Investment Postcards from Cape Town

I will find myself in Slovenia over the next week, with my wife Isabel and a group of ten South African travel and business journalists we have invited to first-hand explore this delightful country with the aim of boosting tourism and trade between South Africa and Slovenia.

Blog posting will be slow (and totally absent on some days) while I am on the road. The normal blogging service will be resumed on my return to Cape Town on September 12.

However, I will be “tweeting” regularly throughout my trip. For those not familiar with the concept, a Twitter feed has been added to the sidebar of Investment Postcards where I post short comments (maximum 140 characters) on topical market issues, and also on my personal whereabouts. You can also “follow me” direct on Twitter by clicking here.

For those not familiar with Slovenia, the country has been dubbed many things – “Europe in Miniature”, “The Sunny Side of the Alps”, “The Green Piece of Europe” – and they’re all true. It is a compact country, around half the size of Switzerland, and is situated between Austria (280 km from Salzburg and 370 km from Vienna), Croatia (135 km from Zagreb), Hungary (440 km from Budapest) and Italy (220 km from Venice and 470 km from Milan), in the very centre of Europe.

Although it is a small country of only 20 273 km², it is very diverse with areas of outstanding natural beauty ranging from rugged Alpine mountains to tranquil lakes to fairytale forests to valleys with lush vineyards and even a stretch of beautiful coastline on the Adriatic. The country’s “wooded” area amounts to 63% of the total, making it a clear leader in this category among all European countries (even beating Sweden).

Add a historic capital like Ljubljana with unsurpassed architecture, museums and numerous cafes along the river banks and you indeed have a cross-section of Europe. Moreover, all this can be experienced in a single day – after all, it only takes three to four hours to drive across the entire country.

Now for braving 13 hours at airports and on airplanes flying from Cape Town to Johannesburg, then on to Frankfurt, and finally to Ljubljana. Meanwhile, I have posted a few pictures below to give you a feel for my surroundings over the next few days …

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Stock markets have improved handsomely over the past three days, notching gains for four consecutive days and registering the first positive week since early August.

Will the rally have legs, or is it merely a bear market bounce?

According to Yahoo Finance – Tech Ticker, The Big Picture blogger Barry Ritholtz is taking it slow, “legging in” to test the waters. He is of the opinion that the S&P 500 Index is in a trading range market right now, with key support at 1040.

“We’ve traded down to that a dozen times, and you see on the chart that every time you hit that, we’ve bounced off of it. People think of September as the dangerous month, but when you have a real bad August, maybe it anticipates it and washes it out of the system,” said Ritholtz.

Source: Yahoo Finance – Tech Ticker, September 2, 2010.

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On this week’s WealthTrack, Consuelo Mack interviews Brian Rogers. He shares the lessons learned from the financial crisis and how he is applying them as Chairman of T. Rowe Price and manager of the highly regarded T. Rowe Price Equity Income Fund. (This interview was recorded in May and has just been reposted on the Wealthtrack site as what Rogers said then still holds true today.)

Note: The transcript of this interview is not available yet, but will be posted here as soon as it arrives.

Source: Wealthtrack, September 3, 2010.

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The comments below come courtesy of Dave Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, sharing his latest views on the U.S. economy.

The U.S. employment report for August was uninspiring in the aggregate but the bright spots cannot be readily dismissed. First, the private payroll number came in at +67,000, which was above the consensus estimate of +40,000, not to mention the ADP print of -10,000. This, along with the upward headline revisions of 123,000 and the 0.3% MoM gain in the wage number has the bulls rather excited.

The jobs report, much like the previously released ISM and chain store sales numbers, had the “muddle through” thumbprints all over it, which is why an equity and bond market bracing for a “double dip” scenario have reacted so violently in recent days. The data are hardly strong but admittedly are not consistent with the economy contracting this quarter. But the data do not alter our outlook for a double-dip scenario unfolding before year-end as the policy stimulus continues to fade and the inventory cycle subsides.

While capital spending remains a lynchpin as businesses replace obsolete machinery and equipment, its contribution to overall growth is actually showing signs of receding and we see nothing really in the consumer, housing, commercial construction, net exports or State & local government sectors to get us excited over the macro backdrop.

Now that the financial market sentiment is moving away from the “double dip” outcome, equity investors still have to confront what a “muddle through” scenario is going to mean for corporate profits because we had such a “muddle through” in the second quarter with 1.6% volume GDP growth, which translated, at a time of cycle-high margins, into virtually flat sequential corporate earnings growth. So, it would stand to reason that if there is vulnerability, it is highly unlikely that we will see profits rise 20% in the coming year as is currently the consensus view in the marketplace.

One can easily draw the conclusion from the data that we have dodged a bullet. But that does not mean we are out of the woods. Employment is a coincident indicator. Leading indicators, such as the ECRI, continue to deteriorate and to levels still consistent with nontrivial double-dip risks. Keep this in mind – private payrolls came in at +97,000 in November 2007 and the “Great Recession” began the next month. In other words, the +67,000 tally we saw today basically tells you nothing about how the pace of economic activity is going to unfold as we move into the fall.

