Words from the (investment) wise 1.11.08

Words from the (investment) wise for the week that was (January 5 – 11, 2009)

Global stock markets reversed course during the last three days of the first full trading week of 2009 as investors were confronted by dreadful economic data, escalating layoffs and a bleak earnings outlook.

As investor sentiment soured, the MSCI World Index and the MSCI Emerging Markets Index declined by 2.5% and 1.7% respectively during “turnaround week”.

The US stock markets – leaders among mature markets since the November 20 low – were on the receiving end of the selling orders and recorded relatively large weekly losses of 4.8% for the Dow Jones Industrial Index and 4.4% for the S&P 500 Index. On the other end of the performance scale, Brazil (+11.8%) and Ireland (+11.0%) brought investors cheer. (The Dublin ISEQ Index was the worst bear market performer, losing 76.8% from June 2007 to November 2008.)

Source: Daryl Cagle

Elsewhere, the US Dollar Index (+1.0%) closed up for the week, but off its highs on the back of dismal US labor market data. As governments seek to raise record amounts of debt to stimulate declining economies, the increasing supply of sovereign paper pushed up yields of longer-dated bonds in the US, UK and eurozone. “The long-held assumption that US assets – particularly government bonds – are a safe haven will soon be overturned as investors lose their patience with the world’s biggest economy,” said respected economist Willem Buiter in The Telegraph.

Despite geopolitical problems and the disruption of European gas supplies, West Texas Intermediate Crude closed 11.9% down on the week as the severity of the global recession raised fresh concerns about demand. Platinum (+6.2%) made up lost ground relative to its precious metal cousins, gold (-2.8%) and silver (-1.5%). (Also see my post “Picture du Jour: Gold or platinum?“.)

The release on Tuesday of the minutes of the Federal Open Market Committee’s meeting of December 15 and 16 showed committee members very concerned about the economic outlook. It was decided to move beyond using the Fed funds rate as the key policy tool, expand the central bank’s balance sheet to buy assets to help reduce longer-term interest rates, and make it explicit to keep the Fed funds rate low for an extended period of time, also in an attempt to bring down longer-term rates.

The Fed on Monday started its $500 billion program of buying securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, resulting in a decline in home loan rates.

Meanwhile, President-elect Barack Obama’s incoming administration is planning an economic stimulus package worth more than $800 million, including $300 million of tax cuts. Obama said: “The economy is very sick. Economists from across the political spectrum agree that if we don’t act swiftly and boldly, we could see a much deeper economic downturn …”

Source: Daryl Cagle

The past week saw some progress on the credit front, with the TED spread (down to 1.20% from 4.65% on October 10, 2008), LIBOR-OIS spread (down from 3.64% on October 10 to 1.07%) and GSE mortgage spreads having narrowed markedly since the record highs. More recently, high-yield spreads have also seen a strong improvement, with the Merrill Lynch US High Yield Index declining by 23.7% since its high of December 15 (see chart below).

Although credit spreads still have to narrow considerably before the world’s financial system functions normally again, the recent action has been a step in the right direction.

With many analysts warning that the bubble in Treasuries looks ready to pop, corporate credit seems to beckon. According to a Financial Times survey of 30 leading asset managers and strategists “high-grade corporate bonds are set to outperform other asset classes in 2009”.

The iBoxx Investment Grade Corporate Bond Fund (LQD) and High Yield Corporate Bond Fund (HYG) both rallied over the past week and increased by 2.0% and 3.8% respectively. These Funds have performed excellently since their October/November lows, with LQD up by 26.7% and HYG by 26.2% from November.

Next, a quick textual analysis of the dozens of articles I have read during the past week. Interestingly, many reports were concerned with “bonds” and “yields”.

Turning to the outlook for the stock market, Bennet Sedacca (Atlantic Advisors Asset Management) warned as follows in a guest post entitled “Setting the bull trap“: “The Fed has declared a war on savers, a war on prudence and provided the ultimate Moral Hazard Card – and with our money no less. They are also setting up the ULTIMATE BULL TRAP – a trap so large that when it is sprung, perhaps as early as the end of the first quarter/beginning of second quarter, there will only be sellers left.”

“It is difficult to see how equities can sustain an advance until the monetary transmission mechanism begins to function more normally,” added BCA Research. “In addition, the poor earnings outlook will be a persistent headwind for stocks throughout 2009 and analysts are likely to be disappointed in their overly optimistic profit forecasts: earnings could fall by as much as 25 to 30% as revenue growth slows and margins contract.”

Arguing the bullish case from Hong Kong, Puru Saxena‘s MoneyMatters newsletter listed the following reasons to support his viewpoint that “the skies are clearing for a four- to five-year bull market”: surging liquidity, low interest rates, declining corporate bond yields, declining TED spread, low valuations, volatility has peaked, the US dollar rally has ended, global stock markets are making higher lows, and a huge amount of cash on the sidelines.

The short-term technical picture is tricky, with the Dow having pulled back below the 50-day moving average and the S&P 500 (shown in the graph below) testing both the 50-day line and the short-term trendline defining the bottom of a rising wedge (usually a negative chart pattern). The December 22 and 29 lows of 857 are also important initial levels for the uptrend to remain intact.

Commenting on the chart, Richard Russell (Dow Theory Letters) said: “My guess (and I do have to guess) is that the market will be doing work inside the bottom pattern. This is only natural since it takes a good deal of ‘work’ for stocks to break out of a bottom in the face of the ongoing abysmal news. It looks like we are going to have some bobbing and weaving inside the base that has formed. A breakout either way may be a matter of months away.”

