord and if not, how long will it be before bonds collapse and take everything with them?

“AIG posted its first quarterly profit since 2007. Will the SEC investigate to see who profited from the obvious inside information about its earnings last week? Don’t bet anything you can’t afford to lose.

“As for the stock market – as we asserted a week or two ago, it again has become greatly disconnected from the economy. But that’s what funny money does.

“We completely understand how funny money can induce the masses to get jiggy on stocks no matter the economic condition. Heck, Easy Al and Bernanke’s reigns are testament to stocks divorcing from economic reality on funny money.

“But one must consider that just five months ago, the US was in probably its greatest financial crisis since the Revolution. (No Wall Street firm failed during the 1929 Crash; no insurance company or the largest manufacturer was nationalized; there were no FNM/FRE takeovers, etc. etc. etc.). And the US economy collapsed at the greatest rate since The Great Depression.

“Now we are asked to believe that only five months after possibly the worst two-quarter collapse in US financial and economic history the recovery is here. This would be a first if true.

“Last week we noted that while many pundits are correlating the recent 50%-ish rally to 1975 and 1982 May 1930.

“The FT’s John Authers echoes our warning that stocks did not get to historically cheap levels in 2009 like they did in 1974 and 1982, which is precisely what transpired in 1929- 1930.”

Source: Bill King, The King Report, August 10, 2009.

Bloomberg: Tudor calls stock gain a bear market rally
“Tudor Investment Corp., the $10.8 billion hedge-fund firm run by Paul Tudor Jones, said equity markets could decline later this year, creating buying opportunities.

“Slowing growth in China and the return of front-page stories on swine flu may be ‘further catalysts for global equity markets to pause in September’, the Greenwich, Connecticut-based firm said in an August 3 client letter.

“Tudor said the 47% gain in the Standard & Poor’s 500 Index of the largest US companies since March 9, when it fell to a 12-year low, is a ‘bear-market rally’. The index topped 1,000 for the first time in nine months this week after companies reported better-than-expected profits.

“‘Impressive counter-trend rallies are a feature, not an oddity, of secular bear markets,’ Tudor said. ‘We are not inclined to aggressively chase the market here. Many doubts remain about the sustainability of this recovery, most prominently the weakness of household income growth.’

“Tudor’s biggest hedge fund, the $8.9 billion Tudor BVI, gained 10% this year through July after losing 4.5% in 2008. Hedge funds on average lost a record 19% last year, according to Chicago-based Hedge Fund Research Inc.

“The firm said that a year-end gain in stocks may be another bear market rally with equities falling in 2010.”

“Tudor said it expects the US dollar to fall by the end of the year as money managers diversify their currency reserves. ‘Reserve accumulation and diversification trends will be persistent and mutually reinforcing the direction of the US dollar,’ Tudor said.”

Source: Saijel Kishan, Bloomberg, August 6, 2009.

David Fuller (Fullermoney): Markets temporarily overextended
“Most of the world’s stock markets are temporarily overextended once again so they too are likely to experience another pause and consolidation of recent gains before long. If this process coincides with anniversary jitters as investors recall last year’s meltdown, we can expect a further delay. Nevertheless, with monetary policies remaining favourable and economic prospects improving, we would not be surprised to see new recovery highs for most stock markets prior to yearend 2009.

“Active investors may wish to reduce some equity positions on current strength, or to hedge, with a view to repurchasing on setbacks. I would not be tempted to chase stock markets higher at this time. I will retain all long-term positions in my personal long-term investment portfolio because I think they have further and potentially significant potential over the duration of this bull market. Meanwhile, sentiment will turn more negative in the event of a general stock market pullback and I would regard that as an additional buying opportunity in favoured themes.”

Source: David Fuller, Fullermoney, August 11, 2009.

TheStreet.com: Kass – a summary of my bearishness
“As I see it, the bull market argument is that the US is exiting the recession just like the many that preceded the current one. Consequently, corporate profits will exceed consensus forecasts in tandem with: the resumption of revenue growth; the record fiscal and monetary stimulation; an export-led Asian recovery; and the operating leverage associated with productivity gains achieved through draconian cost cuts and influenced by the benefits of wage deflation.

“The bulls further argue in favor of Say’s Law of Production (i.e. business drives consumer incomes and spending) and that the high-tax health and energy bills introduced by the President have been recently set back (as the Blue Dog Democrats and the liberal leadership are already battling).