Source: David Rosenberg, Gluskin Sheff & Associates – Lunch with Dave, September 3, 2010.

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The video clips below provide a handy summary of the reports expected on the economic, financial and corporate front around the globe during the week ahead.

US: Parsing economic data
Economic reports take center stage in a holiday-shortened week, with consumer credit figures, U.S. trade balance, jobless claims and wholesale inventories. Consumer, trade numbers could be disappointing.

Europe: Economic data and air traffic
German economic data, Bank of England interest-rate decision, August air traffic reports from Air-France KLM, easyJet and Air Berlin.

Asia: Bank of Japan addresses the yen
The Bank of Japan is set to take center stage in the coming week as it looks at revised GDP and machinery orders in order to determine how to address the rising yen.

Source: MarketWatch (here, here and here), September 3, 2010.

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The article below is a guest contribution by Bill Bonner of The Daily Reckoning.

Japan was the world’s most admired economy in the ’80s. Then it was the world’s most despised economy in the ’90s. By 1995, economists pointed their fingers and laughed – the world’s most admired businessman had lost his left shoe.

But now, much of the world is barefoot. The US inflation rate has been going down since the early ’80s and was cut in half since last year. It now hovers barely above zero. Surely Japan – where prices have been falling for two decades – has something to tell us. As we pointed out last week, the Nipponese have been in decline for the last 20 years – with lower stock prices, falling real estate prices, and a falling GDP. Even the population has been sliding for the last five years

This week the Japanese decided to throw some more grit on the slope. Japan’s central bank governor, Masaaki Shirakawa, said he was boosting his “special loan facility” by 10 trillion yen, about $120 billion. And Mr. Naoto Kan, Japan’s Premier, said he would support the central bank, adding a “second pillar of stimulus’ of some 920 billion yen. The numbers always sound impressive in yen. But they are unlikely to give the economy much traction.

Professors Ken Rogoff and Carmen Reinhart studied 15 economic crises over the last 75 years. What they found was what you’d expect: real recoveries in the post-Keynes era are rare. Instead, in the 10 years following a crisis, economic growth rates are lower and unemployment is higher than in the years preceding the crisis. In two thirds of the episodes, jobless rates never recovered to pre-crisis levels, ever. And in 9 out of 10 of them, housing prices were still lower 10 years after the crisis ended.

“Our review of the historical record, therefore, strongly supports the view that large, destabilizing economic events produce big changes in the long-term indicators, well after the upheaval of the crisis. [Up to now,” the authors warn, “we have been traversing the tracks of prior crises. But if we continue as others have before, the need to de-leverage will dampen employment and growth for some time to come.”]

It was perhaps this scholarly warning that roused Shirakawa to action, with Ben Bernanke right behind. Neither wants to be known as the central banker who followed in the footsteps of losers. Urged on by sages and simpletons, they will print money. “It falls to the Fed to fuel recovery,” writes Clive Crook, one or the other, in The Financial Times. “Under the circumstances,” he writes, “better to print money and be damned.” At last week’s conference in Jackson Hole, Wyoming, the Americans promised to print more money, if needed. Shirakawa rushed home early so he could turn on the presses right away.

We would have more faith in central bankers if they had not been responsible for causing the crisis in the first place. Shirakawa joined the Bank of Japan more than 30 years ago. Ben Bernanke, an expert on the Great Depression, joined the Fed in 2002; he was standing at Alan Greenspan’s right side, with a pin in his hand, years before the bubble reached a crisis level.

“In a sense,” said Professor John Taylor, also at Jackson Hole, “the Fed caused the bubble.” That is, in the only sense that matters – they kept the key lending rate too low for too long. Now they are about to make another monumental mistake. No, two of them.

The first is already in progress. By promising the world extremely low rates for an “extended period” of time, they have created the exact conditions they wanted to avoid. President of the St. Louis branch of the Federal Reserve, James Bullard, explained that the Fed had unwittingly put the economy into an “unintended steady state.” The key rate cannot go any lower as prices sink; it is already at zero. It cannot go higher, either, not as long as inflation remains below the target. So, it does not move. The private sector has come to expect no policy response, Bullard concludes, “so nothing changes with respect to nominal interest rates or inflation.” As in Japan, the US economy remains in a coma.

The second major mistake is still ahead. Quantitative easing is a new weapon. It is not meant to kill dollar holders or bond buyers. It is intended merely to scare them with a little bit of inflation. But with the Fed’s QE shotgun staring him in the face, an investor may doubt the Fed’s promise to pull the trigger “just a little.” He will drop the dollar and US bonds and run. Inflation will soar.

Here at The Daily Reckoning, we have argued that it is coming … but not soon. Our opinion hasn’t changed. We’re just getting tired of waiting.

Source: Bill Bonner, The Daily Reckoning, September 3, 2010.

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