An old stock market saw tells us the first five trading days of January sets the course for January, and if the month of January is higher, there is a good chance the year will end higher, i.e. the so-called “January Barometer”. So far so good, as the S&P 500 registered a gain of 0.7% over the first five days (although the Dow was down by 0.4%).

Jeffrey Hirsch (Stock Trader’s Almanac) said: “The return of seasonal bullish market action is encouraging. Since the week of Thanksgiving the market has been constructive. Thanksgiving week was bullish, as was the last half of December, the Santa Claus Rally and now the First Five Days. The final arbiter of these year-end/new-year indicators is of course the January Barometer at month-end.”

While a sustained stock market advance will rely on the thawing of credit markets, I am of the opinion that selective buying in global markets is in order. However, make sure to winnow the wheat from the chaff. The current default rate on American high-yield bonds is less than 4%, but Barclays Capital is predicting a rate of 14.3% by the second half of 2009. “If 2008 was the year of systemic risk [i.e. risk affecting all assets], 2009 seems likely to be a year dominated by specific risk [i.e. risk that is unique to each asset],” said The Economist.

For more discussion about the direction of stock markets, also see my post “Video-o-rama: Figuring out the lie of the financial land“.

Economy
“Global business confidence began 2009 as dark as it has ever been. While sentiment has improved a bit during the last two weeks, it remains near record lows,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Businesses are nearly equally pessimistic across the globe and across all industries. Hiring intentions have turned particularly negative in recent weeks. Pricing power has collapsed, suggesting that deflation is a significant threat.”
The eurozone economy contracted by 0.2% in the third quarter of 2008, according to Eurostat. Following a similar decline in GDP in the previous quarter, the monetary union has officially entered a recession.

The latest industrial production data for the UK, Germany and France continued a downward spiral. It therefore did not come as a surprise that the Bank of England (BoE) on Thursday lowered its repo rate by 50 basis points to 1.5% – the lowest level since the inception of the BoE in 1694. The European Central Bank (ECB) is also expected to lower interest next Thursday as a result of gloomy economic reports and the eurozone inflation rate last month falling below the ECB’s target.

Nouriel Roubini (RGE Monitor) said: “Manufacturing surveys reflect simultaneous contraction in manufacturing throughout the G7 and in key emerging markets like China, Brazil and Russia, verifying the global recession that is well on course. PMI and industrial production is at decade lows in key emerging markets, and the US and EU PMI surveys reflect the weakest levels in several decades.” The JPMorgan Global Manufacturing PMI, posting its weakest reading ever in December, bears this out.

As far as the US is concerned, 2008 ended on a depressing note for the US labor market. Payroll employment declined by 524,000 jobs in December, slightly more than expected and the largest one-month decline since December, 1974. Payrolls shrank by 2.6 million jobs over the course of 2008, recording the largest annual decline since 1945. The unemployment rate rose to 7.2% – the highest level since the early 1990s.

“The Bureau of Labor Statistics employed seasonal adjusting chicanery to mitigate job losses. Not seasonally adjusted (NSA), 954,000 jobs were lost. Additionally, the BLS’s hokey Net Business Birth/Death Model unfathomably created 72,000 jobs in December,” commented Bill King (The King Report).

Asha Bangalore (Northern Trust) summarized the US economic situation as follows: “The Fed is expected to stay on hold for all of 2009 in terms of implementing monetary policy changes via adjustments of the target Fed funds rate, but other non-interest avenues to support/ease financial market conditions remain open. The details of the employment report are grim and provide ample evidence for proponents of a large fiscal stimulus package to revive economic activity.”

Week’s economic reports

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Jan 5	10:00 AM	Construction Spending	Nov	-0.6%	-1.3%	-1.4%	-0.4%
Jan 5	2:00 PM	Auto Sales	Dec	–	3.1M	NA	3.3M
Jan 5	2:00 PM	Truck Sales	Dec	–	4.1M	NA	4.3M
Jan 6	10:00 AM	Factory Orders	Nov	-4.6%	-2.0%	-2.3%	-6.0.%
Jan 6	10:00 AM	ISM Services	Dec	40.6	37.0	36.5	37.3
Jan 6	10:00 AM	ISM Services	12/08	–	NA	–	37.3
Jan 7	10:30 AM	Crude Inventories	01/02	6682K	NA	NA	549K
Jan 7	10:35 AM	Crude Inventories	01/02	–	NA	NA	NA
Jan 8	8:30 AM	Initial Claims	01/03	467K	540K	545K	491K
Jan 8	2:00 PM	Consumer Credit	Nov	-$7.9B	$2.0B	$0.0B	-$2.8B
Jan 9	8:30 AM	Average Workweek	Dec	33.3	33.5	33.5	33.5
Jan 9	8:30 AM	Hourly Earnings	Dec	0.3%	0.2%	0.2%	0.4%
Jan 9	8:30 AM	Non-farm Payrolls	Dec	-524K	-520K	-525K	-584K
Jan 9	8:30 AM	Unemployment Rate	Dec	7.2%	7.0%	7.0%	6.8%
Jan 9	10:00 AM	Wholesale Inventories	Nov	-0.6%	-0.7%	-0.7%	-1.2%

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

Source: Yahoo Finance, January 9, 2009.

