Words from the (investment) Wise

Words from the (investment) wise for the week that was (November 10 – 16, 2008)

The Oxford Dictionary defines “volatility” as “liable to change rapidly and unpredictably, especially for the worse”. It’s not as if investors do not know this by now, as global stock markets were again subjected to extreme fluctuations during the past week.

The red line in the chart below shows the daily percentage change in the S&P 500 Index, illustrating the severe movements stock markets have seen in recent times.

Turbulence was rife as more data pointed to the world economy facing a longer and more intense downturn than feared. Battle-weary investors were also spooked by continued financial trauma and a bleak corporate earnings outlook for at least the next few quarters, and found little comfort in hints of additional interest rate cuts.

Global stock markets were beset by angst and plunged by more than 6% over the week in the case of the MSCI Word and Emerging Markets indices, with the only safe havens for risk-averse investors being the US dollar, developed-market government bonds and gold bullion. Unsurprisingly, the US one- and three-month Treasury Bills declined to minuscule yields of 0.066% and 0.117% respectively.

Financial markets reacted badly to US Treasury Secretary Henry Paulson’s decision to shelve plans to buy troubled mortgage assets, shifting the focus of the government’s TARP bailout plan to non-bank financial institutions and consumer credit. Priorities going forward are: 1) to strengthen the capital base of the financial system; 2) to provide support for securitization of credit-card receivables, auto loans and student loans; and 3) to explore ways of reducing the risk of foreclosure.

Further dealings in Washington were concerned with the debate over whether to provide government aid to the US auto industry in what looks to be a showdown among the lame-duck US Congress, President Bush and the incoming Obama administration.

According to MarketWatch , Deutsche Bank analyst Rod Lache slashed his price target for General Motors (GM) from $4 to $0. Meanwhile, Richard Russell ( Dow Theory Letters ) pointed out: “Mattel (MAT) makes toy cars. Mattel is now worth more as a company than General Motors.” It gives one pause for thought.

An end to the credit turmoil does not seem to be in sight as AIG (AIG) and Fannie Mae (FNM) reported huge losses, and renewed strains surfaced in the money markets after the US Treasury’s decision not to buy toxic assets. The three-month dollar Libor rate ended a 23-day run of consecutive falls and edged up from 2.13% to 2.24% on Thursday and Friday.

In the spirit of the tumultuous times, a microbrewery in British Columbia is toasting the economic downturn by launching a special brand of recession-style beer, naming its brew “Bailout Bitter” in honor of the government bailouts, reported CBC News . Truly a “bitter ale for bitter times”!

Next, a tag cloud of the text of the dozens of articles I have devoured during the past week. This is a way of visualizing word frequencies at a glance. As expected, keywords such as “market”, “economy” and “bank” feature prominently. “Gold” has also been receiving a fair bit of publicity as the yellow metal improved in price during the past week.

Back to Richard Russell for more wisdom from the venerable analyst: “This bear market is a bloody brute. I’m not trying to frighten my subscribers. What I am trying to do is to caution subscribers, and notify them that the lows for this bear market may still be far away. We simply do not know, nor do we have evidence to indicate that the bottom is in or near. I continue to believe that the 2002 Dow low will be closely tested, and that the test will fail in that the Dow will break through the 2002 low of 7,286.”

Regarding the shorter-term outlook, Michael Panzer ( Financial Armageddon ) commented: “It’s been said that markets do whatever is necessary to hurt the most people. That is why prices sometimes shoot higher when news flow, investor sentiment and speculative positions are skewed to the negative, and why rampant euphoria is occasionally the set-up for a violent correction. With that in mind, I still believe the path of least resistance for the equity market over the next month or two is up, in large part because bad news and increasing volatility have so many people worrying and thinking – and betting – otherwise.”

A further positive for the bulls is that, according to Jeffrey Hirsch ( Stock Trader’s Almanac ), the Dow has been up 12 out of the last 14 years during the week before Thanksgiving.

I summarized my current views in a post (“ Is Stock Market Rally ‘Real’ ”) on Friday: “Stock markets are caught between the actions of central banks, governments and the IMF frantically fending off a total economic meltdown on the one hand, and a worsening economic and corporate picture on the other. This situation has a ‘no-man’s-land’ feel to it. By all means try to play a possible nascent rally, but be cognizant that, failing further technical and fundamental evidence, you are trading against the primary trend. Caution is still warranted!” (Also, read my post of Wednesday: “ Stock Markets: Which Way José ”.)

I will be donning my winter woollies and visiting New York City from December 3 to 7, 2008. There are still a few gaps on my itinerary for those wishing to meet me to discuss global financial markets, financial blogging or, for that matter, any money-making ideas. If you happen to be in the Big Apple at the same time, let’s get together and share a cup of coffee (or glass of wine).

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.

Economic reports
“Global business confidence continues to evaporate, as sentiment fell again during the first week of November to another new record low,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com . “Sentiment is extraordinarily negative everywhere, including heretofore stalwart Asia. The global financial panic which hit in early September and has yet to abate has been a body blow to global business confidence.” The global economy is now in recession according to the Survey.

Economic reports released in the US during the past week confirmed the severity of the economic recession and included the following:

• Initial claims for unemployment insurance increased by 32,000 to 516,000 for the week ended November 8. This was well above expectations and could be an early indication that labor market slack is beginning to grow more quickly.

• Falling for a fourth consecutive month, total retail sales plunged by 2.8% in October, somewhat more than expected due to tumbling gas station sales and widespread weakness elsewhere. The October drop is the largest since record keeping for the current series began in 1992.

Weak retail sales set a poor foundation for the PCE component of the fourth quarter GDP report. Asha Bangalore ( Northern Trust ) commented as follows: “It is important to note that the boom in consumer spending has come to a screeching halt after an extended period of spending that began in the fourth quarter of 1991 and ended with the 3.1% annualized decline in real consumer spending in the third quarter (see chart below).

“The drop in net worth of households resulting from declines in prices of homes and equity, the historically high debt levels of households and the debt service burden associated with the debt, the rising trend of the jobless rate, additional likely layoffs, and a serious lack of savings are factors that will hold back consumer spending.”

Elsewhere in the world, economic reports showed an acceleration in the weakening of activity.

Notably, the 15-nation Eurozone entered its first recession since the launch of the single currency in 1999. The region’s third-quarter GDP shrank by 0.2% compared to the previous quarter, following a second quarter that also saw a 0.2% decline.

Europe’s largest economy, Germany, fell into a recession after government data showed that the economy contracted by 0.5% in the third quarter. This is the second consecutive quarter that the economy has shrunk after a 0.4% contraction in the second quarter.

GDP growth in the UK declined by 0.5% during the third quarter – the first official evidence that the economy is heading for recession and the first decline since 1992. The Bank of England’s GDP projection for 2009 was slashed, showing a low point of close to -2.0% year on year from the previous forecast of +0.5%.

Further afield, Hong Kong became the second Asian economy, after Singapore, to officially tip into recession. Economic figures also showed worse-than-expected declines in output growth in China and Japan.

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

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Nov 13	8:30 AM	Initial Claims	11/08	516K	475K	479K	484K
Nov 13	8:30 AM	Trade Balance	Sep	-$56.5B	-$56.0B	-$57.0B	-$59.1B
Nov 13	2:00 PM	Treasury Budget	Oct	-$237.2B	NA	-$134.0B	-$55.6B
Nov 14	8:30 AM	Export Prices ex-agriculture	Oct	-1.2%	NA	NA	-0.9%
Nov 14	8:30 AM	Import Prices ex-oil	Oct	-0.9%	NA	NA	-0.9%
Nov 14	8:30 AM	Retail Sales	Oct	-2.8%	-1.9%	-2.1%	-1.3%
Nov 14	8:30 AM	Retail Sales ex-auto	Oct	-2.2%	-1.0%	-1.2%	-0.5%
Nov 14	10:00 AM	Business Inventories	Sep	-0.2%	0.2%	-0.1%	0.2%
Nov 14	10:00 AM	Michigan Sentiment-preliminary	Nov	57.9	58.5	57.0	57.6

Source: Yahoo Finance , November 14, 2008.

