Words from the (investment) wise for the week that was (November 9 – 15, 2009)

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“Words from the Wise” this week comes to you in a shortened format as I do not have access to my normal research resources while on the road in Europe. Although very little commentary is provided, a full dose of excerpts from interesting news items and quotes from market commentators is included.

While the Dow Jones Industrial Index and other benchmark indices reached 52-week highs last week and pleased Wall Street, the cartoonists reminded us that worrisome economic issues remained in Main Street …

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Source: Jeff Parker, Comics.com, November 11, 2009.

The past week’s performance of the major asset classes is summarized by the chart below – a mixed bag, so to speak, with government bonds, equities, corporate bonds and gold closing the week in positive territory.

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Source: StockCharts.com

A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below. With the exception of only a few indices – notably the Japanese Nikkei Dow that recorded a third consecutive down week – most global stock markets made headway last week, adding to the gains for the month.

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

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Top performers among stock markets this week were Romania (+8.1%), Russia (+6.1%), Jamaica (+6.1%), Hungary (+5.2%) and Israel (+5.2%). At the bottom end of the performance rankings countries included Latvia (‑5.1%), Cyprus (-4.4%), Greece (-4.2%), Serbia (-4.0%) and Kuwait (‑3.8%).

Of the 99 stock markets I keep on my radar screen, 66% recorded gains (last week 52%), 31% (43%) showed losses and 3% (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 PowerShares Global Coal (PKOL) (+7.6%), iShares Cohen & Steers Realty Majors (ICF) (+7.4%), Vanguard REIT (VNQ) (+6.4%) and Market Vectors Russia (RSX) (+6.4%).

At the bottom end of the performance rankings, ETFs included United States Natural Gas (UNG) (-4.9%), ProShares Short Emerging Markets (EUM) (-3.7%), ProShares Short QQQ (PSQ) (-3.4%), SPDR Russell/Nomura Small Cap Japan (JSC) (-3.0%) and WisdomTree Japan Small Cap (DFJ) (-2.5%).

Still on the topic of ETFs, Clusterstock reported that investors have been pouring $108 billion into ETFs during the year to date, with $24 billion coming in during the last three months.

“Yet while investors have been pouring money into commodity, fixed income and global equity ETFs, one very important category has remained a complete pariah – US stocks. Despite the stock market rally …, money has continued to flow out of US equity ETFs. Thus while some might be able to argue that the crowd has jumped into commodities, fixed income and global equities, it’s pretty hard to say that investors are in love with stocks again …,” said Clusterstock.

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Source: Clusterstock – Business Insider, November 11, 2009.

Referring to the surge in the gold price, the quote du jour this week comes from Richard Russell, 85-year-old author of the Dow Theory Letters. He said: “America’s Fed Chairman, Ben Bernanke, is convinced he knows the secret of avoiding hard times. The Fed can halt deflation and turn the picture into asset inflation. All it takes, thinks Bernanke, is zero interest rates and the creation of trillions of new dollars – and they will come, and they will spend. This is the path the Bernanke Fed has chosen. So far, it has not worked – they are not coming, and they are not spending. The Fed’s strategy has not even succeeded in bringing down unemployment. Bernanke’s solution – more of the same: ‘Whatever it takes, and as long as it takes.’

“Thus we have a strange and ironic situation. We have world deflation, and a Fed Chairman who believes he can manipulate the primary trend. Bernanke’s strategy is leading to a weakening dollar. The more dollars that are created, the weaker the dollar. As the dollar’s very status comes into question, wise and seasoned investors move to protect their wealth. They move to the time-honored ‘safe haven': the one unit of wealth that cannot be destroyed in that it is not a liability of any government. And, of course, I’m talking about the one unit of wealth that is never questioned – gold.

“So it’s the gold bull market that I trust and believe in. I think and I ponder – what can halt the gold bull market? The only thing that can halt the gold bull market is a complete reversal by the politicians and the Fed, and that would allow the US to sink into a state of deflation and depression. Unthinkable.”

Next, a quick textual analysis of my week’s reading – mostly done on airplanes and between meetings in Europe. This is a way of visualizing word frequencies at a glance. Although “bank” still features prominently, the key words have started taking on a more normal pattern compared to the crisis-related words that have dominated the tag cloud for many months. Unsurprisingly, “gold” is gaining in prominence.

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The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town) are given in the table below. With the exception of the Russell 2000 Index, most of the indices are trading above their 50-day moving averages, with all the indices also above their respective 200-day moving averages. The 50-day lines are also above the 200-day lines in all instances.

The October lows are also given in the table. A break below these levels would indicate a reversal of the uptrend since March, i.e. reversing the progression of higher-reaction lows.

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

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Still on charting, Adam Hewison (INO.com) sounded a cautious note on the outlook for the Dow Jones Industrial Index and S&P 500 Index as explained in one of his popular technical analysis presentations. Click here to access the presentation.

The announcement of Wal-Mart’s results marked the end of the Q3 earnings season. Research outfit Bespoke provided the following summary of the Q3 earnings results as well as Q4 estimates:

“The estimates for the year-over-year change in Q3 earnings at the start of earnings season were -23.2% for the S&P 500. Currently, the actual number sits at -17.2%. As shown below, the Financial sector has seen its earnings grow by 358.8% in Q3 ’09 versus Q3 ’08! Given how bad things were last year, it’s not surprising to see a reading this high, but it is a sign that things have gotten much better. Health Care, Utilities and Consumer Staples (all non-cyclical) are the only other sectors that have seen year-over-year earnings growth this quarter. Energy has seen the biggest decline in earnings at -62.9%, followed by Materials (-43.4%), Industrials (-37.3%), and Consumer Discretionary (-29.3%).

“The Financial sector is currently expected to see growth of 133.8% in Q4 ’09 versus Q4 ’08. This high estimate in the Financial sector helps put estimates for the entire S&P 500 at +65.2% in the fourth quarter. Ex-Financials, the S&P 500 is expected to see Q4 earnings actually decline by 7.6%. Technology is expected to see growth of 21.5% in Q4, while estimates for the Materials sector are currently at 97.5%.”

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Source: Bespoke, November 11, 2009.

From across the pond, David Fuller (Fullermoney) said: “Veteran subscribers will recall a remark often used on this site [Fullermoney]: Bull markets do not die of old age – to which I will add warnings by Roubiniesque economists. Instead, they are assassinated – usually by central banks. So how many rate bullets does it take to fell a bull? You may not be surprised to hear that there is no precise answer, because it depends mainly on sentiment and liquidity. We know when central banks start to reduce liquidity, or at least increase its price, but we do not know precisely when that will affect sentiment adversely.

“Note the still widening spread between US 10-year yields over 2-year yields, otherwise known as the yield curve, on this historical. It is still rising, indicating to me that quantitative easing continues. The time to start thinking about closing long portfolios in anticipation of the next bear market, I suggest, will be when the yield curve next inverts by moving below zero. However, the lead was so early last time (early 2006) that some of us became complacent about it.”

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Source: Fullermoney.com

For more discussion on the economy and financial markets, see my recent posts “Picture du Jour: Dow rally in perspective“; “Richard Russell: Six reasons to invest in gold“; “Albert Edwards still über-bearish, calls for new lows in 2010“; “Roubini’s RGE: Global monetary policy outlook“; “Bull markets do not die of old age; they are assassinated – usually by central banks” and “WealthTrack: Jim Grant interview – transcript“.

Twitter and Facebook
I regularly post short comments (maximum 140 characters) on topical economic and market issues, web links and graphs on Twitter. For those not doing so already, you can follow my “tweets” by clicking here. You may also consider joining me as a friend on Facebook.