In addition to a speech by Fed Chairman Bernanke at the London School of Economics (Tuesday, January 13) and the European Central Bank’s interest rate announcement (Thursday, January 15), the US economic highlights for the week, courtesy of Northern Trust, include the following:

1. International Trade (January 13): The trade deficit is predicted to have narrowed in November ($54.5 billion versus a trade gap of $57.2 billion in October), largely reflecting lower prices of imported oil. Consensus: $51.5 billion.

2. Retail Sales (January 14): Auto sales moved up slightly in December (10.7 million versus 10.3 million in November). But lackluster non-auto retail sales and lower gasoline prices should bring down the headline reading. Consensus: -1.2% versus 0.3% in January; non-auto retail sales: 0.2% versus 0.3% in January.

3. Producer Price Index (January 15): The Producer Price Index for Finished Goods is expected to have declined by 1.7% in December, reflecting lower energy prices. The core PPI is most likely to have risen by 0.1% after a 0.2% increase in November. Consensus: -2.0%, core PPI +0.1%.

4. Consumer Price Index (January 16): A drop in the overall CPI, due to lower energy prices, is nearly certain. The core CPI is expected to have increased by 0.1% after holding steady in November. Consensus: -0.9%, core CPI +0.1%.

5. Industrial production (January 16): The 2.4% drop in the manufacturing man-hours index in December is indicative of a large decline in industrial production (-1.3%). The operating rate is projected to have dropped to 74.5 in December. Consensus: -1.2%; Capacity Utilization: 74.5 versus 75.4 in November.

6. Other reports: Inventories, Import prices (January 14), Consumer Sentiment Index (January 16).

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, January 9, 2009.

And now for a few news items and some words from the investment wise that should be of help in keeping our investment portfolios on a winning path. As the Irish say: “Go n-éirí an bóthar leat. May the road rise with you.”

That’s the way it looks from Cape Town.

CNN Money: The wealthy self-destruct
“Millionaires and billionaires are turning to suicide in the wake of the financial crisis.”

Source: CNN Money, January 9, 2009.

CNBC: Marc Faber – markets to rally, but retest lows

Click here for article.

Source: CNBC, January 9, 2009.

Mish’s Global Economic Trend Analysis: Themes for 2009
“Looking ahead in 2009 here are some things I see as likely.
“Obama will pass a stimulus package of $850+ billion but $300 billion will be ‘tax relief’ amounting to $19 a week per household at most. $19 a week is not going to stimulate much of anything but it will add to the budget deficit. People will use that money to pay down bills, which is exactly what they should be doing with it.

“The first 3-5 months are going to be extremely weak on the jobs front with 400,000 or more jobs lost each month. Obama is going to need to create 2-3 million jobs just to counteract job losses in first half of the year. There is no way he is going to create jobs that fast given implosions in state budgets and retailers.

“In 2009 consumers will continue to retrench, housing will continue to decline, and as many as 100 small or regional banks will implode over falling commercial real estate prices. The Fed may arrange shotgun marriages with these banks instead of letting them go under.

“I am sticking with a thesis that says we are currently in a sucker rally in the stock market that will end soon after inauguration or moments after Obama signs a new stimulus package. My target is 600 on the S&P but 450 is not out of the question. However, it is better to think of this in ranges and that range would roughly be 450-700.

“It is quite possible the lows in treasury yields are in. Unlike 2008 where I was constantly beating the drums for lower yields, 2009 could be different. Here are the facts: 3 month and 6 month yields hit 0% and the 10 year came close to hitting 2%. Could there be lower yields still? Yes, quite easily. Is it worth playing for other than as a hedge or part of an overall investment strategy? No.

“Should treasuries be shorted? No, it is too early. Yields can easily make lower lows. Just because something is not a good long, does not make it a good short. Look at how long yields stayed low in Japan. I doubt we see a print of 4 on the 10-year treasury for a long time. If one wants to bet on yields rising for a reflation trade, there are better plays such as going long energy stocks that yield a nice dividend as well.”

Click here for the full article.

Source: Mike “Mish” Shedlock, Mish’s Global Economic Trend Analysis, January 6, 2009.

CNBC: President-elect Obama on the economy

Source: CNBC, January 8, 2009.

BBC News: Obama says US economy “very sick”
“US President-elect Barack Obama has described America’s economy as ‘very sick’ and has said that the situation was worsening. Earlier, he met politicians in Washington to discuss ways to boost the economy and create new jobs.
“US media reports say he is planning a stimulus package worth more than $800 billion, including $300 billion of tax cuts.

“Mr Obama has said he wants a plan that will create 3 million jobs by 2011.

“The president-elect hopes to be able to enact the package shortly after his inauguration on 20 January.

“‘The economy is very sick,’ he said. ‘We have to act and act now to break the momentum of this recession. We’ve got an extraordinary economic challenge ahead of us, we’re expecting a sobering job report at the end of the week.’

“‘Economists from across the political spectrum agree that if we don’t act swiftly and boldly, we could see a much deeper economic downturn that could lead to double-digit unemployment and the American dream slipping further and further out of reach,’ Mr Obama said.”

Source: BBC News, January 06, 2009.

CNBC: Barney Frank on TARP
“Rep. Barney Frank comments on the revisions to the TARP.”

Source: CNBC, January 9, 2009.

Fox Business: Outraged! – Peter Schiff on the economy

Source: Fox Business, January 7, 2009.

Financial Times: New York Fed starts $500 billion home loans aid
“The Federal Reserve Bank of New York on Monday said it had started its $500 billion plan to drive down US mortgage rates by buying securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, the government-run mortgage financiers.
“Mortgage bond yields fell sharply as a result, extending a dramatic decline that followed the New York Fed’s announcement of the programme on November 25. Thirty-year agency mortgage securities yielded 190 basis points over Treasuries on Monday, compared with 208bp on Friday.