In addition to the release of the minutes of the FOMC’s October meeting on Wednesday, November 19, next week’s US economic highlights, courtesy of Northern Trust , include the following:

Other reports include the NAHB Survey (November 18) and the Philadelphia Fed Survey (November 20).

Click here for a summary of Wachovia’s weekly economic and financial commentary.

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

Source: Wall Street Journal Online , November 14, 2008.

Equities
Stock markets experienced another wild week on the back of large swings in sentiment as investors focused on a more severe economic downturn and worsening earnings outlook. Developed and emerging markets alike closed a second straight week with significant losses, with the MSCI World Index down by 6.4% and the MSCI Emerging Markets Index losing 6.1%.
Among developed markets, the Nikkei 225 Average (-1.4%) fared the best, whereas some of the US markets such as the Russell 2000 Index (-9.7%) and the Nasdaq Composite Index (-7.9%), Australia (-7.0%) and Canada (-5.6%) were at the bottom end of the performance rankings.

As far as emerging markets are concerned, Russia bore the full brunt of the selling pressure with a decline of 15.3%, taking its losses since the peak of about six months ago to a massive 74.1%. On the other hand, the Philippines (+3.0%) and China (+13.7%) were two of the few markets to register gains.

The Shanghai Stock Exchange Composite Index has bounced by 16.4% off its low of November 4 on the back of the Chinese government announcing a $586 billion economic stimulus package. This makes for an interesting-looking chart with the Index challenging its 50-day moving average and roundophobia 2,000 level. Also, the Chinese trailing price-earnings multiple has fallen from 45.9 to 14.3 – cheap for a country still seen as a top growth situation over the medium term.

The US stock markets all declined over the week as shown by the major index movements: Dow Jones Industrial Index -5.0 (YTD -35.9%) and S&P 500 Index -6.2% (YTD -40.5%). The Dow closed 321 basis points (3.9%) above its October 27 low of 8,176 and the S&P 500 24 basis points (2.8%) above its low of 849.

Click here or on the thumbnail below for a (predominantly red) market map, obtained from Finviz.com, providing a quick overview of the performance of the various segments of the S&P 500 Index over the week.

The bar chart below, also from Finviz , shows the US sector performance for the past week, and specifically how defensive sectors such as utilities and healthcare outperformed on a relative basis.

A reason for Wall Street’s extreme volatility is the great uncertainty regarding the outlook for US companies’ earnings. During the past week, Best Buy (BBY), the leading consumer electronics retailer, and Intel (INTC), the world’s largest semiconductor company, were key contributors to analysts’ concerns as both companies reduced their forecasts sharply.

Putting the stock market outlook in perspective, Jim Rogers was quoted by Bloomberg as saying: “Stocks in the West are still expensive on any historical valuation method, while bonds are going to be a terrible place to be for the next 10, 20 years”. Equities in the West will be “in a trading range for years to come”, he said.

Fixed-interest instruments
Yields on government bonds, especially shorter maturities, declined during the past week as a result of escalating economic woes prompting safe-haven buying.
The two-year US Treasury Note yield declined by 10 basis points to 1.24%, the UK two-year Gilt yield dropped by 39 basis points to 1.86% and the German two-year Schatz yield fell by 18 basis points to 2.23%. However, emerging-market bonds, in general, lost ground as further deleveraging took its toll on risky assets.

But not everybody was enamored with investing in bonds. Bill King ( The King Report ) posed the question: “Who will buy all the bonds that will be issued throughout the known universe in coming days?”

US mortgage rates edged higher, with the 30-year fixed rate rising by 4 basis points to 6.18% and the 5-year ARM by 6 basis points to 5.98%.

The cost of buying credit insurance for US and European companies increased as shown by the wider spreads for both the CDX (North American, investment grade) Index (up from 188 to 203) and the Markit iTraxx Europe Crossover Index (up from 762 to 813).

The three-month dollar Libor rate edged up on Thursday and Friday, limiting the week’s decline to 5 basis points from 2.29% to 2.24% – 124 basis points (compared to 43 basis points at the start of 2008) above the Fed’s target rate of 1.0%. The TED spread (i.e. three-month dollar Libor less three-month Treasury Bills) also perked up, indicating that credit strains are not quite back to normal yet.

Currencies
The week’s feature among currencies was the dramatic collapse of the British pound as the market factored in further aggressive easing of UK monetary policy and dumped the currency. Sterling dropped to a 13-year low against a basket of currencies and to its lowest level ($1.47) since 2002 against the US dollar.

Over the week the US dollar gained against the euro (+0.9%), the British pound (+5.8%), the Swiss franc (+1.4%), the Canadian dollar (+3.9%), the Australian dollar (+3.7%) and the New Zealand dollar (+3.9%). However, the greenback lost ground against the Japanese yen (-1.2%) as investors liquidated assets previously funded with low-yielding currencies such as the yen.

Emerging-market currencies had a torrid time as investors shunted risky assets. Examples of losses against the US dollar include: the Brazilian real ( 6.2%), the Turkish lira (-4.8%), the South Korean won (-5.3%), the South African rand (-3.2%) and the Russian ruble (-1.2%). The ruble lost 15.4% against the US dollar over the past four months as the downturn in commodity prices negatively impacted the Russian economy.

Commodities
The Reuters/Jeffries CRB Index (-3.6%) witnessed a further decline on the back of an ailing economy and a slump in global demand for commodities.
Gold (+1.1%) bucked the trend and edged higher as some commentators punted the yellow metal as being poised for a rally.

On the other hand, West Texas Intermediate crude declined by a further 5.6% to levels last seen in the first quarter of last year. This has prompted OPEC to call an emergency “consultation” meeting on November 29 to consider a further production cut.

The graph below shows the movements for various commodities since the peak of July 2. Interestingly, the Baltic Dry Index, which is closely correlated with economic growth and demand for commodities, declined by 91.0% over the same period.

Now for a few news items and some words and charts from the investment wise that will hopefully assist in optimally managing our wealth in these troubled times. Also remember what John Kenneth Galbraith said: “The conventional view serves to protect us from the painful job of thinking.”

That’s the way it looks from Cape Town.

Source: McClatchy

Financial Times: Obama set to push “big bang” reform package
“US President-elect Barack Obama intends to push a comprehensive programme of social and economic reform beyond an immediate emergency stimulus package, Rahm Emanuel, the next White House chief of staff, indicated on Sunday.
“Mr Emanuel brushed aside concerns that an Obama administration would risk taking on too much when it takes office in January. He said Mr Obama saw the financial meltdown as an historic opportunity to deliver the large-scale investments that Democrats had promised for years.

“Tackling the meltdown would not entail delays in plans for far-reaching energy, healthcare and education reforms when all three were also in crisis, he said. ‘These are crises you can no longer afford to postpone.’

“Mr Emanuel, Mr Obama’s first appointment after his emphatic victory over John McCain last week, added that Mr Obama would push hard during the 11-week transition before he is inaugurated for early assistance to the collapsing US car industry, which he described as ‘an essential part of our economy’.

“His comments increased pressure on George W. Bush to approve a widely-touted $25 billion emergency package for Detroit – possibly as part of a second emergency stimulus package to stave off further decline in the rapidly deteriorating US economy.

“Sunday’s comments also reinforce the impression that Mr Obama’s transition economic advisory board – which includes leading lights of the Clinton era, such as Lawrence Summers and Robert Rubin – is tilting heavily towards a ‘big bang’ approach that would combine a short-term stimulus with large public investments to raise the longer-term US growth rate.”

Source: Edward Luce, Financial Times , November 9, 2008.

Bloomberg: Paulson shifts focus of rescue to consumer lending

Click here for the full article.

Source: Simon Kennedy, Bloomberg , November 12, 2008.

BCA Research: Paulson changes focus
“The focus of the US Treasury appears to be shifting from helping banks directly to supporting homeowners and consumers.
“Treasury Secretary Paulson has decided that purchasing troubled mortgages from banks is not the most effecitive use of the TARP funds. Instead, Paulson will shift focus to areas where problems are growing even faster. First, he will broaden the availability of TARP funds (i.e. capital injections) to non-bank financial institutions. Second, he will try to resuscitate the flow of credit to consumers by creating a liquidity facility for AAA-rated asset-backed securities (ABS), including credit card receivables, auto loans and student loans. Finally, the Treasury is also considering strategies to mitigate foreclosures that would ‘require substantial government subsidies’.