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.

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Source: Dismal Scientist

“Global business confidence has remained largely unchanged during the past two months through mid-October. Sentiment is consistent with a very tentative and fragile global economic recovery,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses … are more upbeat about the outlook into next year … and their broad assessment of current business conditions. South Americans are the most positive, and North Americans generally the most negative.”

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Source: Moody’s Economy.com

As far as hard data are concerned, the Eurozone emerged from recession in the third quarter, but the speed of the recovery fell short of expectations – and the growth rate of 0.9% achieved by the US. “Eurozone gross domestic product expanded by 0.4% compared with the previous three months, after having previously contracted for five consecutive quarters, according to official figures on Friday. Powering the rebound were Germany and Italy, which saw GDP rising by 0.7% and 0.6% respectively,” reported the Financial Times.

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.)

November 13
• Widening of trade deficit reflects oil imports and improving economic conditions
• Michigan Consumer Sentiment Index – households remained gloomy in November

November 12
• Noteworthy news from labor market – total continuing claims are trending down

November 10
• Yellen on budget deficit and inflation
• Inflation expectations – an update

November 9
• October Senior Loan Officer Opinion Survey – improved picture of lending conditions, but demand for loans was weak

Meanwhile, James Bullard, the president of the Federal Reserve Bank of St Louis, has told the Financial Times that uncertainty over the outlook for inflation “is as high as it has ever been since 1980″. “I think there’s still some risk of deflation, but I do think the deflation risk is fading as the economy recovers,” he said. In the medium term, “you have inflation that will be possibly substantially above target over a horizon of two to four years, and that, I think, is because of the combination of very large fiscal deficits in the US with very easy monetary policy.”

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

Nov 12

08:30 AM

Initial Claims11/07

502K

525K

510K

514K

Nov 12

08:30 AM

Continuing Claims10/31

5631K

5700K

5700K

5770K

Nov 12

11:00 AM

Crude Inventories11/06

1.76M

NA

NA

-3.94M

Nov 12

02:00 PM

Treasury BudgetOct

-$176.4B

-$150.0B

-$165.0B

-$155.5B

Nov 13

08:30 AM

Export Prices ex agricultureOct

0.3%

NA

NA

0.1%

Nov 13

08:30 AM

Import Prices ex oilOct

0.4%

NA

NA

0.5%

Nov 13

08:30 AM

Trade BalanceSep

-$36.5

-$30.0B

-$31.8B

-$30.8B

Nov 13

09:55 AM

Michigan SentimentNov

66.0

70.5

71.0

70.6

Source: Yahoo Finance, November 13, 2009.

Click the links below for the following economic reports:

Wells Fargo Securities: Weekly Economic & Financial Commentary
Wells Fargo Securities: Monthly Economic Outlook (November 2009)
Wells Fargo Securities: Global Chartbook (November 2009)

In addition to a speech by Fed Chairman Ben Bernanke to the Economic Club of New York, US economic data reports for the week include the following:

Monday, November 16
• Retail sales
• Empire manufacturing
• Business inventories

Tuesday, November 17
• PPI
• TIC flows
• Capacity utilization
• Industrial production

Wednesday, November 18
• Housing starts
• Building permits
• CPI

Thursday, November 19
• Initial jobless claims
• Leading indicators
• Philadelphia Fed

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

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Source: Wall Street Journal Online, November 13, 2009.

“Amateurs measure potential while professionals measure risk,” said hedge fund legend Steve Cohen, founder of SAC Capital Advisors (hat tip: The Kirk Report). Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist readers of Investment Postcards to properly assess the risk associated with specific investments.

That’s the way it looks from Geneva (from where I will be making my way back to Cape Town later today).

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Source: Larry Wright, Comics.com, November 10, 2009.

The Wall Street Journal: German, French economies continue to grow
“The euro zone’s two largest economies continued to recover from recession in the third quarter, as exports boosted both German and French gross domestic products.

“Germany’s GDP rose 0.7% in the three months to September 30 from a quarter earlier when adjusted for working days, data from the Federal Statistics Office showed Friday. Private consumption, however, dragged on the economy, the office said.

“In France, GDP grew for the second consecutive quarter, rising 0.3%, after shrinking for a year. Exports outpaced imports by growing 2.3%, with the result that the external sector contributed 0.4% to overall economic growth, the data showed.

“Household consumption, the main pillar of the French economy, remained unchanged from the previous three months, when it had gained 0.3%. Investment fell 1.4%, a faster pace of decline than the -1.2% posted in the previous quarter.

“The outlook for the German economy remains uncertain as unemployment is expected to rise in the coming months, hurting consumer demand. And with the euro trading at high levels against the dollar, German exporters may suffer from weaker demand, economists have said.

“The third-quarter growth marked the second quarterly gain after weak activity in the previous quarters, indicating that the euro zone’s largest economy is making progress in easing out of its worst recession since World War II.

“But overall economic activity remains low, with German GDP shrinking 4.8% in the third quarter from a year earlier, when adjusted for the number of working days each year, the data showed.”

Source: Andrea Thomas and Gabriele Parussini, The Wall Street Journal, November 13, 2009.

MoneyNews: Chanos – huge China crash coming
“To the growing number of China bears, add Kynikos hedge fund manager Jim Chanos, who is reportedly shorting the entire Chinese economy.

“Chanos, among the first to see through Enron’s web of accounting tricks, told Politico.com he sees a similar situation evolving in China – starting with the fact that the $4.3 trillion Chinese economy is under-performing despite a $900 billion stimulus program.

“Also, China seems to be cooking its books, making claims such as a huge surge in car sales while gasoline sales stay flat.

“Finally, there’s a concern that China may have too much capacity to produce too many goods for too few buyers, notes financial journalist Ed Conway.

“‘China has grown to its current size, as do most ‘young’ economies, by exporting cheap goods to richer countries. … (resulting in) the biggest trade surplus in history,’ Conway writes in the UK Telegraph.

“Chinese leaders, Conway points out, are doing whatever they can to keep the value of their currency low.

“‘Such a policy made sense when China had an economy that was relatively underdeveloped, and was trying to shield nascent exporters from volatility; but now, by keeping assets artificially cheap, it serves to exacerbate the bubble that is building up as a result of those low US interest rates,’ Conway writes.

“This, combined with trying to pump up the economy further by channeling cheap credit to companies, ‘could hardly be a more reliable recipe for an asset bubble,’ Conway says.”

Source: Julie Crawshaw, MoneyNews, November 12, 2009.

Asia Times.com: China trade surplus shadows Obama visit
“China’s surging trade surplus, with the increase last month almost double the September figure, makes it impossible that trade issues will not be a key topic when United States President Barack Obama makes his first visit to Beijing this Sunday.

“The surplus was US$24 billion in October, compared with $13 billion in September, bringing the total for the year so far to $159.23 billion.

“Trade tension between the two countries was already rising before the latest data were released on Wednesday, with the US imposing a series of anti-dumping sanctions on Chinese imports and Beijing investigating the possibility of action against imports from the US.

“This week, before leaving on his nine-day trip to Asia, Obama warned that the economic relationship between the countries had become deeply imbalanced in recent decades, with a trade gap between the countries and huge Chinese holdings of US government debt.

“The US and China had to work together on the big issues facing the world, and any competition between them had to be fair and friendly, Obama said in a White House interview with Reuters.

“He said he would be raising with Chinese leaders the sensitive issue of their currency, the yuan, which is seen by some in US industry as significantly undervalued and as an important contributor to the imbalances.