“The Fed did not disclose the amount of its purchases on Monday, but said it would provide weekly updates on its buying programme from Thursday.

“Last week, the New York Fed pushed forward with its plan by setting a goal of buying $500 billion in mortgage-backed securities by mid-2009, part of a sustained effort to help the US weather the financial crisis.

“A reduction in financing costs for the mortgage agencies translates into lower rates for US home loans. Average interest rates on 30-year fixed-rate mortgages have fallen from 6% to about 5.3% since the program was announced in November, according to Bankrate.com.”

Source: Saskia Scholtes, Financial Times, January 5, 2009.

The Seattle Times: Steel industry hopes for big stimulus shot
“The steel industry, having entered the recession in the best of health, is emerging as a leading indicator of what lies ahead. As steel production goes, and it is now in collapse, so will go the national economy.
“That maxim once applied to the Big Three car companies. Now they are losing ground in good times and bad, and steel has replaced autos as the industry to watch for an early sign that a severe recession is beginning to lift.

“The industry itself is turning to government for orders that, until the collapse, came from manufacturers and builders.

“Its executives are waiting anxiously for details of President-elect Obama’s stimulus plan and adding their voices to pleas for a huge public investment program – up to $1 trillion over two years – that will lift demand for steel to build highways, bridges, power grids, schools, hospitals, water-treatment plants and rapid transit.

“New spending should provide an immediate jolt to the steel business, which has already gone through the painful makeover now demanded of the Big Three.”

Source: Louis Uchitelle, The Seattle Times, January 2, 2009.

Financial Times: US deficit set for postwar record
“The US budget deficit will hit nearly $1,200 billion this fiscal year even without the cost of Barack Obama’s planned fiscal stimulus, Congress’s budget watchdog warned on Wednesday.
“The warning came as the president-elect said that the stimulus would be ‘on the high end of our estimates’ – implying close to $775 billion over two years – but ‘will not be as high as some economists have recommended, because of the constraints and concerns we have about the existing deficit’.

“The estimate, published by the Congressional Budget Office, threw into stark relief the dilemma facing the president-elect, highlighting the urgent need for stimulus and the fraught state of public finances.

“The CBO said that the budget deficit for the fiscal year 2009 would ‘shatter the previous post-World War Two record’ relative to the size of the US economy. Without a stimulus, it said that the deficit would reach 8.3% of gross domestic product. Its numbers imply that the proposed stimulus could push the US fiscal deficit close to or over 10% of GDP.”

Source: Krishna Guha, Edward Luce and Andrew Ward, Financial Times, January 7, 2009.

Financial Times: Auto sales hit fresh lows in December
“Motor vehicle sales plumbed fresh lows around the world last month, adding to pressure on carmakers, their suppliers and dealers.
“General Motors, Toyota, Ford and Honda all reported declines of more than 30% in the US, the biggest market, compared with December 2007. Total fourth-quarter sales were the lowest since 1981.

“Car sales in Japan, including buses, dropped 22% to the lowest December level on record, according to the Japan Automobile Dealers Association.

“In Europe, registrations in Spain plunged by almost half, in France by 24% and Italy 13.2%.

“The slump in the US and Europe reflected flagging consumer confidence and tight credit.”

Source: Bernard Simon, Financial Times, January 5, 2009.

Bloomberg: Nouriel Roubini – worst is still ahead of US
“The global financial system in 2008 experienced its worst crisis since the Great Depression of the 1930s. Major financial institutions went bust. Others were bought up on the cheap or survived only after major bailouts. Global stock markets fell by more than 50% from their 2007 peaks. Interest-rate spreads spiked. A severe liquidity and credit crunch appeared. Many emerging-market economies on the verge of a crisis had to ask for help from the International Monetary Fund.
“So what lies ahead in 2009? Is the worst behind us or ahead of us?

“Unfortunately, the worst is ahead of us. The entire global economy will contract in a severe and protracted U-shaped global recession that started a year ago. The US will certainly experience its worst recession in decades, a deep and protracted contraction lasting at least through the end of 2009. Even in 2010 the economic recovery may be so weak – 1% growth or so – that it will feel terrible even if the recession is technically over.

“There also will be recessions in the euro zone, the UK, continental Europe, Canada, Japan and the other advanced economies.

“A hard landing for emerging-market economies may also be at hand. Among the so-called BRICs, Russia will be in an outright recession in 2009. Growth in China will slow to 5% or less, representing a hard landing for a country that needs expansion of close to 10% to move 10 million to 15 million poor rural farmers into the urban industrial sector every year. Brazil will barely grow in 2009. Even India will experience a sharp slowdown.”

Click here for the full article.

Source: Nouriel Roubini, Bloomberg, January 1, 2009.

E.S. Browning (The Wall Street Journal): Rebound Wrinkle – recession
“Since the Great Depression, only two recessions have run longer than this one, the first ending in 1975 and the other in 1982. Each lasted 16 months, according to the National Bureau of Economic Research, the government-designated recession tracker.
“The current recession, beginning in December 2007, has run 13 months and could easily surpass those two. If it goes past March, as many economists expect, it will become the longest-running since the 43-month beast that ended in 1933.”

Source: E.S. Browning, The Wall Street Journal, January 5, 2009.