“This suggests that a meaningful taxpayer-backed housing bailout package could be on the way. Bottom line: It is too early to tell whether the change in focus is positive or negative for financial markets at the margin, but government support for the economy and financial system continues to change and broaden. More taxpayer funds will likely be required before the crisis is over. Stay tuned.”

Source: BCA Research – Daily Insights , November 14, 2008.

Bill King (The King Report): TARP was fatally flawed
“Stammerin’ Hank now admits that his TARP plan was fatally flawed, as we stated, and he will do precisely what we proposed before all this ‘buying troubled asset’ nonsense – inject capital directly into troubled firms in order to recapitalize them. And, as we proposed, Hank wants firms taking taxpayer funds to procure matching private investment.
“Hank even gave our reason for injecting capital instead of buying crappy paper – with increased capital you get more leverage to create credit, the multiplier effect.

“All those media types and Street shills should now apologize for pimping for Hank and scaring the heck out of the US public. All that they accomplished was to frighten consumers to a degree that made the US economy collapse in October.

“What disturbed the market on Wednesday is the realization that Hank’s epiphany about the TARP indicates that there is much more crappy paper than initially suspected. And as we warned, $700 billion is not nearly enough taxpayer funds to bailout the crappy paper in the system.

“So estimates of the ever-increasing bailout are soaring … CNBC commentators facetiously talked about ‘a rescue plan for the rescue plan’.”

Source: Bill King, The King Report , November 13, 2008.

The Wall Street Journal: Fed delays its big plan to shore up money funds
“The Federal Reserve said its big rescue plan for money-market funds will be delayed until later this month.
“The delay, announced Monday, presents a challenge for the $3.6 trillion money-market industry, which is struggling to sell short-term debt into tight credit markets. The Fed plans to finance purchases for as much as $540 billion of the money funds’ short-term debt.

“Many had expected the buying program to be up and running last week, but now the Fed says it will start on or about November 24. The funds need the money to meet investor redemptions.

“The reason for the delay appears to be the Fed’s preoccupation with other bailouts and wrangling over how the money-fund program will be set up.

“Money funds have been under pressure since September, when a popular offering called the Reserve Primary Fund suffered losses tied to commercial paper from Lehman Brothers Holdings Inc. and ‘broke the buck’ with its per-share net asset value dropping below $1.

“The losses prompted massive investor redemptions across the money-fund spectrum, especially for ‘prime’ money funds that invest in commercial paper. A lot of commercial paper is issued by financial institutions, and buyers are worried about further bank collapses.”

Source: Diya Gullapalli, The Wall Street Journal , November 11, 2008.

CNBC: Calls for bailouts
“Discussing government help for struggling businesses, with James Galbraith, University of Texas economics professor.”

Source: CNBC , November 12, 2008.

Barry Ritholtz (The Big Picture): Why bailouts attract handout seekers
“A truisim of all bailouts: Enormous amounts of taxpayer cash attract all manner of unsavory, undeserving characters. What was supposed to be a narrow and limited attempt to reduce the systemic risk of a financial collapse has become a taxpayer funded free-for-all …

“Next pig at the trough is the heinous derivatives hedge fund, formerly-known-as-AIG. They were taken over so quickly, with so little oversight and essentially no due diligence, that the price tag on this has already doubled. What no one at the NY Fed is likely to tell you anytime soon is that this price tag is very likely to double yet again.

“Here’s a forecast: After the eventual investigation and audit at Maiden Lane, someone will go to jail. (You read it here first) …

“Last month, I suggested the bailout plan might cost as much as 3 trillion dollars. At the present rate, this will scale up to 8-10 trillion dollars before long. We could even end up spending a full year’s GDP before its all said and done.”

Source: Barry Ritholtz, The Big Picture , November 11, 2008.

Breitbart: Fed’s bailout for AIG swells to more than $150 billion

Source: Jeannine Aversa, Breitbart , November 10, 2008.

Asian Times: Who will finance America’s deficit?
“Indirectly, the rapid expansion of leverage in the global banking system contributed to demand for Treasuries. When de-leveraging commenced in August, an important component of demand for Treasuries declined sharply. That is bad news for Washington, but even worse news is that it will continue to decline sharply, just when Washington most requires global support for the US government debt market …
“Foreign net purchases of US Treasury securities peaked at a $400 billion annual rate, and will fall sharply from this level. Domestic resources to purchase Treasury securities, moreover, are thin. When Ronald Reagan took office, America’s personal savings rate was 10%; today it is around 0%, although it has spiked up in recent months. Disposable income in the US now stands at slightly under $11 trillion. If the US returned to the personal saving rate of 1981, individuals would save $1 trillion a year, enough to fund the Treasury deficit, assuming that all net new portfolio investment flowed into Treasury securities. Nothing, though, would be left over for investment in anything else.”

Source: Asian Times , November 12, 2008.

Forbes: Washington’s $5 trillion tab
“For all the fury over Treasury Secretary Henry Paulson’s $700 billion emergency economic relief fund, it seems downright puny when compared to the running total of the government’s response to the credit crisis.
“According to CreditSights, a research firm in New York and London, the US government has put itself on the hook for some $5 trillion, so far, in an attempt to arrest a collapse of the financial system.

“The estimate includes many of the various solutions cooked up by Paulson and his counterparts Ben Bernanke at the Federal Reserve and Sheila Bair at the Federal Deposit Insurance Corp., as the credit crisis continues to plague banks and the broader markets.

“The Fed has taken on much of that total, including lending a cumulative $1 trillion in overnight or short-term loans since March to primary dealers through its emergency discount window and making a cumulative $1.8 trillion available through its term auction facility, a series of short-term transactions it began making available twice a month in January. It should be noted that a portion of the funds lent in these programs has been repaid and that the totals represent what has been made available.

“The Fed also took on tens of billions in debt, including $29 billion in debt of Bear Stearns, and made $60 billion of credit available to AIG. It is committing $22.5 billion to set up a special purpose vehicle to manage some of AIG’s residential mortgage-backed securities, and it is financing $30 billion of a second fund to hold $70 billion of multi-sector collaterized debt obligations on which AIG wrote credit default swaps.

“The Treasury, in addition to the $700 billion raised in the Emergency Economic Stabilization Act, agreed to guarantee money market funds against losses up to $50 billion, will inject $40 billion of capital into AIG and is backing the conservatorship of Fannie Mae and Freddie Mac, to the tune of $200 billion.

“The FDIC, meanwhile, is guaranteeing $1.5 trillion of senior unsecured bank debt.

“Not included in the total are the Fed’s long-existing discount window lending to commercial banks, the mortgage modification plan announced by regulators on Tuesday, support for the Federal Home Loan Banks and a myriad of other programs.”

Source: Elizabeth Moyer, Forbes , November 12, 2008.

Financial Times: G20 leaders unite to restore global growth
“World leaders agreed to take ‘whatever further actions are necessary’ to tackle the financial crisis and restore global growth at an emergency summit of the Group of 20 in Washington on Saturday.
“They set out an ambitious agenda for reform of the financial regulatory system and institutions such as the World Bank and International Monetary Fund and agreed to meet again in April to consider more concrete steps.

“The 20 leaders, whose countries represent more than 85% of the world’s gross domestic product, also vowed to use ‘fiscal measures’ and monetary policy to shore up the world economy but stopped short of announcing a coordinated stimulus program.

“George W. Bush, the outgoing US president, declared the summit a ‘very successful’ first step but acknowledged it would fall to his successor, Barack Obama, to take the process forward.

“In a five-page communiqué setting out broad principles for reform and a detailed action plan, the G20 agreed to increase supervision of banks and credit rating agencies, tighten regulation of high-risk financial products such as credit default swaps, and ‘review’ executive compensation practices.

“In a blunt assessment, the communiqué blamed the crisis on, ‘weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products and consequent excessive leverage’.

“Without naming the US, the leaders concluded that ‘policymakers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in the financial markets’.”

Source: Financial Times , November 16, 2008.