“‘As we emerge from an emergency situation, a crisis situation, I believe China will be increasingly interested in finding a model that is sustainable over the long term,’ Obama said. ‘They have a huge amount of US dollars that they are holding, so our success is important to them … The flip side of that is that if we don’t solve some of these problems, then I think both economically and politically it will put enormous strains on the relationship.’

“China holds about $2.27 trillion in foreign reserves, about two-thirds of it in US dollars, as of the end of September, up 19% from a year earlier. The country held Treasury bills worth about $797.1 billion in August, making China the world’s largest holder of US Treasuries outside the United States, according to the US Treasury Department.”

Source: Olivia Chung, Asia Times.com, November 13, 2009.

Clusterstock: California’s no. 2 export to China – trash
“American exports to China soared 341% from 2000 to 2008, according to the US-China Business Council. In fact, China is the third largest US export market, behind Canada and Mexico.

“Spearheading the charge is sunny California, the largest American exporter to China by state.

“No surprise, right? California’s right on the Pacific coast and filled with innovative companies.

“Well sort of.

“While computers and electronics are indeed California’s top export to the giant nation, the sad truth is that ‘Waste and Scrap’ are the Golden State’s second largest export to China. California sends about as much junk to China as both machinery and transportation equipment combined.

“The rest of the US isn’t doing that much better either. As a nation, ‘Waste and Scrap’ is America’s fifth largest export to China, at a whopping $7.6 billion. We might need to rethink what ‘Made in the USA’ exactly means to the Chinese.”

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Source: Vincent Fernando and Kamelia Angelova, Clusterstock – Business Insider, November 12, 2009.

Financial Times: EU states given stark warning on debt levels
“The European Union’s public debt could by 2014 rise to 100% of gross domestic product – a year’s economic output – unless governments take firm action to restore fiscal discipline, EU finance ministers will be warned on Monday.

“The stark message is contained in a European Commission analysis, which highlights the rapid deterioration in EU public finances caused by emergency measures in the past 12 months to rescue Europe’s financial sector and combat recession.

“As recently as 2007, the euro area’s public debt was only 66% of GDP. But, even at this level, it was above the 60% target set for countries aspiring to join the eurozone.

“In its latest six-month economic forecast, published last week, the Commission predicted that the eurozone’s public debt would rise to 84% of GDP next year and 88.2% in 2011. But the new document paints a more sombre picture.

“The document says, based on projections of a return to long-term pre-crisis growth levels, that ‘without consolidation, the gross debt-to-GDP ratio for the EU could reach 100% of GDP as early as 2014, and keep on increasing’.

“The Commission identifies five countries as at particular risk – Greece, Ireland, Latvia, Spain and the UK – because their public finances will come under strain from large increases in pension and healthcare costs, and high deficits triggered by the financial crisis.”

Source: Tony Barber, Financial Times, November 8, 2009.

Financial Times: Uncertainty “high” over inflation outlook
“Uncertainty over the outlook for inflation ‘is as high as it has ever been since 1980′, James Bullard, the president of the Federal Reserve Bank of St Louis, has told the Financial Times.

“He said the US central bank still faced a lingering threat of deflation, but might have to pivot quickly once this danger passed to face the threat of excess inflation.

“His comments followed last week’s Fed meeting at which the US central bank signalled that it expected to keep rates on hold near zero for at least six more months but identified factors that could lead to earlier rate rises.

“‘I think there’s still some risk of deflation, but I do think the deflation risk is fading as the economy recovers,’ the St Louis Fed chief said in an interview.

“In the medium term, ‘you have inflation that will be possibly substantially above target over a horizon of two to four years, and that, I think, is because of the combination of very large fiscal deficits in the US with very easy monetary policy.’

“Mr Bullard – whose views do not neatly categorise him as a hawk or a dove – said: ‘For 2009, in particular, and maybe a little bit into 2010, you have to worry about getting out of the recession, establishing your recovery, making sure the recovery has really taken hold. And then, at the appropriate time, when things are all going forward, you have to switch gears and watch whether the inflation rate is coming up.’

“Mr Bullard said historically the Fed had waited until two-and-a-half to three years after a recession ended before raising rates. That, he said, ‘would put you in the first half of 2012′. But the committee might take into account a wider set of factors this time, including the danger that ultra-low rates could fuel asset price bubbles.”

Source: Krishna Guha, Financial Times, November 8, 2009.

Asha Bangalore (Northern Trust): Inflation expectations – an update
“Inflation expectations (as measured by the spread between the nominal Treasury security yield and TIP rate) have moved up 22 bps in six business days ended November 9 if the 10-year time span is considered, while the 5-year time span shows 18 bps increase in the same period.

“It is well known that inflation expectations are important in the formulation of Fed policy and this aspect is stressed in official policy statements and Fed rhetoric. Inflation expectations as of November 9 (222 bps using the 10-year span) is the highest since August 2008. After the collapse of Lehman Brothers, inflation expectations, much like other market indicators, moved to worrisome territory with a possibility of deflation being priced in. This situation has undergone a significant change with improving financial market and economic conditions in place at the present time. Consistent with more bullish economic data, inflation expectations have moved up to reflect the change in business conditions.

14-11-09-02

“Inflation expectations have risen in the past few days but there is an exaggerated concern about inflation evolving despite the fact that there is an enormous level of unused capacity across the economy. Inflation should not be problematic in 2010.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 10, 2009.

Bill King (The King Report): Dubious US economic statistics
“For years we inveighed about dubious, if not fraudulent, US economic statistics. Over the past year or so, an increasing number of analysts, pundits and media types have been converted to the cause. The New York Times this week reported that faulty export accounting is overstating GDP.

“Now Goldman’s Jan Hatzius is preaching the dubious economic data gospel.

“‘Today’s comment attempts to gauge whether the recent official estimates might have overstated the economy’s true growth because of an inability to capture the unusually poor performance of small firms. Our tentative conclusion is that the economy might have grown between ½ and 2 percentage points more slowly than indicated by the Q3 ‘advance’ estimate of 3.5% (annualized). However, even if this proves correct and eventually shows up in the revised data, the revision process could take several years.

“Over the years, we have addressed the problems with ISM and other PMI survey data. Mr. Hatzius:

“‘The weakness of the NFIB stands in stark contrast to other indicators such as the purchasing managers indexes published by the Institute for Supply Management, which have moved back to around their long-term averages, and real GDP, which grew an estimated 3.5% (annualized) in the third quarter. Small firms appear to be underperforming their larger peers, most likely because of differential access to credit.

“‘To illustrate how huge the gap between the NFIB and ISM has become, we regress the ISM on the NFIB using monthly data for the 1974-2006 period. (We only use data through 2006 to avoid biasing down the coefficients via an inclusion of the recent enormous gap.) The equation shows that the current level of the NFIB would have been expected to correspond to a manufacturing ISM index of 41.1, at a time when the actual ISM stands at 55.7…

“‘We have argued that the weakness of the small business sector may mean that real GDP in the third quarter in fact grew more slowly than the 3.5% ‘advance’ estimate. The reason is that the GDP data may not fully capture the performance of small firms, and specifically the formation and dissolution – i.e. the ‘birth’ and ‘death – of small firms…’ Amen, Brother Jan!”

Source: Bill King, The King Report, November 12, 2009.

MoneyNews: Edmund Phelps – recovery will lose steam
“Nobel laureate economist Edmund Phelps says the economic recovery will weaken soon.

“The economy ‘is groggy, but it’s getting to its feet’, he told Bloomberg.

