Investment Postcards from Cape Town

Picture du Jour: Keep an eye on small caps

Prieur du Plessis — Sat, 20 Mar 2010 10:49:57 +0000

As one would expect during a bull market, small caps have been a leading performer since the low of March 9 last year, with the Russell 2000 Index gaining 96.7% compared with the S&P 500 Index rising 70.9%.

Considering the last few days, however, it would seem if small caps have been tiring, resulting in the Russell 2000 Index being the only major US stock market index registering a loss for the past week as shown below.

Source: StockCharts.com

A few days’ underperformance is hardly grounds for drawing meaningful conclusions, but it is worth watching this space for a pointer regarding the overall market.

I will leave you with a chart of the ProShares UltraShort Russell 2000 ETF (TWM), a fund that seeks daily investment results corresponding to twice (200%) the inverse (opposite) of the daily performance of the Russell 2000 Index. Being Saturday morning, I am posting the picture without further comment for you to ponder the most likely short-term direction of this bear ETF, and by implication the next move for small caps and stocks in general.

Source: StockCharts.com

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Roach – “We should take out the baseball bat on Krugman”

Prieur du Plessis — Sat, 20 Mar 2010 10:36:14 +0000

Stephen Roach, chairman of Morgan Stanley Asia, talks with Bloomberg’s Susan Li and Paul Gordon from Beijing about the US calls for a stronger yuan. China is conducting stress tests to gauge the effect of yuan appreciation on companies, a sign the government may be preparing for policy change even as it rebuffs foreign criticism of its 20-month dollar peg.

Criticizing Paul Krugman’s comments that the US should consider a 25% surcharge on Chinese goods, Roach said: “They don’t want to look in the mirror. America doesn’t have a China problem. It really has a savings problem. America has the biggest shortfall of national savings of any leading country in modern history. And when you don’t have savings you have to run current account deficits to import surplus savings from abroad and run massive trade deficits to attract the capital. Last year America ran trade deficits with over 90 - that’s right nine zero - countries. … Isn’t it the height of hypocrisy that America can articulate a particular position in its currency but the Chinese are not allowed to do that.” (Hat tip for transcript: Credit Writedowns.)

Source: Bloomberg (via YouTube), March 19, 2010.

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US debt holdings of foreign central banks continue to grow

Prieur du Plessis — Sat, 20 Mar 2010 10:35:08 +0000

This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

Foreign central banks’ holdings of US Treasury securities and agency debt at the Federal Reserve continue to advance. During the week ended March 17, foreign central banks held $3.00 trillion at the Federal Reserve. Of this, roughly 75% of it is held in the form of Treasury securities and the remaining 25% is Fannie Mae and Freddie Mac securities. Although the pace of acquisition has slowed compared with the peak period of crisis, holdings of US Treasury securities has grown at close to 25% on a year-to-year basis (see chart 1) in the past few weeks.

At the same time, holdings of Fannie Mae and Freddie Mac securities have declined from a year ago (see chart 2).

The main conclusion is that US Treasury securities are still attractive despite the headlines in the financial press about the growing deficit and debt problems of the US economy.

Source: Northern Trust - Daily Global Commentary, March 19, 2010.

* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

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The week ahead

Prieur du Plessis — Sat, 20 Mar 2010 10:33:00 +0000

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: Health care, housing data
Markets will be watching to see if health insurers will be able to sustain their rally after this weekend’s climactic vote to overhaul the nation’s health-care system. Data on existing- and new-home sales will also be examined.

Europe: UK Budget, Carin in focus
European leaders meet in Brussels, Chancellor unveils UK budget. Cairn Energy, Air Berlin report earnings.

Asia: Japan CPI
World bankers will be on inflation watch when Japan reports its consumer price index for February. Policy minutes from the Bank of Japan will also be released next week. On the corporate front, results are due from China Telecom and China Unicom.

Source: MarketWatch (here, here and here), March 19, 2010.

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Don Coxe webcast – updated (March 19, 2010)

Prieur du Plessis — Sat, 20 Mar 2010 10:32:13 +0000

Don Coxe has updated his popular webcast on Friday, March 19 - good news for his followers. You can access the recording here or from the sidebar of the Investment Postcards site (the column on the right-hand side) by clicking on Don’s photograph. Please note that access to Don’s recording works best with Firefox or the latest version of Internet Explorer.

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Getting unemploymed Americans back to work

Prieur du Plessis — Sat, 20 Mar 2010 10:30:48 +0000

Source: Mike Thompson, Comics.com, March 19, 2010.

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Government bonds – what’s up?

Prieur du Plessis — Fri, 19 Mar 2010 10:32:54 +0000

Government bonds have been trading sideways since the middle of last year as market participants wax and wane about the prospects of the nascent economy recovery. Also, it has not quite been the one-way traffic for yields many pundits have been forecasting as seen from the US Treasury being able to sell paper across the yield curve at lower-than-expected yields. It should be interesting to see how the bond vigilantes handle next week’s auction of $118 billion worth of Treasuries, tying for the largest auction on record.

Not subscribing to a meaningful economic recovery under his “new normal” scenario, Bill Gross, the manager of the world’s largest bond fund, last month increased the exposure of the Pimco Total Return Fund to US government debt to 35% from 31% - the first increase since October 2009. Interestingly, $409 billion from a total inflow of $507 billion into US mutual funds over the past year ended up in bond funds.