Financial Times: World Bank in $100 billion aid push
“The World Bank is set to provide up to $100 billion in new aid to developing countries, amid fears that the spreading effects of the financial crisis could devastate poorer and middle-income states.
“Ahead of an international summit on the crisis this weekend, Robert Zoellick, World Bank president, said it would be an ‘error of historic proportions’ to ignore the interests of developing states whose projected growth rates have been slashed in the wake of the crisis.

“As requests for aid continued to come in from around the world, he forecast the Bank would provide up to $100 billion in loans over the next three years through its International Bank for Reconstruction and Development (IBRD) arm. He said the IBRD would increase loans available for developing countries to more than $35 billion this year, up from about $16 billion planned a few months ago. Last year, such aid totalled $13.5 billion.

“‘You are seeing countries that had very good, sound macro­economic programmes – Mexico, Indonesia – that are in a position where they are not at financial risk but they are worried about getting financing,’ Mr Zoellick said. ‘These are the types of countries – Colombia, others – that we are offering as much support as we can.’

“Underlying his concern, Mr Zoellick said global trade was projected to contract next year for the first time since 1982, while developing countries’ growth, which had been expected to reach 6.4% in 2009, was now projected to be 4.5%. On Tuesday the MSCI emerging markets index fell 5.2%.

“The World Bank estimates that each percentage point decline in developing country growth rates pushes an additional 20 million people into poverty.”

Source: Daniel Dombey and Michael MacKenzie, Financial Times , November 11, 2008.

Financial Times: China authorises “massive” stimulus package
“China announced on Sunday a ‘massive infrastructure spending programme’ as part of a new fiscal stimulus plan aimed at boosting the country’s rapidly slowing economy.
“The State Council, China’s cabinet, authorised $586 billion of investment on infrastructure and social welfare over the next two years, although it did not say how much of the spending would be on new projects not already in the budget.

“The government said the spending plan reflected a decision to adopt an ‘active’ fiscal policy to deal with the global financial crisis, while monetary policy would be ‘moderately active’.

“The announcement reflects mounting anxiety in Beijing that China’s economy is cooling much more quickly than was initially expected in the face of weaker international demand and a slowdown in the local property market.

“Beijing has also been under growing international pressure to take fiscal measures to boost its economy in the hope that continued strong growth can provide some counter-balance to recession in the developed world.

“The government has already cut interest rates three times, scrapped quotas for bank lending and unveiled measures to help house buyers and some exporters. However, economists said those measures had not been enough to overcome growing gloominess among companies and consumers.”

Source: Geoff Dyer, Financial Times , November 9, 2008.

Forbes: Roubini – the worst is not behind us
“It is useful, at this juncture, to stand back and survey the economic landscape – both as it is now, and as it has been in recent months. So here is a summary of many of the points that I have made for the last few months on the outlook for the US and global economy, as well as for financial markets.”
Click here for the full article.

Source: Nouriel Roubini, Forbes , November 11, 2008.

BCA Research: Measures of reflation
“Aside from various spreads, we advise clients to look to gold prices and currency volatilities for evidence that policymakers are winning the battle over debt-deflation.
“Additional monetary and fiscal support will be needed before the easing cycle ultimately comes to an end. Still, global policymakers are aggressively pulling out all the stops to shore up both investor and banking sector confidence and limit downside in their various economies (China’s announcement of a massive $US586 billion fiscal package was the latest example).

“Correspondingly, we continue to watch various bond spreads closely for evidence that the credit logjam is starting to unfreeze. So far, there are encouraging signs that US Libor/OIS spreads have adjusted lower (even at longer maturities), although this measure of banking sector risk has not yet narrowed much throughout Europe and both corporate bond yields and mortgage rates are still near their peaks across the globe.

“Aside from these conventional measures, we are also watching gold prices and currency volatilities. In our opinion, gold is a great barometer of excess liquidity and a sustained rise across a broad range of currencies would suggest that reflation measures are starting to work. Similarly, a dramatic reduction in currency volatility may indicate that we are returning to a world of competitive currency devaluation as policymakers seek external support for weakness in their domestic economies. In this environment, no currency adjusts lower but significant monetary stimulus is provided.

“Bottom line: Further evidence in the weeks ahead that policymakers are finally getting ahead of the curve would prove supportive of risky assets.”

Source: BCA Research , November 11, 2008.

Bloomberg: Morgan Stanley’s Roach says Fed following BOJ “script”
“Stephen Roach, chairman of Morgan Stanley Asia, talks with Bloomberg in Singapore about the US’s $700 billion Troubled Asset Relief Program, the effectiveness of the bailout package, and European and US monetary policies.”

Source: Bloomberg , November 13, 2008.

Yahoo News: Soros says deep recession inevitable, depression possible
“George Soros, chairman of Soros Fund Management, testified at a House Oversight and Government Reform Committee hearing on Thursday.
“Highlights are:

* Said ‘a deep recession is now inevitable and the possibility of a depression cannot be ruled out’.

* Said hedge funds were an integral part of the financial market bubble which now has burst.

* Said hedge funds will be ‘decimated’ by the current financial crisis and forced to shrink their portfolios by 50% to 75%.

* Said Fed, Treasury Department and the SEC must accept responsibility to prevent market bubbles from growing too big in future.

* Said impossible to prevent market bubbles from forming, but they can be kept within ‘tolerable bounds’.

* Said financial engineering should be regulated and new products approved by regulators, and that such regulation should be a high priority of the new Obama administration.

* Said a recent IMF credit facility not large enough to stabilize markets.”

Source: Yahoo News , November 13, 2008.

CEP News: RealtyTrac says US foreclosures rose 5% in October
“Foreclosure activity in the United States is not relenting, according to RealtyTrac’s latest survey for October, which suggests filings rose 5% in October and 25% from 12 months ago.
“‘We’ve seen sharp declines in new foreclosure filings after legislation mandating delays to the foreclosure process was signed into law in several states – most notably in California, where overall foreclosure activity was down by double-digit percentage points for the second straight month in October, and where default filings were 44% below October 2007 levels,’ said James J. Saccacio, chief executive officer of RealtyTrac.

“‘Despite this, October marks the 34th consecutive month where US foreclosure activity has increased compared to the prior year.’”

Source: Erik Kevin Franco, CEP News , November 13, 2008.

The New York Times: F.D.I.C. offers plan to stem foreclosures
“Breaking with the Bush administration’s position, the Federal Deposit Insurance Corporation proposed Friday to use $24 billion in government financing to help 1.5 million American households avoid foreclosure.
“The source of the money, though, is in dispute. Agency officials want to use part of the $700 billion bailout of the financial industry to pay for it. But the Treasury Department is opposed to that idea.

“Testifying on Capitol Hill Friday, Neel Kashkari, the Treasury Department’s assistant secretary for financial stability, said the intent of the $700 billion plan was to make investments with the hope of getting the money back. That, he said, was ‘fundamentally different from just having a government spending program’ that would disburse money with no chance of ever seeing any returns.

“Congressional Democrats could take up the plan when they return for a lame-duck session next week. Or the plan could set the stage for a new foreclosure prevention initiative once President-elect Barack Obama takes office in January.

“The agency’s plan, posted on its Web site Friday, would guarantee 2.2 million modified loans – mainly risky loans made to borrowers with weak credit or small down payments – through the end of next year. Borrowers would get reduced interest rates or longer loan terms to make their payments more affordable.

“The F.D.I.C. said the government’s backing will make the lending industry more willing to modify loans because taxpayers will absorb half of the losses if the borrower defaults again. Also, loan servicing companies, which collect and distribute mortgage payments, would be paid $1,000 for each loan they modify.”

Source: Associated Press (via The New York Times ), November 15, 2008.

Business Wire: Nielsen – US consumers negative on economy
“The majority (86%) of US consumers believe the country is currently in a recession and more than half (54%) believe it will last longer than 12 months, according to a new online survey by The Nielsen Company, conducted in the midst of economic turmoil last month.
“Nielsen’s survey shows that when it came to predicting the end of the recession, most consumers are pessimistic. Only 18% said they believe the recession will be over within a year. The least amount of confidence was expressed by 25- to 29-year olds, with just 6% saying the recession would be over within 12 months. 52% of consumers in this age range say they do not feel the recession’s end would come that soon. Similarly, only 7% of consumers age 65 and over believe the recession will be over within the year, with 63% of consumers in this age range saying they don’t believe the recession will be over within 12 months.