“The bear market argument that I have now embraced is that we are seeing nothing more than a second derivative recovery and that, owing to a temporary replenishment of inventories, the economy is only getting less worse (or getting better from a depressed level). The ingredients for a durable and self-sustaining recovery are missing as an economic double-dip grows more likely in a climate of corporate cost cuts, elevated jobless rates, wage deflation and continued pressure on personal consumption expenditures. Bears, such as myself, reject Say’s Law of Production and view weakening consumer incomes and spending as a poor foundation and as inadequate drivers to improving business activity into 2010.

“The economic downturn of 2007-2009 has already been different this time in scope and duration. For example, unlike the other post-depressions/recessions of the last century, we have already witnessed two consecutive quarterly drops in nominal GDP. As well, the 20-month-old recession has resulted in a near 4% drop in real GDP vs. drops of between 2.5% and 3.0% in the mid 1970s and early 1980s recessions. The US economy came out quickly from those prior downturns, with recoveries to new peaks in economic activity taking only three or four quarters.

“My view is that it will continue to be different this time as the typical self-sustaining economic recovery of the past will not be repeated for 10 important reasons.

1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

4. The credit aftershock will continue to haunt the economy.

5. The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.

6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

7. Commercial real estate has only begun to enter a cyclical downturn.

8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

9. Municipalities have historically provided economic stability – no more.

10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.”

Click here for the full article.

Source: Doug Kass, TheStreet.com, August 10, 2009.

Bespoke: Sector relative strength
“The charts below show the relative strength of the ten S&P 500 sectors versus the overall index. Given the interest in the Transports by Dow theorists, we have also included the relative strength of that group. In each chart, a rising line indicates that the sector is outperforming the S&P 500 while a declining line indicates underperformance. We have also included dots showing each time the Fed cut rates (red) and left rates unchanged (black dots).

“In the consumer sectors, Discretionary stocks are near their highest levels of outperformance in the last year, while the Staples sector has been steadily trending lower. In the last week, Financial relative strength has spiked higher as stocks like AIG and C have surged, but with the sharp rise in recent weeks, we wouldn’t be surprised to see the sector take a break in the coming days.

“Finally, the Technology sector has been the market’s leader since the March lows, but it has been lagging since the start of August. As shown in its chart, the current downleg in underperformance looks similar to the leg lower it took in early May right before the overall market began its sideways correction.”

15-08-09-18

15-08-09-19

15-08-09-20

Source: Bespoke, August 11, 2009.

Bespoke: Shorts getting a little lonelier
“Following July’s leg higher, it seems that traders on the short side have cut and run. As shown in the chart below, the average stock in the S&P 500 had 4.97% of its float sold short as of the end of July. This is the lowest level since January 30th, and marks a decline of 17% from the peak levels in July 2008. Bears will cite this number as proof that investors are crowded on the long side. While bulls would probably prefer to see higher levels of short interest, they are likely to note that short interest still remains high from a longer-term perspective.”

15-08-09-21

Source: Bespoke, August 11, 2009.

CNBC: Hedge fund heavyweights on the industry
“Leon Cooperman, of Omega Advisors; Michael Steinhardt, of Wisdom Tree Investments; and David Gerstenhaber, of Argonaut Capital Management, discuss the state of the hedge fund industry.”

Source: CNBC, August 10, 2009.

Financial Times: Speculation grows over dollar’s turning point
“Just a week after the dollar hit its lowest level for 10 months, the main talking point in FX markets is whether the US currency is about to strengthen.

“The change of sentiment has been sparked by last week’s US payrolls report, which saw far fewer job losses in July than expected. This strengthened the view that the US is past the worst of its recession and that its economic recovery could precede that of Europe and Japan.

“‘Markets are in a flurry of debate about whether Friday’s US payrolls data marks an inflection point for FX, whereby good US economic news starts to benefit rather than hurt the dollar,’ says Ray Farris at Credit Suisse.

“Hans Redeker at BNP Paribas says there are signs that the US economy has responded positively to the massive US fiscal and monetary stimulus, thus reducing the risk premium for holding US assets.

“‘The introduction of quantitative easing in March has let the performance of the dollar diverge from the guidance of real interest rate differentials,’ he says.