The chart below, courtesy of the latest Commitment of Traders report (via David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates), shows the net speculative short position in 30-year US Treasury Bonds. The net short position last week was 107,382 contracts (with a face value of $100,000 per contract). This is at the high end of the range and, according to Rosenberg, “perhaps explains why bonds refuse to sell off - anyone who can sell them already has.” He added: “What is truly striking is that even though Treasuries were among the best-performing asset classes of the past decade, the noncommercial accounts spent 80% of that time being short the bond market. Yikes!”

Source: Gluskin Sheff & Associates - Breakfast with Dave, March 18, 2010.

Turning to technical analysis, the short-term picture for the ten-year Treasury Note yield is undecided, showing a symmetrical triangle. However, monthly data, going back to 1998, conveys an important message when considering the two momentum-type oscillators (ROC and MACD) at the bottom of the chart below. The ROC reversed course (crossing the zero line) in October last year for the first time since a buy signal was given at the beginning of 2007, thereby flashing a primary sell signal. The MACD provided a similar indication in June 2009.

Source: StockCharts.com

Lastly, while on the topic of long-term data, actually all the way back to 1850, the graph below featured in a recent report by Pring Turner Capital Group asking: “Are you prepared for a secular bear market in bonds? Bond owners beware”. As shown, the yield is just below its secular down trendline and it would not take a large move in yields to mark the end of the almost 30-year secular decline. What will this do to the US’s debt burden, the economic recovery and stock market valuations?

Source: Pring Turner Capital Group

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Marc Faber: We have a new gold standard

Prieur du Plessis — Fri, 19 Mar 2010 10:31:15 +0000

The markets have created their own gold standard because of uncertainties regarding other asset classes, Marc Faber, author of The Gloom, Boom and Doom Report, told CNBC on Thursday.

“I think we already now have a gold standard … created by the market place. We have the exchange traded funds that have proliferated and we have more and more physical buying of gold,” he said.

Source: CNBC, March 18, 2010.

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Is real estate rolling over?

Prieur du Plessis — Fri, 19 Mar 2010 10:18:11 +0000

David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, yesterday made the following observation: “To be sure, the Case-Shiller index has yet to roll over. But it has slowed, and being a three-month average, it may take time to show deflation again. The LoanPerformance home price index is down for four months running. Freddie Mac’s conventional home price index fell 0.7% in Q4. RadarLogic’s 25-city house price index is down for two months in a row and in four of the past five.”

A useful source for some guidance on the prospects of real estate is Robert Cambell’s Campbell Real Estate Timing Letter (via Dow Theory Letters) from which I have excerpted the paragraphs below.

“Now is not the time to jump into the real estate market because some analysts are telling you we’ve hit a bottom. NOT only are my timing models telling us that the market hasn’t turned yet, but if the Fed stops buying mortgages via its quantitative easing at the end of the month, and if the government allows its tax credits to expire as planned in June, chances are good that we’ll see lower housing prices through the rest of this year - not higher prices.

“Lifting caps on Fannie and Freddie: Do you wonder why? On December 24, 2009 - in a kind of Christmas Eve surprise - the Treasury decided to lift the caps on how much bailout money the failed mortgage giants, Fannie Mae and Freddie Mack could receive in order to stay in business. The previous caps were $400 billion for both companies. Not anymore. Now the US taxpayers are back on the hook for unlimited financial support to keep Fannie and Freddie functioning - which could amount to as much as $8 trillion in taxpayer liability.

“Why did the Treasury do this? Because today, the FHA, Fannie and Freddie government agencies fund 90% of all U.S. mortgages and guarantee 97% of them. And in January, Fannie and Freddie reported combined losses of $94 billion for 2009. In other words, if Fannie and Freddie can’t keep providing hundreds of billions of dollars worth of mortgage financing, the real estate market will likely collapse.

“Mortgage delinquencies are still sharply rising - which is why these ailing mortgage giants require an extended bailout of more capital to cover anticipated future losses and stay afloat. At Freddie, 4.03% of its single family mortgages were at least 90 days past due at the end of January 2010, up from 1.98% in January 2009. Fannie is even worse: 5.38% were 90 days past due in December 2009, up 2.42% in December 2008.”

This is decidedly bearish commentary and leaves me wondering whether the SPDR S&P Homebuilders ETF - ticking all the boxes of a cyclical bull market - is getting it wrong. Then again, the same question can be asked about the US stock market.

Source: StockCharts.com

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Technical Talk: One last move up

Prieur du Plessis — Fri, 19 Mar 2010 10:14:39 +0000

The comments below were provided by Kevin Lane of Fusion IQ.

We remain cautiously optimistic with the trend up, internals strong, the Russell 2000, the NASDAQ and now the S&P 500 at new recovery highs. Skeptics remain the loudest people in the room and while their concerns may be valid we have learned that the market rewards the minority and confounds the majority.

As seen above the S&P 500 cleared its previous resistance peak near 1,150 (lower red line) and now looks to challenge the 1,200 level. Although there may be some back and filling along the way, we have long argued that there would be one last move up driven by investors who skeptically avoided the market. The fear and greed continuim is always at play and the market somehow has a way of prying all liquidity off the sidelines eventually. We think the last holdouts are now deploying cash, believing the economy has turned the corner. (The market has been flashing the economic recovery signals for quite some time by its strength.)

We believe this current move could be a melt-up phase and once completed a move to cash would make sense. However, for now investors need to ride the wave, albeit with tight stops!

Source: Kevin Lane, Fusion IQ, March 18, 2010.

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