“‘Younger consumers grew up in an era of prosperity and have never really known economic challenges to this extent,’ said James Russo, vice president, Marketing, The Nielsen Company. ‘To them perhaps, the current economic downturn is uncharted territory. There is a pervasive feeling of uncertainty, and concern which is clearly affecting spending levels. Older consumers are understandably concerned because of the potential impact of the economic downturn on their near-term financial needs,’ said Russo.”

Source: Business Wire , November 10, 2008.

Asha Bangalore (Northern Trust): Retail sales – significant slump in consumer spending
“Retail sales fell 2.8% in October, marking the third consecutive monthly decline. The October drop is the largest since record keeping for the current series began in 1992.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary , November, 14, 2008.

Bloomberg: Ross says GM bankruptcy filing would be a “total mess”
“Billionaire investor Wilbur Ross talked yesterday with Bloomberg’s Mike Ramsey about the likely consequences of a Chapter 11 bankruptcy filing by General Motors or another US automaker, comparisons between today’s auto industry challenges and those of the steel industry in the past, and the role of the government in circumstances leading to the auto industry’s situation. Ross’s holdings include auto-parts maker International Automotive Components Group.”

Source: Bloomberg , November 14, 2008.

Paul Kedrosky (Infectious Greed): The world in four presidents and five economic factoids
Changes across four presidents in five interesting measures of the economic world as we know it:

Source: Paul Kedrosky, Infectious Greed , November 12, 2008.

Financial Times: Hedge fund chiefs blame the system for financial crisis
“Some of the world’s top-earning hedge fund managers told Congress on Thursday that they broadly agreed that largely unregulated financial vehicles ought to be subject to greater disclosure, though they warned of excessive regulation.
“The statements by George Soros and others suggested that hedge fund executives and lawmakers were reaching a consensus in the wake of the credit crisis that the status quo, in which the funds largely escape scrutiny, was no longer tenable.

“‘We have moved out of the mode of ‘to be or not to be’,’ said Democrat Eleanor Holmes Norton on the inevitability of new regulations.

“The hedge fund managers received a mostly warm reception at the hearing of the House Committee on Oversight and Government reform – in stark contrast to the tough questioning that greeted Dick Fuld, the Lehman Brothers chief executive.

“But the hedge fund managers nevertheless emphasised that they were not culpable in the financial meltdown. Mr Soros pinned blame on the ‘financial system itself’, while James Simons, president of Renaissance Technologies, criticised credit ratings agencies, which he said had facilitated the sale of ‘sows ears … as silk purses’ through ‘fanciful’ ratings of mortgage-backed securities.

“Kenneth Griffin of Citadel went further, saying he did not believe greater regulation of hedge funds was required and that the major failures had occurred in regulated institutions. ‘We have not seen hedge funds as a focal point of carnage.’

“Using a less aggressive tone than in previous hearings, Henry Waxman, the Democratic chairman of the committee, suggested hedge funds’ rapid growth and high leverage posed potential risks to the broader economy, but he stopped short of blaming the funds, or their trading practices, for the current crisis.

“The congressman did, however, question ‘special tax breaks’ that allow managers to treat the majority of their earnings as capital gains, which are taxed at a rate as low as 15%.

“Almost all of the hedge fund managers generally agreed that they should be subject to higher taxes, except for Mr Griffin who defended the current model …

“John Paulson, of Paulson & Co, whose bearish views on the mortgage bubble made him the most highly paid fund manager last year, according to some calculations, said his pay reflected returns to investors.”

Source: Stephanie Kirchgaessner and Henny Sender, Financial Times , November 13, 2008.

Bloomberg: Bloomberg sues Fed to force disclosure of collateral
“Bloomberg News asked a US court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.
“The lawsuit is based on the US Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn’t seek money damages.

“‘The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the US financial industry,’ said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP.

“The Fed has lent $1.5 trillion to banks, including Citigroup and Goldman Sachs Group, through programs such as its discount window, the Primary Dealer Credit Facility and the Term Securities Lending Facility. Collateral is an asset pledged to a lender in the event that a loan payment isn’t made.

“The Fed made the loans under 11 programs in response to the biggest financial crisis since the Great Depression. The total doesn’t include an additional $700 billion approved by Congress in a bailout package.”

Source: Mark Pittman, Bloomberg , November 7, 2008.

Markit: CDS update: gross inaccuracies
“The size of the CDS market has been one of the most controversial – and misunderstood – issues during the current financial crisis. The oft-quoted figure of $54 trillion, sourced from an ISDA survey, has caused many an uninformed pundit to speculate that it was ‘out of control’. But though the ISDA survey is relatively accurate in describing gross notional outstanding, it is flawed in representing total risk.
“Figures published by the DTCC, only made available in the last two weeks, give a truer picture. The table below, for the week ending November 7, shows that the total net notional outstanding – which offsets long and short positions within the same institution, thus giving a more accurate figure of risk – is only a small fraction of the total gross notional. This is because the ISDA survey counts the same position several times and doesn’t take into account aggregate risk. Gross notional in the CDS market has itself decreased significantly in recent months. This is due to compression exercises conducted by Markit and others, which allow offsetting trades to be torn up.

“The latest figures show that total net notional outstanding fell by $229 billion from the previous week. Most of this was due to a $200 billion reduction in single name CDS exposure. The fact that gross single name exposure rose by $30 billion highlights the inadequacy of this metric as a risk indicator. Clearly, investors have been entering into offsetting trades to reduce their risk exposure, a fact not captured by the gross measure, which overstates exposure.

“Drilling down into the single names, the DTCC data shows that the Republic of Ireland is the subject of the biggest increase in net risk exposure this week. The sovereign was the first in the eurozone to go into recession, though it has since been followed by Germany and the region as a whole. Its credit profile worsened significantly after it guaranteed its banking sector and the dire economic news has continued to flow. It looks set for a deep and prolonged period of contraction and the domestic banks will be reliant on the government guarantee for funding.”

Source: Gavan Nolan, Markit (via FT Alphaville ), November 14, 2008.

Bloomberg: Faber says corporate bonds “more attractive” than stocks
“Marc Faber, publisher of the Gloom, Boom & Doom Report, and Charles Maxwell, an analyst for Weeden & Co., talk with Bloomberg’s Pimm Fox in New York about the outlook for the US economy and stock market, Federal Reserve monetary policy and commodity prices.”

Source: Bloomberg , November 10, 2008.

Bespoke: Bypass the depression and head straight for 1907

“‘On October 17, 1907, panic began to spread on Wall Street after two men tried to corner the copper market. In the months preceding the panic, the stock market was shaky at best; banks and securities firms were contending with major liquidity problems. By mid-October, Wall Street was paralyzed; for days, there were runs on several large banks. Millions of dollars were withdrawn, and banks closed their doors.’
“Sound familiar? The above passage is from an article on the NPRs website titled ‘Lesson’s From Wall Street’s Panic of 1907’. 101 years later, the US economy finds itself in an eerily similar situation, and following today’s [Thursday] lunchtime plunge in the Dow, the index is now closing in on 1907 to be on pace for the index’s worst year ever.”

Source: Bespoke , November 13, 2008.

Financial Times: Opaque earnings
“One reason cited for the extreme volatility on Wall Street of late is a lack of clarity for US companies’ future earnings.
“‘How can investors value a stock if they don’t have the foggiest what the ‘e’ in p/e will be?’ is a common refrain.

“Data from Thomson Reuters supports this ‘confusion hypothesis’. Now that most companies have reported their third-quarter results we can see how analysts’ expectations for earnings compared with the actual outcome.

“While results for all sectors were worse than forecast in January, some industries have been easier to gauge.

“The expected third-quarter earnings growth for healthcare of 11% was, under the circumstances, not much different to the 7.3% outcome.

“Financials, on the other hand, moved over the same period from expected growth of 46% to minus 106.5%. Strikingly, a decline of ‘only’ 61% for financials was expected as recently as the beginning of October, suggesting analysts have been scrambling to keep up with the fast-deteriorating prospects.

“The finger-in-the-air nature of the forecasting is further illustrated by the eerily palindromic nature of the number of financial companies that beat, missed, or matched expectations: 45%, 10% and 45%, respectively.