“‘Now, as the economic outlook has stabilised, the relative yield and interest rate differentials should regain their impact on currency markets.’

“Others are hesitant to call an end to the trend of dollar weakness, given that the currency’s rebound has been based on its reaction to a single piece of economic data.

“‘If there is a shift, it’s at a very embryonic stage,’ says Neil Mellor at Bank of New York Mellon.

“But if the dollar does continue to rise, it would mark a very significant development given the pattern of trading that has tended to characterise the currency markets since the onset of the financial crisis.

“This has seen the dollar benefit from haven demand when equities, and hence risk appetite, have fallen.

“In contrast, the dollar has lost ground when stocks and investor confidence have risen as investors abandon the relative safety of the US currency in search of higher returns elsewhere.

“Thus as equities hit their highest level of the year last week, the dollar index, which tracks its progress against a basket of six major currencies, fell to its lowest level since October.

“This correlation has led to the perverse situation where the dollar has fallen on better US economic data and rallied when news from the US has disappointed.

“This pattern seemed to break down last Friday after the US employment report. The positive surprise generated a predictable rise in equity markets and a surge in US Treasury yields. The dollar also strengthened.”

Source: Peter Garnham, Financial Times, August 11, 2009.

Reuters: Pickens – I’m long oil
“Oil man turned wind power fan T. Boone Pickens sees the price of a barrel of oil rising slightly to $75 by the end of this year and $85 next year.

“‘I’m long oil,’ said Pickens in an interview on the sidelines of US Senate Majority Leader and Nevada Democrat Harry Reid’s National Clean Energy Summit, a meeting of industry leaders and policy makers.

“Pickens has written a blueprint for US energy policy, called the Pickens Plan, that focuses on converting heavy vehicles like big long-distance trucks, to natural gas.

“Pickens, traditional environmentalists and those fearing US dependence on foreign oil sources have argued that the nation should focus its efforts on alternative energy, like wind. As the economy has soured, potential jobs for building new energy infrastructure has taken a leading role in debates for changing the economy away from oil.

“Nevertheless, ‘when the global economy gets going again, demand will be above supply,’ said Pickens, explaining his forecast for oil prices, which has been constant for most of the year.

“The billionaire recently delayed plans to build the nation’s largest wind farm in the Texas panhandle, blaming financing problems and transmission limitations.

“‘You’ve got wind corridors all the way from Sweetwater, Texas to the Canadian border, so we’re looking at projects all up and down that corridor,’ he said, adding that he was talking to groups with transmission capacity to decide where to site more than 600 windmills.”

Source: Peter Henderson, Reuters, August 12, 2009.

Bloomberg: IMF gold sales may begin in 2010
“The International Monetary Fund will probably sell 200 metric tons of gold annually starting next year, ‘potentially weighing on prices’, Citigroup Inc. said in a report e-mailed today.

“Gold will fall to $850 an ounce in the second half of 2010, Citigroup Sydney-based analyst Alan Heap wrote in the report. The IMF board will approve a gold sale before its annual meeting in October, Reza Moghadam, director of strategy, policy and review, said on July 29. A planned sale of 13 million ounces (403 tons) was accepted by the US last month.

“‘We believe the sell down will likely begin in 2010 and see around 200 tons sold per year, potentially weighing on prices,’ Heap wrote in the report.

“The IMF owns 3,217 tons of gold, the third-largest holder of gold after the US and Germany, according to data compiled by London-based research company GFMS Ltd. A sale of 200 tons would compare with 246 tons disposed last year by central banks, according to GFMS.

“European central banks have an agreement to limit their gold sales to 500 tons a year, and that arrangement expires in September. A new accord has not been announced.

“‘The central bank agreement is expected to be renewed after it expires in September, although, in our view, it could now perhaps afford to be more relaxed in terms of annual limits and allocating quotas,’ Barclays Capital analyst Suki Cooper wrote in a report.”

Source: Claudia Carpenter, Bloomberg, July 31, 2009.

TheStreet.com: Nadler – gold could go lower
“Jon Nadler, senior analyst at Kitco.com, argues that gold could go lower and outlines a potential trading strategy.”

Source: TheStreet.com, August 12, 2009.

Financial Times: China’s economy cools as lending slows
“China’s surging economy slowed slightly in July as state-controlled banks heeded Beijing’s instructions to rein in excessive lending, with the volume of new lending dropping 77% from a month earlier.