“‘We’re already seeing a strong recovery. I just think that it’s going to run out of gas.’

“Phelps, a Columbia University professor, agrees with Pimco executives Mohamed El-Erian and Bill Gross that the economy has entered an extended period of slow growth and high unemployment.

“‘As output goes up, employment is going to continue to lag,’ Phelps said.

“‘Firms have gotten rid of a lot of their workforce cushion, so to speak, and they’re going to do without that for a quite a while.’

“The problem is structural, he said. ‘There are signs that the economy has lost its dynamism, its urge to innovate, or its ability to innovate.’

“Phelps said that the Obama administration’s fiscal stimulus program made sense, but that more stimulus isn’t necessary.”

Source: Dan Weil, MoneyNews, November 9, 2009.

Asha Bangalore (Northern Trust): Widening of trade deficit reflects oil imports and improving economic conditions
“The trade deficit widened to $36.5 billion in September vs. $30.8 billion in August. Exports (+2.9%) and imports (+5.8%) of goods and services grew in September. A large part of the import bill was due to an increase in oil imports resulting from higher prices and a larger quantity of imports (+7.0%). The trade deficit has risen about $10 billion in the past five months from a low of $26.4 billion in April 2009. The September trade data suggest a likely downward revision of the 3.5% gain in third quarter real GDP. The net impact will be known after inventories and retail sales data are published next week.”

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

Asha Bangalore (Northern Trust): Households remained gloomy in November
“The early-November University of Michigan Consumer Sentiment Index edged down to 66.0 from 70.6 in October. Both the Current Conditions Index (69.6 vs. 73.7 in September) and the Expectations Index (63.7 vs. 68.6 in October) declined. The weak labor market situation appears to have played a major role in households revising their assessment of economic conditions as the index has dropped for two straight months after posting a large increase in September.”

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

Asha Bangalore (Northern Trust): Job market – total continuing claims are trending down
“Initial jobless claims dropped 12,000 to 502,000 during the week ended November 7, the lowest reading in a year. Continuing claims, which lag initial claims by one week, declined 139,000 to 5.631 million.

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“Total claims which include recipients under the special programs, Extended Benefits Program and Emergency Unemployment Compensation Program, were 9.81 million during the week ended October 24, down from 10 million during the week ended October 3. These data underscore the positive developments in the labor market amid the gloomy news about a climbing unemployment rate. Initial jobless claims data are a leading indicator, while the overall jobless rate is a lagging economic indicator.

“The 4-week moving average of initial jobless claims is 519,750 for the week ended November 7. Historically, the median of the four-week moving average of initial jobless claims is 347,000. In other words, the current 4-week moving average of initial jobless claims is nearly half way from the median level of jobless claims. At the cost of stating the obvious, robust growth of real GDP will be necessary for achieve more vibrant conditions in the labor market but the current improvements remain significant.”

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

Bloomberg: Obama administration accelerating review of ways to boost jobs
“President Barack Obama’s administration is accelerating plans to boost job growth, including more spending on infrastructure and business tax cuts, after the unemployment rate jumped to 10.2% last month.

“Obama and his advisers will within a matter of weeks review ideas for adding to the $787 billion stimulus passed earlier this year, an administration official said. Previously the president’s aides said they wanted to wait for the full impact of the earlier stimulus before taking additional action.

“‘My economic team is looking at ideas such as additional investments in our aging roads and bridges, incentives to encourage families and businesses to make buildings more energy efficient,’ additional tax cuts to spur hiring, and more steps to ease the flow of credit to small business, Obama said today at the White House following the Labor Department report.

“The president made his remarks after signing into law a measure extending an $8,000 tax credit for first-time homebuyers and benefits for unemployed workers, the first major expansion of provisions that were included in February’s economic stimulus. The legislation also provides tax refunds to money- losing companies.”

Source: Kate Andersen Brower and Roger Runningen, Bloomberg, November 6, 2009.

CNBC: Foreclosures fall again but improvement likely fleeting
“Foreclosure rates fell for the third consecutive month in October, but remained sharply higher than a year ago, according to a new report, with analysts cautioning that the improvement was at best temporary.

“The number of Americans receiving foreclosure notices was down 3% on a month-to-month basis, as 332,292 properties generated a foreclosure notice. That was 18.9% higher than last October. (Foreclosure notices are defined as a default notice, bank repossession or auction sale notice.)

“‘It’s good to see that foreclosures have slowed down marginally, but we don’t really think it’s a trend,’ said Rick Sharga, vice president of marketing at foreclosure tracking Web site RealtyTrac, which released the report.

“Legislation in some states has slowed foreclosures, says Sharga, but the impact will be temporary and won’t ultimately prevent most of them. In Nevada, for example, foreclosures dropped 26% from the previous month because of new legislation requiring mediation before initiating foreclosure proceedings.

“The data comes a couple of days after the Treasury Department released a report showing that more than 650,000 homeowners have taken trial loan modifications under the Making Home Affordable program, which was announced last February. About one-third of those modifications have been in California and Florida, which also happen to have some of the highest foreclosure rates in the country.”

Source: Joseph Pisani, CNBC, November 11, 2009.

Clusterstock: The bailout has transformed into an MBS buying program
“When the financial crisis hit its high tide last year the Federal Reserve used a couple of blunt instruments to rescue financial institutions.

“The largest of the credit easing policy tools were the Fed’s programs direct lending to financial institutions, including opening the discount window to investment banks and extending an unprecedented credit line to AIG. It also provided credit to ‘key credit markets’ in the form of loans and guarantees to money market funds and asset backed securities markets.

“But over the course of 2009, those program have shrunk or been phased out. Meanwhile, one program, the Fed’s purchase of mortgage back securities, has grown by more than enough to make up for the decline of those programs. What this means is that despite the rollback of some Fed bailout programs, the market is still highly leveraged to the balance sheet of the Fed.”

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Source: John Carney and Kamelia Angelova, Clusterstock – Business Insider, November 9, 2009.

Financial Times: Health reformers prepare for Senate hurdle
“The first thing Barack Obama did late on Saturday night following the passage of the healthcare bill in the House of Representatives was to phone the heads of three industry lobby groups to thank them for their support. Not included on the list was the largest insurance lobby group, American Health Insurance Plans, which doggedly continues to oppose Democratic reform efforts.

“Amid all the late night celebrations after the razor-thin 220-215 vote for the bill, Karen Ignagni, head of AHIP, warned that it would be a much tougher battle to push reform through the Senate in the weeks ahead. ‘The current House legislation fails to bend the healthcare cost curve and breaks the promise that those who like their current coverage can keep it,’ she said. ‘The result will be increased costs and massive disruptions in the quality of coverage individuals and families rely on today.’

“On Sunday, Harry Reid, the Senate majority leader, who will now become the central figure in the drama of the weeks ahead, said ‘we stand closer than ever to reforming our broken healthcare system’.

“The battle is by no means even close to its finale. Mr Reid’s first task will be to persuade sceptical colleagues that the bill should retain the controversial ‘public option’ – a government insurance plan intended to keep the ‘insurers honest’. Even though Mr Reid has watered down that element by allowing states to opt out of it, many Democrats remain opposed.

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“Secondly, Mr Reid will be under pressure to restore a strong ‘individual mandate’ that compels all Americans to take out insurance or pay a hefty fine. Dilution of that element is what led AHIP to come out strongly against healthcare reform last month.

“If and when Mr Reid cobbles together a majority in the Senate, Democrats then face the thorny task of stitching the very different House and Senate versions into one bill and then voting on that final product all over again.”

Source: Edward Luce, Financial Times, November 8, 2009.