“So, an important question for investors is: are we close to a point when even perceptions of earnings clarity may improve?

“Sadly not, because so many statements with the third-quarter reports have been laden with bosses bemoaning the murky economic outlook.

“Bulls, however, may point to a possible benefit of such gloom-mongering. The longer the uncertainty goes on, the more one would expect shell-shocked analysts to overdo the pessimism.

“That could pave the way for some pleasant surprises.”

Source: Jamie Chisolm, Financial Times , November 12, 2008.

Blogging Stocks: Are market extremes calling a bottom?
“Money manager and advisor Jim Stack, who accurately sidestepped the bear market over the past year, is now turning more optimistic. Here’s the latest from his InvesTech Market Analyst.
“‘As a bear market unfolds, investor emotions travel down a slippery slope of anxiety, fear and panic. And it is just this kind of emotional upheaval that creates some of the extremes that we are seeing now.

“‘Media headlines containing the word ‘depression’ and images like this are appearing more this year than in any year since the 1930s.

“‘Stock market volatility, as measured by the number of 1% daily closing moves in the S&P 500 Index, is near a record high. The percentage of stocks on the NYSE hitting new 12-month lows is higher than any previous record level during the past 50 years.

“‘Yet, bear markets bottoms occur right in the midst of fear and panic – at the point of maximum gloom. And for consumers, it’s hard to get much gloomier: In addition, more bear markets have ended in October than in any other month.

“‘On Wall Street, fear and market volatility go hand in hand. However, this is not necessarily bad news. Day to day volatility in the S&P 500 is currently at its second highest level in 70 years – exceeded only by the bear market bottom in 2002.

“‘Of particular interest is the fact that all past ‘peak’ levels have occurred during years in which important market bottoms have appeared.

“‘Downside leadership is also hitting new extremes as this bear has tightened its grip. On October 10, a record 88% of stocks on the NYSE hit new 12-month lows – 14 percentage points greater than the previous record set on May 29, 1962. Once again, this is not necessarily bad news!

“‘We’ve identified the days when more than 50% of the NYSE stocks have fallen to new 12-month lows and we’ve tracked the percentage gain and/or loss in the S&P 500 that followed. Not one instance saw the market lower 3 months and 6 months later.

“‘While there isn’t much precedent – only 4 periods before this have seen such extremes since 1962 – this still offers hope that there is light at the end of the tunnel.

“‘Meanwhile our technical ‘pressure factor’ indentifies overbought or oversold extremes in the market, which typically occur at points of maximum optimism or pessimism. Historically, oversold levels such as this usually precede some type of market bottom.

“‘This indicator has proven to be reliable even for short-term bottoms during prolong bear markets like 2000-02. On October 22, the Pressure Factor hit its fifth most oversold level in the past 40 years.

“‘Such prior extremes occurred in October 1987, March 2003, and February 2007. Following each of these oversold readings the market moved upward on average for a 13% gain after 3 months and 17% after 6 months.

“‘The odds are high we are either near (or past) a market bottom … but only time will tell how important this bottom will be.’”

Source: Steven Halpern, Blogging Stocks , November 10, 2008.

David Fuller (Fullermoney): Stock markets are cheap, but no base formations yet
“By most measures stock markets are cheap. We have certainly seen extremes of sentiment and price trend, and valuations are much improved. Reactive and crisis oriented central banks are no longer targeting the inflation which they helped to create, because it has been in rapid retreat since July. Urged on by their respective governments, central banks are now attempting to cushion a steepening global economic decline. Having embarked on this journey, they will not desist until conditions improve. Additionally, governments are now using fiscal policy to fight a disinflationary recession.
“However while deleveraging continues and more of America’s best known companies face insolvency, we have reason to think we are living through an epochal event. As Richard Russell points out: ‘Mattel makes toy cars. Mattel is now worth more as a company than General Motors.’ It gives one pause for thought.

“I often feel confident in my analysis, sometimes justifiably so, and sometimes naïvely or rashly so. Today, I have far more questions than answers. An important reason for this is that too many of the price trends intrigue rather than entice me. I see the climactic action in many charts, but not the base formations to support sustained recoveries. The performance of many financial stocks remains a concern.

“Looking ahead, I suspect we will not be able to fault our politicians for effort. However there is certainly no unanimity regarding the solutions.”

Source: David Fuller, Fullermoney , November 11, 2008.

Barry Ritholtz (The Big Picture): Is the US market cheap?
“Maybe not, if this graph of the trailing 12-month P/E ratio is anything to go by.”

Source: Barry Ritholtz, The Big Picture (via Mike Panzner ), November 14, 2008.

Bloomberg: Jim Rogers – global stock market rout may continue
“The rout in global markets may continue while bonds will be a ‘terrible’ investment as economic problems may persist until 2010, investor Jim Rogers said.
“‘Stocks in the West are still expensive on any historic valuation method,’ while ‘bonds are going to be a terrible place to be for the next 10, 20 years’, Rogers, chairman of Singapore-based Rogers Holdings, said at a conference in Seoul today. Equities in the West will be ‘in a trading range for years to come,’ he said.

“‘I have started going back into the markets; that does not means it’s the bottom,’ Rogers said. His purchases since mid-October include commodities and equities in China and Taiwan, as well as ‘a Korea stock’, he said, without giving details.

“‘We may be hitting ‘a’ bottom,’ Rogers said. ‘I don’t know if it’s ‘the’ bottom.’

“Rogers continues to favor commodities as an investment as fundamentals are ‘unimpaired’ amid a global liquidation of assets, he said. ‘You will see that stocks have gone down more so far than commodities. That will continue as far as I’m concerned.’”

Source: Kyung Bok Cho, Bloomberg , November 12, 2008.

Richard Russell (Dow Theory Letters): Tread with caution
“… so many well-known analysts are proclaiming that stocks now represent great values, and therefore, we must be at or near the bottom of this bear market, and that this is the time to accumulate selected ‘great value stocks’. These bullish analysts may be right or wrong, but from a Dow Theory standpoint, there is nothing yet to indicate that we are at a great stock market bottom.
“First, the Dow is not selling at historic great values since the dividend yield on the Dow is only 3.88% – still far below the classic 6% seen at great bottoms.

“The Lowry’s studies have been invaluable in assessing the situation. I have followed the Lowry’s studies for half a century, and currently I don’t see indications of a major bear market bottom in their statistics. Normally, prior to a major bottom Lowry’s Selling Pressure Index embarks on an extended decline – an indication that the inventory of stocks for sale has been exhausted. Once the sellers have completed their selling, a bear market is ready to form a bottom. Unfortunately, Lowry’s Selling Pressure Index (supply) is currently still in the vicinity of its recent record high. Therefore, we know that potential selling is far from exhausted, despite the recent series of 90% down-days on the NYSE.

“I’m not trying to frighten my subscribers. What I am trying to do is to caution subscribers, and notify them that the lows for this bear market may still be far away. We simply do not know, nor to we have evidence to indicate that the bottom is in or near.”

Source: Richard Russell, Dow Theory Letters , November 11, 2008.

Bespoke: Breaking the back of Buffett
“With nearly everyone and their brother lately questioning the investment prowess of Warren Buffett, it looks as though the shorts have finally broken the back of Berkshire Hathaway stock. After riding out most of the credit crisis and actually benefiting from it for awhile, the stock has finally succumbed to the pull of the overall market and broken below $100,000 for the first time in over two years. It’s amazing how index derivative contracts are coming back to haunt the man who once called them ‘financial weapons of mass destruction.’”

Source: Bespoke , November 13, 2008.

Bespoke: Biggest increases and decreases in country P/E ratios
“Below we highlight the country indices from the list in our last post that have seen the biggest increases and decreases in P/E ratios (trailing 12-month) in 2008. As shown, Bulgaria’s P/E ratio has fallen the most of any other country this year, from 48.46 down to 6.22. China ranks second, with its P/E ratio falling from 44.28 to 14.55. A 14.55 trailing P/E for China is very low.
“Just five countries of the 84 on our list have seen their P/E ratios actually increase this year. Unfortunately, the US is one of the five. During bear markets, P/Es usually contract because the price (P) of the index falls more than earnings (E). Since P/Es have increased (albeit slightly) in the US in 2008, it means earnings have fallen even more than price.”