BCA Research: FOMC Minutes – Fed’s balance sheet to balloon further
“The Minutes from the mid-December FOMC meeting confirmed that policymakers are very concerned about the possibility of a prolonged economic slump and a sustained bout of deflation.
“With the fed funds rate virtually zero, the Minutes highlighted that the policy focus would shift to unconventional tools. The first such tool is communication strategy. This includes signalling that the policy rate would stay ‘exceptionally low for some time’, in order to keep longer-term borrowing rates low.

“The Fed also would reinforce its commitment to keep inflation from falling below ‘desired levels’ on a sustained basis, in order to avoid an unwelcome rise in real rates of interest if expectations for deflation mushroom (as occurred in Japan).

“The second major unconventional tool is quantitative easing, in which the Fed’s balance sheet and excess bank reserves would grow as needed while purchasing large amounts of assets (including Agencies and Agency-backed MBS).

“Although not mentioned in the Minutes, the Fed’s next move could be to purchase high-quality corporate bonds if yields on these instruments do not fall in the near term. Bottom line: Investors should expect falling private sector bond yields and a long period of zero short-term rates.”

Source: BCA Research, January 8, 2009.

Trader Dan (JS Mineset): Fed monetizing US agency debt
“The reason they [the Fed] are being forced into buying the debt is because no one else wants it. We have been charting this for some time by monitoring the Custodial data from the US Federal Reserve system.
“… chart … see how foreign central banks are dumping Fannie and Freddie debt in large amounts onto the market. Without the Fed monetizing that debt, there would be a significant drop off in the amount of funds for mortgages.

“The Fed is going to need every bit of that $500 billion they are going to create out of thin air to acquire what the foreign central banks are unloading.”

Source: Trader Dan, JS Mineset, January 5, 2009.

Asha Bangalore (Northern Trust): December employment report – further deterioration of labor conditions
• Civilian Unemployment Rate: 7.2% in December versus 6.8% in November, cycle low is 4.4% in March 2007.
• Payroll Employment: -524,000 in December versus -584,000 in November, net loss of 154,000 jobs after revisions of payroll estimates for October and November.

• Hourly earnings: +5 cents to $18.36, 3.7% yoy change versus 3.8% yoy change in November; cycle high is 4.28% yoy change in December 2006.

The Fed is expected to stay on hold for all of 2009 in terms of implementing monetary policy changes via adjustments of the target federal funds rate but other non-interest avenues to support/ease financial market conditions remain open. The details of the employment report are grim and provide ample evidence for proponents of a large fiscal stimulus package to revive economic activity.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 9, 2009.

Paul Kedrosky (Infectious Greed): There’s unemployment, and then there’s unemployment
“I have been sent this Reuters story from yesterday umpteen times, so I may as well post it, as well as the underlying graph. The gist: If unemployment were being measured the same way as it was during the Depression, the US would be well on its way to similar numbers.
Check the SGS line in the following graph from John Williams’ ShadowStats:

Eye-opening, is it not?

A few quick comments:

• Unemployment by SGS’s measure is at almost 18%, but it’s also not been under 10% in recent history.

• The whole idea of employment/unemployment has changed a great deal over time, with, for example, there being more part-time and flex work etc., messing with figures.

• The existence of a social safety net has, for better or worse, made it possible for people to withdraw permanently from the workforce without having to live on the streets.

• There is no denying that there are far more able-bodied people out of work than the skewed-low US BLS figures purport to show.”

Source: Paul Kedrosky, Infectious Greed, January 9, 2009.

Bloomberg: Pimco’s McCulley says US economy in “nasty recession”
“Paul McCulley, managing director at Pimco, talks with Bloomberg’s Kathleen Hays about the outlook for the US economy in 2010. McCulley says the Fed is using the right policy response to the current crisis and that he has ‘very small’ concerns about inflation.”

Source: Bloomberg, January 9, 2009.

Comstock Partners: The cycle of deflation

Source: Comstock Partners, January 2009.

Asha Bangalore (Northern Trust): Further declines in pending Home Sale Index
“The Pending Home Sales Index (PHSI) of the National Association of Realtors dropped 4.0% to 82.3 in November after a 4.2% drop in the prior month. Although mortgage rates have dropped in recent months, the positive impact on the housing market in terms of an increase in sales is yet to be seen.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 6, 2009.

Asha Bangalore (Northern Trust): Non-manufacturing ISM Survey close to record low
“The Non-manufacturing ISM composite index increased to 40.6 in December from 37.3 in November. But the level is significantly below the expansion cut off mark of 50.0, implying that the non-manufacturing sector continues to lose momentum.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 6, 2009.

Bloomberg: US retail sales fell 0.8% in week after Christmas
“Purchases at US retailers declined last week as post-Christmas markdowns failed to overcome what may have been the worst holiday shopping season in four decades.
Sales at stores open at least a year dropped 0.8% in the seven days through January 3, the International Council of Shopping Centers and Goldman Sachs Group said today [Tuesday] in a statement. ICSC Chief Economist Michael Niemira said November-December sales declined as much as 2%.

‘December was relatively chaotic in price, with more discounts than retailers planned, especially in department stores,’ Richard Hastings, a consumer strategist at Global Hunter Securities, said in a telephone interview. ‘Consumers have discovered that the industry is responding with lower and lower and lower prices.'”

Source: Heather Burke, Bloomberg, January 6, 2009.

Bloomberg: US shopping mall vacancies reach 10-year high
“Vacancies at US malls and shopping centers approached 10-year highs in the fourth quarter, and are set to rise further as declining retail sales put more stores out of business, research firm Reis Inc. said.
Regional mall vacancies rose to 7.1% last quarter from 6.6% in the third quarter. It was the highest vacancy rate since Reis began tracking regional malls in 2000, as well as the largest quarter-to-quarter jump in vacancies, according to New York-based Reis.