Financial Times: US banks bill seeks to strip Fed of powers
“An influential US Senate committee has proposed a sweeping overhaul of the country’s regulatory architecture that would strip powers from the Federal Reserve and create a single banking regulator.

“Chris Dodd, chairman of the Senate banking committee, on Tuesday presented a more radical vision of regulatory reform than that proposed by the Obama administration. The move ushered into the open a behind-the-scenes struggle between banks, policymakers and regulators.

“Democrats lined up behind Mr Dodd as he presented the bill. But senior Republicans were missing from a press conference despite attempts by President Barack Obama to secure their support for one of his most important legislative goals.

“The proposal to consolidate regulators faces strident opposition from the Fed, the Federal Deposit Insurance Corporation and smaller regulators who argue they are best placed to supervise banks.

“Mr Dodd said most institutions should benefit from a regulator that would provide ‘clarity, cut red tape and make it easier to compete’ but banks would ‘no longer be able to shop for the weakest regulator’.

“Viral Acharya, professor of finance at the Stern School of Business at New York University, said he thought the idea of a single bank regulator was a bad idea. ‘I think it’s going to be too huge an overhaul of what exists,’ he said. The Fed and FDIC need to keep supervisory functions in order to inform their other roles, he argued.

“An Obama administration official said last week that he was open to the idea of consolidating bank regulators even though that went much further than initial plans from the Treasury.

“The Senate draft legislation also creates an agency to oversee systemic risk, which could call for banks to be broken up if they threatened the entire financial system and impose tougher capital requirements.

“The draft legislation, although more radical than other versions, stops short of forcing the break-up of healthy banks, which has been advocated by some economists.”

Source: Tom Braithwaite and Sarah O’Connor, Financial Times, November 10, 2009.

CNBC: Fed in the crosshairs
“Frederic Mishkin, former Federal Reserve Board Governor and a Columbia University economics professor, discusses Sen. Dodd’s financial reform bill and its potential unintended consequences.”

Source: CNBC, November 12, 2009.

The Wall Street Journal: Banks hasten to adopt new loan rules
“Banks are moving quickly to restructure commercial mortgages under new US guidelines that are more forgiving of battered property values and can help banks avoid bigger losses.

“Citigroup Inc., regional bank Whitney Holding Corp. and other lenders around the country are planning to review loans now considered nonperforming to determine if they can be reclassified under the guidelines announced October 30 by bank, thrift and credit-union regulators, according to bank executives and people familiar with the matter. The moves could help the banks absorb fewer losses on troubled real-estate loans and preserve capital.

“‘It’s a positive all the way around,’ said James Smith, chief credit officer for National Bank of South Carolina, a unit of Synovus Financial Corp.

“Matthew Anderson, partner at research firm Foresight Analytics, estimates that about two-thirds of the $800 billion in commercial real-estate loans held by banks that will mature between now and 2014 are underwater, meaning the loan amount exceeds the value of the property. The flexibility extended by regulators will apply to $110 billion to $130 billion of these loans, he said.

“The guidelines are controversial, with critics accusing the US government of prolonging the financial crisis by not forcing borrowers and lenders to confront inevitable problems.

“Regulators respond that they are being prudent, adding that a crackdown will occur at any banks misinterpreting last month’s announcement as an opportunity for leniency.”

Source: Lingling Wei and Peter Grant, The Wall Street Journal, November 12, 2009.

Reuters: Goldman Sachs boss says banks do “God’s work”
“The chief executive of Goldman Sachs, which has attracted widespread media attention over the size of its staff bonuses, believes banks serve a social purpose and are doing ‘God’s work’.

“In an interview with London’s Sunday Times newspaper, Lloyd Blankfein also said he believed big profits and bonuses at banks were a sign that the world economy was recovering.

“‘We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. We have a social purpose,’ he told the paper.

“The dominant Wall Street bank posted third-quarter earnings of $3 billion and plans to hand out more than $20 billion in year-end bonuses.

“Blankfein told the Sunday Times that the bank’s compensation practices correlated with long-term performance.

“‘Others made no money and still paid large bonuses. Some are not around anymore. I wonder why?’

“He added that he understood, however, that people were angry with bankers’ actions: ‘I know I could slit my wrists and people would cheer.'”

Source: Victoria Bryan, Reuters, November 8, 2009.

Financial Times: A lumpy ride for JGBs
“Government bond markets around the world are quite calm at the moment, but a sharp rise in Japanese government bond yields hints at what could be a lumpy ride to come. Jennifer Hughes, senior markets correspondent of the Financial mail, explains how the credibility of governments is key to keeping any bond market volatility to a minimum as large swathes of debt are offered to the market in the coming months.”

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Click here for the full article.

Source: Financial Times, November 10, 2009.

Bespoke: 2009 country stock market performance
“Below we highlight the year-to-date percentage change (local currency) for the major equity indices of 82 countries. So far this year, 71 of the 82 countries are in positive territory, and the average change of all countries is 33.27%. With a gain of 20.76%, the S&P 500 is 13 percentage points below the average, yet it’s the second best G-7 performer behind Canada so far in 2009.

“The BRIC countries (Brazil, Russia, India, China) have been standouts this year. Russia is up the most out of all countries with a gain of 126.71%. Brazil, China, and India are all up more than 70%. Along with Russia, the Ukraine, Argentina, and Peru are up more than 100% year to date.

Eleven countries are down so far in 2009. Ghana is down the most at -48.26%, followed by Puerto Rico (-40.56%), Bermuda (-38.36%), and Costa Rica (-35.37%).”

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Source: Bespoke, November 10, 2009.

Bespoke: S&P 500 breadth check-up
“Although the S&P 500 is within 1% of its closing high, breadth in this recent rally has been lagging. As of today [Tuesday], the cumulative A/D line for the S&P 500 since September 2008 is at 778, which is 571 below the highs from October. Given the fact that days where the S&P 500 has a 1% gain typically see a net A/D reading of about +300, it is likely that if we get a rally to new highs, it will not immediately be confirmed by breadth. Therefore, if the S&P 500 does manage to rally to a new closing high, investors with cash already on the sidelines may want to wait for breadth confirmation before putting any new funds to work.”

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Source: Bespoke, November 10, 2009.

Bespoke: Breadth not yet confirming new highs
“As we noted on Tuesday [article above], breadth as measured by the cumulative advance/decline line has not yet confirmed the market’s recent rally to new highs. The same holds true for another breadth indicator that tracks the percentage of stocks trading above their 50-day moving averages. At prior highs during the current bull market, the percentage of stocks trading above their 50-days moved up to the 80%-90% mark. Currently, just 72% of stocks in the S&P 500 are trading above their 50-days, so less stocks have participated in the recent run-up.

“In the Financial sector, just 56% of stocks are currently above their 50-days, which is the weakest reading among all ten sectors. Consumer Staples currently has the highest reading at 83%, which is somewhat peculiar given that this sector usually only outperforms when the market is declining and not rising. Industrials and Health Care both have readings of 80% or better as well.”

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Source: Bespoke, November 12, 2009.

Bespoke: Midcaps lead the way in 2009
“As shown below, the S&P Midcap 400 has outperformed its large and smallcap brethren so far in 2009. The Smallcap 600 has been the worst performer with a gain of 15.4%, but it was down the most during the declines in the first quarter, so it has had to make up the most ground. The S&P 500 is up 20.77% year to date, while the Midcap 400 is up 29.17%.”

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Source: Bespoke, November 12, 2009.