Source: Bespoke , November 10, 2008.

Bespoke: Comparing valuations in China and the US
“Since US markets peaked last October, the S&P 500 is down 41%, while China’s Shanghai Composite is down 68%. Over the same time frame, the trailing 12-month P/E ratio of the S&P 500 has gone from 19.62 to 20.21, while the P/E ratio of the Shanghai Composite has fallen from 45.85 all the way down to 14.31.
“So even though China’s equity markets have declined much more than the US on a percentage basis, earnings have held up much better. China is still considered an emerging market and is experiencing growth of 8% or so. Growth stocks generally have much higher valuations than value stocks, and it’s surprising to see China’s P/E at 14.31, or 6 points lower than the S&P 500’s P/E of 20.21.”

Source: Bespoke , November 11, 2008.

Bespoke: Dollar bull has more legs
“The one bright spot in the current market environment is the strength in the US dollar. Months ago, we wrote that the dollar was in store for a lengthy bull market, and at the end of October, the currency officially made it to the +20% threshold confirming a new bull. As we’ve noted in the past, bull and bear markets for the dollar typically last much longer than other asset classes, and below we highlight the four prior bulls for the currency since 1970. Three of the four bull markets for the dollar have lasted 500 days or more, and two lasted for 7+ years. Using history as a guide, we expect the current bull market in the dollar to continue through 2009.”

Source: Bespoke , November 10, 2008.

Bloomberg: Ruble devaluation concern triggers stock plunge, rate increase
“Russia’s ruble fell the most in two months as the central bank loosened its defense of the currency amid the country’s worst financial crisis since the 1998 devaluation.
“‘They’re going to move the line in the sand back a little bit, where they hope they can defend it,’ while resisting a formal devaluation that would erode confidence in ruble deposits, Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow, said in an interview today. ‘If people start to lose confidence in the banking system, we could have a massive run on the banks as we saw twice in the nineties, and then the game is up.’

“Russia drained 19% of its currency reserves to stem a 17% slide in the ruble against the dollar since the start of August, prompting warnings of possible downgrades from Fitch Ratings and Standard & Poor’s.

“The central bank is raising rates, at a time when the US, Europe, China and India are cutting to help unlock credit markets, after a 1% slide in the ruble against the euro-dollar basket today. Investors sold the Russian currency after central bank Chairman Sergey Ignatiev said the ruble has a ‘tendency toward weakening’, during a televised press conference yesterday.”

Source: Laura Cochrane and Emma O’Brien, Bloomberg , November 11, 2008.

Richard Russell (Dow Theory Letters): Gold is being manipulated
“I’ve never been a big fan of the ‘gold is being manipulated’ thesis. However, I’m now giving the manipulation thesis second thoughts. Most of the world’s central banks are now in the process of fighting recession and deflation. This requires government spending and the production of enormous quantities of new fiat money. The last thing the central banks want is for the public to realize what they are doing. Normally, surging gold would be the signal for the public to ask questions – rising gold is a red flag for the fiat money creators.
“It’s amazing and beyond coincidence the way gold rallies, and then immediately is hammered down below 740. I know that there are huge short positions in gold on the COMEX. I’m no longer a skeptic on the ‘gold is being manipulated’ claim. Somebody is selling gold every time gold rallies toward a breakout above 870 or more properly gold at 840. I don’t think the manipulators (if there are such people) can keep it up.”

Source: Richard Russell, Dow Theory Letters , November 13, 2008.

Richard Russell (Dow Theory Letters): Gold in early accumulation period
“I believe that gold is ‘trying’ to bottom here, and I believe hedge fund selling is easing off. It’s significant that gold coins and bullion bars have been swept off the market even while the price of gold has been fairly static. Central banks have also been sellers of gold and I believe the IMF will be a seller. Once all these various entities get rid of their gold, the supply of gold for sale will be reduced drastically, and the stampede for gold will begin in earnest. I look at the present as the early accumulation period (first phase) in the coming great bull market for gold. The second phase of the gold bull market will begin once gold is firmly above 1000 again. Near-term, December gold above 775 will be very bullish.”
Source: Richard Russell, Dow Theory Letters , November 10, 2008.

Leon Esterhuizen (RBC Capital Markets) Gold prices poised for gains
“The current financial crisis has delivered the perfect conditions for the price of gold to rise over the next year or two, believes Leon Esterhuizen, equity analyst at RBC Capital Markets.
“He points out that, historically, banking crises have tended to be hugely deflationary, as interest rates are cut aggressively and for extended periods.

“‘We expect the Federal Reserve to ease further in order to turn market sentiment away from pricing in low or no growth, which would be reflected in a low long bond yield.’

“Ultimately, this would be likely to lead to dollar weakness – which is beneficial to US exports but heightens the risk of steep inflation, Mr Esterhuizen says.

“‘If economic growth rapidly rebounds, the gamble will have paid off. If not, be prepared for an even bigger collapse in a year or two from now. Given current conditions, the US has little option but to take that bet.’

“He adds that Europe will converge with the US in terms of cutting rates, strengthening the case for an extended period of rock-bottom real rates.

“‘Finally, oil could play a key role, as recent efforts by producers to reduce output might leave crude prices higher than many expect.

“‘If this is the case, inflation will most certainly be rising in an environment where rates are being cut. This is gold price heaven – declining real rates or even negative real rates will drive the gold price much higher.’”

Source: Leon Esterhuizen, RBC Capital Markets (via Financial Times ), November 11, 2008.

Commodity Online: Why gold mines are collapsing in Zimbabwe
“Gold contributes 35% of Zimbabwe’s foreign currency earnings. But gold mines are shutting shops in this African country.
“Reports say several gold mines in Zimbabwe have stopped operations as a result of inadequate capital. Metallon Gold, the largest gold producer in Zimbabwe with four mines, has since stopped production.

“The company has also been hit by massive turnover of key staff after it failed to pay salaries for the past two months. Metallon chief executive Collin Gura confirmed that production at his company was at a standstill.

“Gold miners say they cannot continue with operations because the Reserve Bank of Zimbabwe (RBZ) has not paid their foreign currency revenue from gold sales. RBZ, through its subsidiary, Fidelity Printers, is the sole marketer of gold in the country.

“Gold mining companies are obliged by law to sell their gold to the central bank, but for the past two years it has been falling behind on payments ‘due in terms of official policy to be made four days after delivery’.”

Source: Commodity Online , November 7, 2008.

Financial Times: IEA warns of new oil supply crunch
“A lack of investment in new sources of oil risks a supply crunch worse than the problems that pushed prices to $147 a barrel this summer, the developed world’s energy watchdog said on Wednesday.
“The International Energy Agency (IEA) warned that cuts and delays in investment that were prompted by the fall in oil prices and the credit crunch had put the world ‘on a bad path’.

“Fatih Birol, chief economist at the IEA, said: ‘We hear almost every day about a project being postponed. This is a major problem.’

“Last year, $390 billion was invested in oil and gas exploration and production, one of the highest amounts in recent years. Yet it still fell short of the $450 billion the IEA said would be needed in both sectors.

“Oil prices have fallen as economies have struggled in the credit crisis and demand has dropped, especially in the developed world.”

Source: Carola Hoyos, Ed Crooks and Javier Blas, Financial Times , November 12, 2008.

Financial Times: Brazil oilfield may house 100 billion barrels
“Brazil’s newly discovered ‘pre-salt’ oilfields may contain more than 100 billion barrels, Haroldo Lima, head of the industry regulatory, said on Friday.
“Mr Lima said just the pre-salt oilfields already under concession may contain between 50 billion and 80 billion barrels and that the total area could surpass 100 billion barrels.

“If so, the new fields would propel Brazil up the world league table of oil producing nations. Brazil currently has reserves of about 12.6 billion barrels (or 14.4 billion barrels of oil equivalent if natural gas is included), according to a statistical review produced by BP of the UK, a standard industry reference.

That compares with 79.4 billion barrels of oil in Russia, for example, or 101.5 billion in Kuwait, according to BP.