“Most economic indicators however suggested a continuing strong recovery, largely as a result of government investment and state-directed lending that saw new loans nearly triple in the first seven months from the same period last year.

“Industrial output expanded by 10.8% in July from a year before, less than most economists had predicted. Fixed asset investment growth rose 32.9% from a year earlier for the first seven months of year, indicating some slowing in July as half-year growth had been 0.7 percentage points higher.

“Senior Chinese leaders have repeatedly emphasised their commitment in recent weeks to a ‘moderately loose’ monetary policy but fears of bubbles forming in the property and stock markets prompted the central bank and banking regulators to order banks to slow lending last month.

“‘This policy of ‘backdoor tightening’ will be replaced with effective tightening measures authorised by top policy makers when the growth recovery is further confirmed, most likely in the fourth quarter of 2009,’ according to Goldman Sachs economists Helen Qiao and Yu Song. ‘We also expect more meaningful tightening measures to be adopted in 2010, after more signs of overheating and inflationary pressures emerge.'”

Source: Jamil Anderlini, Financial Times, August 11, 2009.

Financial Times: The Bank of England versus deflation
“The UK appears to be the main exception to the disinflation affecting the global economy – yet the Bank of England is the most concerned of all the main central banks about the risks of deflation, says Stephen Lewis, chief economist at Monument Securities.

“‘There is no mystery about the divergence of inflation in the UK from the experience in other economies,’ he says.

“‘Currency factors have probably contributed significantly to the pattern, with sterling’s overall depreciation tending to boost UK import costs.’

“Mr Lewis says that in the light of history, the Bank of Japan might have been expected to be the most worried of the world’s central banks about declining prices.

“Yet the BoJ and the European Central Bank have stood pat on policy for the past two months, while the Federal Reserve has gone a long way in winding down the special measures it undertook to cope with the financial crisis, he says. ‘The Bank appears to be alone in believing that fresh action was needed to support demand in the economy, when it increased the scope of its asset purchase facility by £50 billion last week.

“‘The conclusion seems inescapable, bearing in mind recent inflation data, that there is a stronger bias towards growth and a greater tolerance of inflation at the Bank of England than at the other central banks.'”

Source: Stephen Lewis, Financial Times, August 12, 2009.

Financial Times: UK tax deal with Liechtenstein
“About 5,000 investors with an estimated €2 billion to €3 billion in secret Liechtenstein bank accounts will be asked to come clean under an agreement signed on Tuesday. Tax correspondent Vanessa Houlder explains the background to the ground-breaking deal.”

15-08-09-22

Click here for the article.

Source: Financial Times, August 11, 2009.

Financial Times: UBS and US strike tax evasion deal
“UBS and the US government have agreed an out-of-court settlement to end one of the most bitter assaults on Switzerland’s hallowed bank secrecy.

“The case has significant implications for the future of client confidentiality, amid fears among many Swiss bankers that a dilution of traditional secrecy rules could prompt a defection by worried foreign customers.

“No details of the deal were revealed on Wednesday, pending formal signing, probably early next week. However, lawyers said the settlement would involve UBS supplying the names of least 5,000 US offshore clients and possibly paying a big fine.

“Bankers were reluctant to comment before knowing the terms. But the Swiss bankers’ association said it expected the settlement ‘would be consistent with Swiss law’.

“The difficulty of finding a formula allowing Bern to authorise a breach of secrecy rules, while maintaining the facade of confidentiality, probably explains why the deal took so long, after lawyers indicated agreement in principle last month.

“‘We are pleased to have initialled an agreement with the Swiss government which protects the US government’s interests,’ said Doug Shulman, the Internal Revenue Services commissioner.

“‘I am pleased to say that it has been possible to resolve the matter in the form of a compromise between two sovereign states – that is in the interests of both states,’ said Eveline Widmer-Schlumpf, the Swiss justice minister.”

Source: Haig Simonian, Financial Times, August 12, 2009.

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1 comment to Words from the (investment) wise for the week that was (August 10 – 16, 2009)

  • j. m. smith

    Excellent post. Got onto to you by way of John Mauldin’s posts and starting to understand his enthusiasm for your writing. Thanks for the postcard – it will take a while to digest this one. Quite possibly the best chart presentation on the web.

    j m smith

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