Bespoke: Sector relative strength – technology & financials
“The charts below show the relative strength of the Financial and Technology sectors versus the S&P 500. 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 has left rates unchanged (blue dots). Believe it or not, the Fed hasn’t made a change in interest rates in the last year.

“Given the fact that Technology and Financials are the most widely followed sectors in the market, any meaningful rally in equities will need to see both Financials and Technology participating. As shown in the charts, while Financials have stopped rolling over, they are hardly outperforming. Since the last Fed meeting on November 4, Financials have merely been performing in line with the S&P 500. Unlike Financials, Technology stocks have been outperforming the market over the last several weeks. Even here though, the sector has yet to make a new high in relative strength. If the S&P 500 is going to stage a meaningful break above the 1,100 level, we will need to see these two sectors leading the way.”

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Source: Bespoke, November 12, 2009.

Bespoke: Top line numbers not bad
“With everyone worried about the top line revenue numbers this earnings season, we’ve been tracking this data closely. As shown below, 59% of US companies have beaten revenue estimates this quarter, which is the highest reading over the last 5 earnings seasons. While it’s not in the 70-80% range we saw during the last bull market, the direction of the revenue ‘beat’ rate is trending higher, which is a positive for the market.”

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Source: Bespoke, November 10, 2009.

MoneyNews: Prechter – 2008 crash just a warm-up
“Elliott Wave analyst Robert Prechter says the rally is over and predicts the start of ‘another wave of the bear market’, similar to the one investors experienced in 2008.

“‘I don’t think we’ve hit the V bottom yet,’ Prechter told CNBC.

“Prechter, who predicted last March that the Dow would top 10,000, says investors don’t need to be hurt in market downtrends.

“‘Just make sure you have stepped aside in the safest possible cash equivalents in the safest possible institutions,’ he advises.

“‘My message is very easy,’ Prechter says. ‘You want to be as safe as possible. You might miss an upside, but you won’t get hurt.’

“To achieve safety, Prechter advises investors to move their money into Treasury bills and make sure their banks are financially healthy.

“‘You don’t want to be in stocks, real estate, or commodities,’ says Prechter, who believes the number of bank failures is going to increase next year.

“Stocks are still overvalued, but they won’t be for long, according to Prechter. ‘It’s still too early, but there’s a great buying opportunity coming,’ he notes.

“Prechter is very bullish on the dollar, which he thinks is ‘going to be up for a year or two’ and bearish on gold.”

Source: Julie Crawshaw, MoneyNews, November 9, 2009.

MoneyNews: Citi – Treasury yields could torpedo rally
“Rising Treasury bond yields may put an end to the global stock rally, says Yutaka Yoshino, chief technical analyst at Citigroup in Tokyo.

“Investors have been borrowing dollars at low interest rates to invest in stocks around the world – the so-called carry trade.

“But if 10-year bond yields, now about 3.50%, surpass 3.55, that would signal a rise in US interest rates, Yoshino tells Bloomberg.

“That in turn could stanch investors’ desire for the carry trade.

“‘If we pass that 3.55 level on the yield, we stop being in a rebound phase (from the October 1 low of 3.18%) and enter into a rising trend,’ Yoshino said.

“‘Inflation concerns are starting to creep in, and the Federal Reserve has no control over long-term interest rates.’

“US stocks could drop as much as 14%, with the Dow Jones Industrial Average hitting 8,600, and Japan’s Nikkei 225 Stock Average may fall the same amount, he said.

“Yoshino’s calculations come from the Japanese technical analysis method of ‘ichimoku kinko’, which utilizes wave patterns and repeating trends. Ichimoku kinko was devised by a Japanese journalist more than 70 years ago and resembles the Elliott Wave theory popularized by Robert Prechter.”

Source: Dan Weil, MoneyNews, November 9, 2009.

MoneyNews: Siegel – stocks will rise, causing Fed hike
“Market guru and Wharton professor Jeremy Siegel says strong economic growth will keep pushing stocks higher and lead the Federal Reserve to raise interest rates in the first half of next year.

“Meanwhile, rising profits will send stocks up another 10% this year, he says.

“‘I think there are a lot of legs to this bull market. Profits are coming in extremely well in the third quarter.’

“The booming economy, along with rising bond yields and a weak dollar, will push the Fed to hike rates in the first half of next year, Siegel maintains. That’s earlier than most analysts expect.

“Fed officials ‘are going to basically say we’ve got to increase that rate because of the strength in the economy and to preserve the bond market and the dollar’, he says.”

Source: Dan Weil, MoneyNews, November 11, 2009.

Bespoke: Stock market returns lost in translation
“One of the side effects of a weaker dollar is that the returns for foreign investors who invest in US assets are diminished. While the value of the asset may rise in dollar terms, if the dollar is losing value, the investor takes a hit when they convert their funds back into their domestic currency. For example, while the S&P 500 has risen 20.2% so far this year in US dollars, investors outside of the US have generally seen much less impressive returns.

“In the table below, we looked at the YTD returns of the S&P 500 for investors in various currencies. Of the currencies we looked at, the only one that has seen a benefit from the currency translation is the Argentinian peso. Returns have been diminished once fluctuations are taken into account for all other currencies. And of course some countries have been affected more than others. So far this year, Brazilian investors who bought the S&P 500 at the end of last year have lost nearly 12 reals for every 100 they invested on January 1.”

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Source: Bespoke, November 9, 2009.

Bespoke: International revenues making an impact
“When the dollar is in decline, companies that generate the bulk of their revenues overseas benefit as the weak dollar attracts purchases of US-made products by foreign companies and consumers. The most recent stock market rally/dollar decline this month has been led by companies that generate a big portion of their revenues outside of the US, which has been characteristic of the entire bull market as well.

“When breaking the S&P 500 into deciles (10 groups of 50 stocks) based on the amount of sales that companies generate overseas, the deciles of stocks with high international revenues have outperformed during the November rally, while the two deciles of stocks with very little or no international revenues have significantly underperformed.”

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Source: Bespoke, November 11, 2009.

Moneycontrol.com: Mobius on emerging markets
“In an interview with CNBC-TV18, Mark Mobius, Managing Director of Temptation Asset Management, spoke about his reading on the emerging markets (EMs) and his outlook.”

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Source: Moneycontrol.com, November 7, 2009.

The Wall Street Journal: World tries to buck up dollar
“Governments around the world stepped up efforts to stem the US dollar’s slide, as officials grow increasingly concerned about the impact of the weak greenback on their nascent economic recoveries.

“Thailand, South Korea, Russia and the Philippines have been snapping up dollars this week in order to hold down the value of their currencies, traders said Wednesday, as the US currency wallowed near 15-month lows.

“In Latin America, Brazil’s finance minister said the country’s currency remained too strong, sparking speculation that the government would intensify recent efforts to curb the real’s ascent. On Tuesday, Taiwan banned foreign investors from parking time deposits in the country in an effort to ease upward pressure on the local currency.

“The fresh buzz over the dollar’s fall prompted Treasury Secretary Timothy Geithner, visiting Tokyo on Wednesday, to repeat the Obama administration’s commitment to a strong dollar. Still, Washington hasn’t taken any concrete steps to arrest the slide. The weaker dollar is actually benefiting the US as it struggles to come out of recession by helping keep US exports competitive.

“China is coming under new pressure from Pacific Rim countries to let its dollar-linked currency rise in value. On Wednesday, China’s central bank made a nod to concerns about the declining dollar and yuan by issuing a rare change to the official language of its exchange-rate policy. The central bank said it would take major currency trends into account in setting policy, though it wasn’t clear what impact that may have on the yuan’s future value.