More than a dozen retailers, including Circuit City, Linens ‘n Things and Sharper Image, filed for bankruptcy protection in 2008 as the credit squeeze and recession drained sales. Vacancies will rise further until the job market recovers, housing prices stabilize and lending resumes, restoring consumer confidence, said Reis.”

Source: Hui-yong Yu, Bloomberg, January 7, 2009.

Bespoke: “Official” 2009 strategist S&P 500 price targets
“Below we list the 2009 S&P 500 strategist price targets in the final Bloomberg survey of 2008 (on 29 December). The average 2009 year-end S&P 500 estimate of the 11 sell-side strategists that participated is 1,056, or 16.9% above the S&P’s year-end price of 903.25.
UBS strategist David Bianco is the most bullish of the group with a year-end target of 1,300 (a 43.9% gain). Deutsche Bank’s Binky Chadha is the second most bullish with a target of 1,140, followed by Goldman, Strategas, and JP Morgan, who are all looking for a gain of 21.8%. Only one strategist, Barclays’ Barry Knapp, believes the S&P 500 will fall in 2009, but only by 3.2%.

The consensus estimate for year-end 2008 was 1,632 at the start of last year, which translated into an expected gain of 11.12%. Let’s hope the strategists are a little closer to the mark this year.”

Source: Bespoke, January 6, 2009.

Bespoke: Crazy gains since November 20 low
“While no one is calling it that, we are technically in a new cyclical bull market and have been since December 8. Since the 11/20 lows, the S&P 500 is up 24%, which meets the standard bull market definition of a 20% rally that was preceded by at least a 20% decline. But the unwillingness for the majority to call it a bull market is what bulls should be thankful for, since the market typically climbs a wall of worry where investors are full of doubt throughout the rally.
Regardless of what you call it, some of the performance numbers since the 11/20 lows are downright crazy. Even though the S&P 500 is up 24% since 11/20, the average stock in the index is up 41.25%. This means the smaller cap names in the index are up much more than their larger cap brethren. And the stocks that were down the most during the 10/9/07 to 11/20/08 bear are up much more than the ones that were down the least. As shown below, the average performance since 11/20 of the 50 stocks that were down the most during the bear market is 112%! The 50 best-performing stocks during the bear market are only up an average of 8.3%.

And while 20 stocks in the S&P 500 are down since November 20, 29 of them are up more than 100%!”

Source: Bespoke, January 6, 2009.

Bespoke: Investor sentiment shows improvement
“When gauging investor sentiment, the two most popular surveys that track bullish sentiment are the polls conducted by Investors Intelligence of newsletter writers and the American Association of Individual Investors (AAII) survey of its members. As shown below, both measures have shown improvement in recent weeks and have broken their downtrends of the last several months. Given that investor sentiment is typically a contrarian indicator, high readings of bullishness are generally considered negative for the market. However, with current bullish sentiment readings below 50%, these are hardly levels that can be considered extreme.”

Source: Bespoke, January 8, 2009.

Investment Week: Mobius reduces cash holdings
“Franklin Templeton’s Mark Mobius has reduced his cash positions over the past couple of months, saying he is positive on the prospects for the global economy.
Manager of the Emerging Markets Investment Trust, Mobius says he is ‘quite bullish on the future despite all the negative news’ and predicts the beginning of a recovery in the second quarter of this year.

‘Valuations look good and with interest rates at one or below and stocks yielding up to 20% on dividends this looks very tempting for investors,’ he says.

Mobius claims that while he is actively investing, others are not: ‘I don’t think this is the consensus – people have the feeling we are nearing the bottom but they are not putting their money there. Bull markets are built on a bull market, not a bear market. However we are being proactive.’

Having ramped up his cash allocations going into the big fall, Mobius started reinvesting in November. He favours energy and emerging market consumer stocks – including banks which weren’t hit by the debt crisis – and maintains oil and commodities valuations are still strong.”

Source: Beth Brearley, Investment Week, January 6, 2009.

BCA Research: A challenging equity outlook
“Equity markets could have a healthy January effect this year after the fallout in 2008. However, the macro backdrop remains risky.
Last year’s violent selloff left global equity prices down nearly 50% from their cyclical highs, making this the second deepest bear market in the past 40 years. In other words, a lot of bad news has been discounted as sentiment became crushed and investors rushed for safety. It now appears that selling pressures may finally be abating: equity prices have edged higher in recent trading days on the back of tentative improvements in the credit markets and an easing in implied option volatilities from sky-high readings.

Upside momentum could persist in the weeks ahead as investors and money managers reposition their portfolios and redeploy some of the cash piled on the sidelines. That said, it is difficult to see how equities can sustain an advance until the monetary transmission mechanism begins to function more normally. In addition, the poor earnings outlook will be a persistent headwind for stocks throughout 2009 and analysts are likely to be disappointed in their overly optimistic profit forecasts: earnings could fall by as much as 25% to 30% as revenue growth slows and margins contract.

Bottom line: Equities seem poised to edge higher from oversold levels but a sustained advance will rely on the stabilization of credit markets.”

Source: BCA Research, January 5, 2009.

Bloomberg: Saut says “decent chance” equity markets have bottomed
“Jeffrey Saut, chief investment strategist at Raymond James Financial, talks with Bloomberg’s Carol Massar about his investment strategy in the stock market. Saut also discusses the outlook for the US economy and the impact of rising credit costs on corporate margins.”