“‘Dimensions are so big that we still don’t have a good vision of what this means for Brazil,’ Mr Lima told reporters in Rio de Janeiro.”

Source: Jonathan Wheatley, Financial Times , November 7, 2008.

Ifo: Economic climate for the euro area
“The Ifo Economic Climate in the euro area has worsened again in the fourth quarter of 2008 for the fifth time in succession and has now fallen to the lowest level since 1993. The decline in the Ifo indicator is primarily the result of less favourable assessments of the current economic situation. The pessimistic level of the expectations for the coming six months remains virtually unchanged. These survey results suggest that the economic decline will continue in the euro area.
“The economic climate indicator has fallen in the fourth quarter of 2008 in nearly all countries of the euro area and is now clearly below its long-term average. The most unfavourable economic climate prevails in Spain and Ireland. The assessments of the current economic situation have worsened this time especially in Italy, Belgium, France, Austria and Germany. The expectations for the coming six months remain clearly pessimistic in most countries, in Ireland, Portugal and the Netherlands they have further deteriorated.

“In the course of the coming six months a strong decline in the rate of inflation is anticipated. Key interest rates will be lowered further during the coming six months in the opinion of the World Economic Survey (WES) experts; capital market interest rates are also expected to decline.

“In comparison to the euro, the US dollar is assessed as undervalued despite the increase in value that has occurred. In the coming six months a further recovery of the US dollar is expected. After having increased in value the Japanese yen is now seen as only slightly undervalued. The British pound is regarded as properly valued vis-à-vis the euro.”

Source: Ifo , November 12, 2008.

BBC News: German economy now in recession
“Germany has entered a recession after government figures showed that Europe’s largest economy contracted by 0.5% in the third quarter. This is the second consecutive quarter that the economy has shrunk after a 0.4% contraction in the second quarter.
“The fall in economic output, driven by falls in exports, was greater than many analysts had expected.

“‘This confirms the German economy is in a marked slump,’ said Klaus Schruefer at SEB. ‘We will definitely get a further contraction in the fourth quarter, probably of a similar order,’ he added.”

Source: BBC News , November 13, 2008.

BCA Research: UK Housing bubble – rapid deflation to persist
“The UK housing bust will prove to be much worse than in the US, ensuring that the BoE continues to aggressively play catch-up.
“Yesterday’s release showed that the RICS survey came in at -82% for October (up only modestly from -84%). Although the release shows evidence of flattening off, it is doing so at historically depressed reading, indicating that the vast majority of realtors continue to expect a steady rot in prices in the coming months. Our UK housing model echoes this sentiment, suggesting that house price deflation will level off over the next six months, albeit at a whopping -12% YoY rate.

“In short, the bubble has much further to deflate, given that the rise in the house price-to-income ratio was much larger in the UK earlier this decade than any other economy in the developed world. The once virtuous circle has clearly now turned vicious and will lead to dramatic knock-on effects for the consumer and overall domestic economy in the months ahead. Already, sentiment has been shattered (due to declining housing and financial wealth as well as rising unemployment) and consumers have begun to retrench.

“Bottom line: Last week’s aggressive 150 basis point rate cut by the BoE will be followed by significantly more easing in the months ahead. Stay overweight gilts within a global hedged fixed income portfolio.”

Source: BCA Research , November 12, 2008.

James Pressler (Northern Trust): Is Beijing’s $586 billion “new deal” stimulus plan really “new”?
“For a change, the latest news to rock global markets actually triggered a rally in Japan, Hong Kong and other regional markets. Yesterday, Beijing announced a 4 trillion yuan ($586 billion, or about 16% of GDP) fiscal stimulus package to be implemented between now and end-2010 to shore up its ailing economy. Regional markets rose in hopes that renewed Chinese import consumption would keep exporters throughout Asia and the industrialized world busy, and commodity prices went higher in anticipation of a recovery in demand. This package has been coined by some as a ‘New Deal’ for China. We decided to pick through the details and see how much of it is ‘new’, how much is a good ‘deal’, and to see if there could be any downsides that have so far been overlooked.
“The actual economic activities cited by this package center around the further development of infrastructure – rail and highway connections, housing construction and earthquake recovery support – mostly in the western provinces. Considering how underdeveloped that part of the country is relative to wealthier eastern coastal regions, such investment seems a worthy cause and very much in line with the government’s long-term plan to spread development to areas that have so far been left out. However, lost within the blurry figures is how much of this ‘new spending’ is actually a repackaging of programs already queued up for implementation, with their costs now announced as ‘stimulus’. Details are sketchy, but there seems to be a suspicious amount of overlap between previously announced projects and new, stimulative projects. In short, not all of this program is ‘new’.

“There is, perhaps, a ‘deal’ within this package, regardless of how much spending is actually ‘new’. The market rallies throughout Asia were not based solely on hopes that those countries would benefit from China’s extra economic activity. There is also a growing feeling that China will be able to avoid an economic hard landing and a prolonged period of weak growth. If this fiscal package shores up the waning confidence of foreign investors, it could keep investment flowing into the country and prevent growth from taking a precipitous dive – a nice way to maintain the virtuous cycle of investment, development and growth.

“There is one lingering concern we have about today’s announcement, however, and it is the same concern we have about any country’s stimulus package – where is the money to pay for this? If it considers liquidating any of its many US-backed assets or no longer buying as much of our debt, this New Deal would be a bad deal for the US.”

Source: James Pressler, Northern Trust – Daily Global Commentary , November 10, 2008.

Times Online: CLSA’s Fishwick says that China may be heading for a severe economic slowdown
“China must be radically reassessed by investors and could be lurching towards a more dramatic economic slowdown than Beijing authorities will admit, a CLSA report says.
“The grim assessment from Eric Fishwick, chief economist at CLSA, an Asia specialist brokerage firm, argues that it will be impossible for China to achieve anything like the growth rates it is presently projecting for next year.

“Even with aggressive government measures, growth in 2009 could plunge to 5.5%, he said.

“The super-bearish forecast depends on certain weak signals that may emerge in the fourth quarter of 2008, but comes amid reports from the Chinese electricity sector that suggest the country’s mighty manufacturing engine-room is already sputtering badly.

“More than 70% of the electricity generated in China is consumed by industry and according to reports, monthly national power output in October fell for the first time in a decade.

“Traders in Singapore said it could be a slump that would have a huge negative impact on global commodity demand: ferrous and nonferrous metal-processing industries are among the heaviest consumers of electricity in China and it is their slowdown that is reflected in the drop in power usage.

“In the report circulated to investors yesterday, Mr Fishwick dismissed the idea that the authorities in Beijing would be able to manipulate the economy as effectively as other analysts believe.

“Not all analysts share CLSA’s bleak assessment. Goldman Sachs issued a report on the Chinese economy yesterday that told investors to expect it to stabilise in the second half of 2009, with a potentially strong positive effect on stocks.

“Deng Tishun, Goldman’s China strategist, said that the index of Chinese stocks listed in Hong Kong could rise more than 50% next year.”

Source: Christine Seib, Times Online , November 8, 2008.

US Global Investors: Sharp decline in Chinese power output
“The October decline of China’s electric power generation, widely watched as a proxy for its economic activity, was even worse than during the Asian Financial Crisis. With recent production cutbacks at power-consuming industrial companies besides energy and environmental conservation mandates, electricity usage could remain sluggish in the near term.”

Source: US Global Investors – Weekly Investor Alert , November 14, 2008.

Bryan Crowe (Northern Trust): Hong Kong goes to recessionland
“The latest quarterly data released today officially confirm that Hong Kong is indeed in a technical recession. After a startling Q2 decline of 1.67%, real GDP continued its downward trajectory through Q3 posting a 0.5% contraction from a quarter earlier. Hong Kong became the second Asian economy thus far to officially tip into recession, after Singapore, and will certainly not be the last. The two main culprits have been identified as exports and consumer spending.”

Source: Bryan Crowe, Northern Trust – Daily Global Commentary , November, 14, 2008.

Prison Planet: Gerald Celente predicts revolution, food riots, tax rebellions by 2012
“Trend forecaster, renowned for being accurate in the past, says that America will cease to be a developed nation within four years, crisis will be ‘worse than the great depression’.”

Click here for the full article.

Source: Prison Planet , November 13, 2008.

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