“The US wants to see a stronger yuan, though Washington has avoided explicit public pressure on China to abandon its policy of managing its currency. But in the jargon of finance ministers, Mr. Geithner has made clear that’s what he thinks should happen. In an op-ed piece in Thursday’s Wall Street Journal Asia, he emphasized the advantages of ‘market oriented exchange rates in line with economic fundamentals’.

“Asian finance ministers, now gathered in Singapore for a meeting of the 21-member Asia-Pacific Economic Cooperation forum, are expected to raise their concerns about both the dollar’s decline and the inflexibility of the Chinese yuan.

“The fear is two-fold. If currencies surge against the dollar, it damages the ability of countries in the region to compete in world markets, by making their exports more expensive. What’s more, one of their major competitors – China – ties its currency to the dollar. As the yuan sinks in tandem with the dollar, China is able to keep its export prices low and price out competition.

“A concluding statement from the assembled APEC officials is expected to underline the importance of flexible exchange rates to sustainable global growth – generally viewed as code for a rise in the Chinese yuan. Such efforts are unlikely to bear fruit in the near term, which means these countries must act on their own to slow their currencies’ rise.”

Source: Joanna Slater, William Mallard and Bob Davis, The Wall Street Journal, November 12, 2009.

Financial Times: Tough times ahead for rouble
“The best of the rouble’s recent rally seems to have passed – and the currency could drop as much as 15% against its trading basket next year, says Neil Shearing at Capital Economics.

“He notes that, since March, the rouble has risen by 15% against its dollar/euro basket, prompting Russia’s central bank to switch from intervening to shore up the currency to stepping in to stem further appreciation.

“‘The size of the rebound is perhaps surprising given the lingering fragilities in the Russian economy,’ Mr Shearing says. ‘The rally has been driven by developments on the current account side of the balance of payments and, more specifically, by the rebound in oil prices.’

“He notes that, in the past, any improvement to the trade surplus from rising oil prices was largely sterilised by the operations of the Oil Stabilisation Fund and had relatively little impact on the exchange rate.

“‘But things seem to have changed – the authorities have not made any deposits into either the Reserve Fund or the National Welfare Fund since August and thus the rebound in oil exports has led to a rally in the currency – so the prospects for the rouble, for now, are inherently tied to moves in the oil price.

“‘If our forecast for oil to fall to $50 a barrel by the end of 2010 proves correct, the rouble is likely to test the bottom band of its trading range against the dollar/euro basket.'”

Source: Neil Shearing, Financial Times, November 11, 2009.

David Fuller (Fullermoney): Gold bull market on track
“I would not expect gold’s secular bull market to end until short-term interest rates are considerably higher.

“Even if this hypothesis is correct, it is impossible to know in advance the level of short-term rates which would cause gold’s advance to reverse. My guess is that global rates will be rising behind an accelerating advance in the gold price, eventually leading to a spike peak for bullion.

“Meanwhile, everything that gold is doing currently remains consistent with its earlier breakouts from large (approximately eighteen-month) trading ranges from September 2005 to May 2006 and September 2007 to March 2008. If this behavioural consistency continues, gold would reach at least $1,300 between March and May of next year.

“I previously mentioned that if gold maintained its consistency of the last three months, we could expect another ranging consolidation in a $40 to $45 range, commencing near $1,125. However given the post-India purchase excitement, it might accelerate. Whatever, a break in the progression of higher reaction lows evident on the daily chart would be required to question the medium-term uptrend.

“Fullermoney remains bullish of gold bullion and its sister precious metals. Tactically, we prefer to buy them on pullbacks within the medium-term trends. Precious metals mining shares are much more volatile and could do very well if the metals continue to perform, as we expect.”

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

Richard Russell (Dow Theory Letters): Gold in strong bull market
“As matters stand today, I’m confident of only one rising tide or bull market. Let’s examine the whole picture. The world is suffering from over-production. In the space of a single decade, the population of the global economy has more than doubled. In our lifetime, we have seen China, India and most of Asia join the world economy. Initially, this was greeted as a great new source of purchasing power. I disagreed. I saw it as a great new source of supply. I was correct. China, India and Asia have produced a vast amount of goods, and as time goes on, this new competition has become increasingly more sophisticated and powerful.

“Three billion people (including their children) are willing to work for comparatively low wages, and they’re willing to work without benefits: no medical, no Social Security, no 401Ks, no state or corporate saving plans or help.

“The net result is over-production and world deflation. Whatever the US can make, whether it’s washing machines or women’s panties or garden hoses, the Chinese and Indians can make cheaper. We’re dealing with a world-wide deflationary tide.

“US politicians feel the pressure. A politician’s first duty is to get re-elected. When the people are unhappy, politicians hear the people’s complaints and hasten to give the people what they want. Making the voters happy is how the pols get re-elected.

“Ultimately, the pressure falls on the president and the party. The president, in turn, puts the pressure on the Federal Reserve. ‘Make the voters happy’ demands the president and the pols, and the Fed hastens to do what it does best. The Fed creates a torrent of money to offset the forces of deflation and it drops interest rates to zero. The problem is that the global forces of deflation are fundamental and powerful. The primary force of deflation is more powerful than the Fed and the rest of the world’s central banks taken together.

“America’s Fed Chairman, Ben Bernanke, is convinced that he knows the secret of avoiding hard times. The Fed can halt deflation and turn the picture into asset inflation. All it takes, thinks Bernanke, is zero interest rates and the creation of trillions of new dollars – and they will come, and they will spend. This is the path the Bernanke Fed has chosen. So far, it has not worked – they are not coming, and they are not spending. The Fed’s strategy has not even succeeded in bringing down unemployment. Bernanke’s solution – more of the same: ‘Whatever it takes, and as long as it takes.’

“Thus, we have a strange and ironic situation. We have world deflation, and a Fed Chairman who believes he can manipulate the primary trend. Bernanke’s strategy is leading to a weakening dollar. The more dollars that are created, the weaker the dollar. As the dollar’s very status comes into question, wise and seasoned investors move to protect their wealth. They move to the time-honored ‘safe haven': the one unit of wealth that cannot be destroyed in that it is not a liability of any government. And, of course, I’m talking about the one unit of wealth that is never questioned – gold.

“So it’s the gold bull market that I trust and believe in. I think and I ponder – what can halt the gold bull market?

“The only thing that can halt the gold bull market is a complete reversal by the politicians and the Fed, and that would allow the US to sink into a state of deflation and depression. Unthinkable.

“If gold goes parabolic, we will be in the third speculative phase of the gold bull market. This will be the final phase in which gold ‘blows its top’. No tree grows to the sky, and neither will gold.”

Source: Richard Russell, Dow Theory Letters, November 9, 2009.

Bloomberg: Faber – gold price won’t drop below $1,000 again
“Gold won’t fall below $1,000 an ounce again after rising 27% this year to a record as central banks print money to help fund budget deficits, said Marc Faber, publisher of the Gloom, Boom & Doom report.

“‘We will not see less than the $1,000 level again,’ Faber said at a conference today in London. ‘Central banks are all the same. They are printers. Gold is maybe cheaper today than in 2001, given the interest rates. You have to own physical gold.’

“China will keep buying resources including gold, he said.

“‘Its demand for commodities will go up and up and up,’ he added. ‘Emerging economies will grow at the fastest pace.'”

Source: Zijing Wu, Bloomberg, November 11, 2009.

Bespoke: Gold compared to silver and platinum
“Gold has been the talk of the town recently, with everyone wondering if the current rally is a bubble waiting to pop or just the beginning of a run to much higher prices. While gold is getting the attention, its sister metals – silver and platinum – have actually been outperforming.