Source: Bloomberg, January 7, 2009.

The New York Times: China losing taste for US debt
“China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.
In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries.

But now Beijing is seeking to pay for its own $600 billion stimulus – just as tax revenue is falling sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and medium-size enterprises, many of which are struggling with lower exports, and to local governments to build new roads and other projects.

‘All the key drivers of China’s Treasury purchases are disappearing – there’s a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates,’ said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland.”

Source: Keith Bradsher, The New York Times, January 7, 2009.

Barron’s: Stay away from Treasury bonds
“The bubble in Treasuries looks ready to pop, sending prices on government debt sharply lower. But just about every other corner of the bond market beckons.”

Click here for the article.

Source: Barron’s, January 3, 2009.

John Authers (Financial Times): A bond bubble?

Source: John Authers, Financial Times, January 6, 2009.

Bloomberg: Treasury bond market not a bubble, Goldman Sachs says
“Goldman Sachs Group said the US Treasury market hasn’t turned into an asset bubble even as investors debate the wisdom of buying government bonds with yields near record lows.
The US economy is likely to expand below its potential for the next six to eight quarters, resulting in lower ‘core’ inflation, according to a report released today by the New York- based firm. Inflation erodes the fixed payments of bonds.

‘By mapping one-year ahead macro expectations to long-dated government yields through our Sudoku framework we find that global bonds are, in the aggregate, currently trading close to the model’s measure of fair value,’ Francesco Garzarelli, chief interest-rate strategist at Goldman Sachs in London, wrote in a research note.

As the year progresses and investors’ focus shifts to the prospects for recovery into 2010, yields will likely drift higher, though in line with Goldman Sachs’ forecasts, Gazarelli wrote. Treasury 10-year note yields will likely trade at 3% to 3.25% by year-end, he said. During the current quarter, yields will trade in a 2.50% to 2.75% range, Goldman Sachs’ predicts.”

Source: Liz Capo McCormick, Bloomberg, January 8, 2009.

Financial Times: German bond sale’s fate signals trouble ahead
“A German sovereign bond auction failed on Wednesday as investors shunned one of the most liquid and safe assets in the world in a warning for governments seeking to raise record amounts of debt to stimulate slowing economies.
The fate of the first eurozone bond auction of 2009 signals trouble ahead as governments around the world hope to issue an estimated $3,000 billion in debt this year, three times more than in 2008.

The 10-year bonds failed to attract enough bids to reach the €6 billion the German government wanted. Bids of €5.24 billion, a cover of only 87%, amounted to the second worst auction on record in terms of demand.

Analysts said the vast amount of supply is deterring investors and a growing number of countries, including those with deep and mature bond markets, such as Germany, the UK and Italy, are struggling to attract buyers.”

Source: David Oakley, Financial Times, January 7, 2009.

Financial Times: Asset managers turn to corporate bonds
“High-grade corporate bonds are set to outperform other asset classes in 2009, fund managers and market strategists surveyed by the Financial Times have forecast.
More than half those surveyed said high-quality corporate credit was trading at cheap levels and that this was the asset class most likely to see a rally in 2009.

In contrast, government bonds were the least-favoured asset class, with many of the 30 leading asset managers and strategists surveyed arguing that yields had plummeted too far in 2008, prompting talk of a possible price bubble.

A majority of those polled said high-quality corporate bonds had been oversold after investors had abandoned corporate credit of all grades over the past year in favour of the safest and most liquid assets, such as government bonds and gold.

Tim Bond, global head of asset allocation at Barclays Capital, said: ‘I like credit as an asset class the best. Investment-grade corporate bond spreads are at levels last seen in 1932, which happened to be an excellent point to buy credit – even though it was the middle of the Great Depression.’

John Paul Smith at Pictet Asset Management said corporate credit offered the best potential returns while the severe global recession continued. ‘While we don’t anticipate any immediate improvement in the economic outlook, with corporate credit yields currently at unprecedented levels, investors are being paid to wait.’

Credit market prices are consistent with an unprecedented risk of default, even for the highest quality corporate bonds.

US investment-grade corporate bond prices, for example, imply a cumulative default rate of 36% over five years, assuming a typical recovery of 40 cents in the dollar, according to analysts at Morgan Stanley. This is more than 7.5 times higher than the worst default rate in any previous five-year period.”

Source: Esther Bintliff, Financial Times, January 5, 2009.

Bespoke: High yield spreads narrow for 13th straight day
“High yield bond spreads (based on Merrill Lynch indices) narrowed for the 13th straight trading day on Monday. This marks the longest streak of declines since April 2003, and the second longest streak since the series began in 1997.
At a current level of 1,744 basis points above Treasuries, high yield spreads are now down 20% from their peak level from December 15 (2,182 basis points) and back to levels we saw before the election and the run on Citibank.

Make no mistake that at current levels high yield spreads are still extremely high, but given the widespread view that the market cannot stage a meaningful rally until spreads begin to narrow, the current move is a step in the right direction.”

Source: Bespoke, January 6, 2009.

Edmund Conway (The Telegraph): Willem Buiter warns of massive dollar collapse
“The long-held assumption that US assets – particularly government bonds – are a safe haven will soon be overturned as investors lose their patience with the world’s biggest economy, according to Willem Buiter.
Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.

The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency’s prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama’s mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.

Writing on his blog, Prof Buiter said: ‘There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place.'”

Source: Edmund Conway, The Telegraph, January 06, 2009.