“Below we provide historical charts of the ratio between gold and silver and gold and platinum. When the line is rising, gold is outperforming, while gold is underperforming when the line is declining. As shown, late last year both silver and platinum lost big ground to gold, with platinum and gold even reaching parity at one point. During the metals rally this year, however, silver and platinum have actually done better than gold.”

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Source: Bespoke, November 11, 2009.

MarketWatch: Global energy agencies see world rebound in demand
“Two major agencies Tuesday forecast worldwide energy demand would soon rebound as the global economy recovers, and the US Energy Information Administration raised its forecast for oil prices, in part due to rising appetite in China.

“The EIA said it now expects global oil demand to increase next year by 1.26 million barrels per day, compared with a 1.1 million gain predicted in October, with developing countries the largest part of yearly growth. The EIA, which had bumped up its outlook for consumption last month, also raised its demand forecast for this year.

“‘Sustained economic growth in China and other Asian countries is contributing to the beginnings of a rebound in world oil consumption,’ the agency wrote in its monthly short-term energy outlook.

“As a result of this higher demand and the rise in oil prices since its last outlook, the US government agency lifted its price forecast.

“The price of West Texas Intermediate oil will average $77 a barrel during the period from October to March, the EIA predicted, up $7 a barrel from last month’s forecast. By December 2010, it forecast monthly average oil prices will rise to $81 a barrel, assuming global economic conditions keep improving.

“Earlier Tuesday, the Paris-based International Energy Agency said global energy use will decline this year because of the global economic crisis, but it will soon resume an upward trend if government policies don’t change.

“The IEA said world energy demand is projected to rise by 40% between now and 2030, reaching 16.8 billion tons of oil equivalent.

“Oil demand is expected to grow by 1% per year on average over the projection period, from 85 million barrels per day in 2008 to 105 million barrels a day in 2030, the IEA said.

“The Guardian newspaper quoted an unnamed IEA whistleblower as saying the market would struggle to produce even 90 million to 95 million barrels a day.”

Source: Laura Mandaro and Polya Lesova, MarketWatch, November 10, 2009.

Financial Times: Copper barometer is broken
“The copper market is beginning to price in ‘unrealistically high expectations for global economic activity’, says Daniel Brebner, analyst at Deutsche Bank, who cautions that weaker prices could last well into mid-2010.

“Deutsche says that China’s copper imports will be ‘meaningfully lower’ in 2010 compared with this year and that western world restocking will be modest at best, and largely complete by April.

“But despite the risk of a near-term correction, Deutsche says copper prices should rise 11% next year because of long-term structural constraints on supply and a continuation of investment flows into the market.

“‘We view copper as one of the few commodity markets that has properties of true scarcity,’ says Mr Brebner, who expects copper to average $5,731 a tonne in 2010 from $5,158 a tonne this year.

“Deutsche says that only a thin pipeline of quality copper projects will mature to full production in the next decade because of underinvestment in new mines and a lack of new development opportunities.

“Much of the growth in global copper output has come from a few very large mining operations – the ‘Big 12′ – but these are no longer contributing meaningfully to supply.

“‘The problem for the market is that there are no obvious heirs to these ageing giants,’ says Mr Brebner.”

Source: Daniel Brebner, Financial Times, November 10, 2009.

Financial Times: Bank of England lifts forecasts for UK growth
“The Bank of England has sharply upgraded its forecasts for growth over the next two years but still expects any recovery in the UK economy to be slow and unstable because of how deeply output has fallen since early last year.

“Mervyn King, the Bank governor, said Britain was ‘facing a prolonged period of balance sheet adjustment’ as households, businesses and government rein in spending to levels they can afford, a trend that will limit inflationary pressures.

“The Bank forecast growth rates of 2.1% for 2010 and 4% for 2011 in its quarterly inflation report, much higher than the outlook of private sector economists and the Treasury’s predictions.

“The Bank’s latest estimate for growth is a big upward revision from its own forecasts in August, of 1.9% and 3% for 2010 and 2011 respectively.

“However, Mr King said that gross domestic product had fallen so far that even relatively rapid rates of growth would leave total output well below where it would have been had the recession never happened.

“‘Small movements in quarterly growth rates will not alter the extent of the challenges now facing the economy, such is the scale of the fall in output over the past 18 months,” he said. ‘We have … only just started along the road to recovery.'”

Source: Daniel Pimlott, Financial Times, November 11, 2009.

Financial Times: China recovery accelerates in October
“China’s economic recovery accelerated in October with industrial output increasing at the fastest rate since March of last year while retail sales also grew strongly.

“However, the Chinese central bank said that the rate of new lending declined last month, a possible indication that the government is beginning to slow the aggressive monetary stimulus it has injected into the economy this year.

“Exports and imports were also weaker than expected last month.

“China has rebounded faster and more strongly than any other major economy from the global financial crisis and economists believe the government will meet its target of 8% growth in gross domestic product this year.

“There have been increasing warnings that China could face bubbles in asset prices and even high inflation, however, as a result of this year’s huge stimulus measures.

“The State Council said in late October that monetary policy would remain ‘appropriately loose’ for the time being, but added that it was also now monitoring inflationary pressures.

“The National Bureau of Statistics said that industrial production rose 16.1% from the same month a year before, up from a rate of 13.9% in the year to September. Power generation was 17.1% higher over the same month last year, the fifth month in a row of increases.

“Retail sales gained 16.2% over a year earlier, accelerating from a 15.5% increase the month before, while fixed asset investment increased 33.1% year-on-year.

“The central bank said that Rmb253 billion ($37 billion) of new local currency loans were issued in October, down from Rmb516.7 billion last month and well below the rapid rate of the first few months of the year.

“But economists cautioned against reading too much into the drop in bank loans, as lending is usually weak in the fourth quarter. ‘Policy has already been modestly tightened with credit growth slowing sharply in the second half,’ said Ben Simpfendorfer, economist at RBS in Hong Kong. The October figures could ‘imply some tightening’, he added.”

Source: Geoff Dyer, Financial Times, November 11, 2009.

The Wall Street Journal: Goldman Sachs’s Fred Hu on China’s recovery
“WSJ’s Jason Dean speaks to Dr. Fred Hu, managing director of Goldman Sachs Group, about the biggest challenge in China’s recovery, at the China Financial Markets conference. He also discusses what China needs to do to sustain its growth.”

Source: The Wall Street Journal, November 9, 2009.

Financial Times: China pledges $10 billion in loans to Africa
“Wen Jiabao, China’s premier, has pledged $10 billion in new low-cost loans to Africa over the next three years and defended China’s engagement against accusations it is ‘plundering’ the continent’s oil and minerals.

“Mr Wen’s pledge at a China-Africa summit in Egypt on Sunday came as he urged the US to keep its deficit at an ‘appropriate size’ to ensure the ‘basic stability’ of the dollar.

“China is the biggest holder of US government debt and Mr Wen was reinforcing comments he made in March when he expressed concern that Washington’s deficit would erode the value of its US dollar assets.

“The loan pledge was double a commitment made in 2006 and came during a summit at which delegates from both sides stressed their ties go beyond the Chinese acquisition of raw materials.

“Mr Wen told a press conference: ‘There have been allegations for a long time that China has come to Africa to plunder its resources and practice neo-colonialism. This allegation in my view is totally untenable.’

“Trade between China and Africa jumped 45% to $107 billion in 2008, a tenfold increase since 2000, and the new loans are likely to sustain the expansion.”

Source: Barney Jopson, Financial Times, November 8, 2009.

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