FT Alphaville: Beware, commodity index rebalancing ahead
“The major commodity indices rebalance their respective asset weightings once a year (or occasionally more) – and with that comes a mass dose of buying and selling. The 2009 rebalancing is expected to start sometime this week.
Luckily, JP Morgan has produced its best guess of how the 2009 reweightings of the DJ AIGCI and the S&P GSCI indices will impact the market.

The weightings for both indices are released ahead of time, but begin to kick in the first few working days of the new year. In the case of the DJ-AIGCI – which JP Morgan estimates has $25 billion in funds tracking it – the new weightings come into force during the roll period that begins January 9. The S&P GSCI index weightings kick-in after its January roll which commences January 8. JP Morgan estimates about $50 billion of investment into that index.

JP Morgan see the most significant change coming in the DJ-AIGCI rebalance. Here the market weight of crude oil is expected to increase from 9.6% to 13.8%, gold from 10.8% to 7.9%, copper (COMEX) from 4.5% to 7.3%, live cattle from 6.4% to 4.3% and sugar from 4.7% to 3.0%. Meanwhile, S&P GSCI crude oil weight will go from 32% to 33.8%”.

Source: Izabella Kaminska, FT Alphaville, January 5, 2009.

Ambrose Evans-Pritchard (Telegraph): Merrill Lynch says rich turning to gold bars for safety
“Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or ‘paper’ proxies.
Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. ‘People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs,’ he said, referring to exchange trade funds listed in London, New York, and other bourses.

‘They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of Krugerrands,’ he said.

Merrill predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June.”

Source: Ambrose Evans-Pritchard, Telegraph, January 9, 2009.

Reuters: Pickens – oil prices to top $100 by end of 2010
“Texas billionaire T. Boone Pickens said on Tuesday that oil prices will rise above $100 a barrel by the end of 2010 as the global economy recovers.
Oil prices in the $40 a barrel range are ‘not going to be around much longer,’ Pickens told a gathering at Rice University in Houston.

Oil prices have tumbled from over $147 a barrel in July to about $48 a barrel on Tuesday as demand in the United States and other developed countries slows due to the global economic crisis.

By late 2010, Pickens sees a rebound in oil demand sparked by a global recovery, pushing prices higher. If the US continues to rely on imported oil for 70% or more of its supply, prices could reach $200 to $300 per barrel in another decade, Pickens said.

As an investor, Pickens said he remains ‘on the sidelines’, with just 10% of his BP Capital hedge fund invested in energy. The fund lost $2 billion last year before shifting to cash as energy prices and stocks declined.”

Source: Reuters, January 6, 2009.

Bespoke: New bull market for oil
“Based on the standard bull/bear market move of 20%, oil is already well into a new bull market with its move of 44.7% since its closing low of $33.87 on December 19. Since 2000, the average oil bull market has seen the commodity rise 89%, while the average bear has seen oil decline by 39%.
The 88-day decline in oil from 9/22 to 12/19 of 72% was by far the steepest drop the commodity has ever seen without a 20% rally. The last four bull and bear markets in oil have all come within 6 months, highlighting the extreme volatility in the commodities market.

As shown in the bottom chart, the number of days that the last four market cycles have lasted has been much lower than normal. It’s likely that we’ll continue to see these big swings in short periods of time until the financial markets cool down.”

Source: Bespoke, January 6, 2009.

CEP News: Euro zone services PMI falls to series low in December
“Following the release of Italian purchasing managers index figures, along with final estimates on both the French and German services PMIs, Markit Economics reported that the services sector in the euro zone continued to deteriorate as the services PMI fell to a series low in December with a revision to 42.1 from the original estimate of 42.0.
December’s reading is much lower than November’s 42.5 print.

‘The final euro zone PMI indicates a 0.6% fall in GDP in the fourth quarter. Although some encouraging – but only tentative – signs of a bottoming-out were evident in Spain and Italy, the downturn gathered momentum in Germany and France,’ said Markit Economics chief economist Chris Williamson.”

Source: CEP News, January 6, 2009.

Financial Times: Alistair Darling on the economy
“UK chancellor Alistair Darling talks to Chris Giles about the outook for the UK economy and what can be done by global governments.”

Source: Financial Times, January 6, 2009.

Victoria Marklew (Northern Trust): UK – record low repo rate
“As widely expected, the Bank of England (BoE) cut its repo rate another 50bps today [Thursday], taking it to a record low 1.50%. In its rather terse statement, the bank noted that output is likely to keep falling sharply in the first half of this year, but also cited a ‘substantial’ decline in the pound as helping to offset the impact of a slower global economy. There was no obvious commitment to cut again at the February 5 Monetary Policy Committee (MPC) meeting, which probably explains the small bounce in sterling this morning.

Today’s policy statement from the BoE said that ‘further measures’ are needed to increase lending to business and consumers, but it did not specify what, and nor did it include any comment on quantitative easing. Boosting money supply would require the approval of the government but Chancellor Darling has dismissed the idea, telling reporters that ‘nobody is talking about printing money’.”

Source: Victoria Marklew, Northern Trust – Daily Global Commentary, January 8, 2009.

Bloomberg: Is China’s economy crisis-bound?
“Anyone who said a year ago that China’s economy was crisis-bound was dismissed out of hand. Today, skeptics have lots of company.
‘This year is going to be characterized by much, much weaker growth in China than I think people are anticipating,’ says Jim Walker, chief economist at Asianomics in Hong Kong.

That may be news to the World Bank, which forecasts China will expand 7.5% in 2009. The government is targeting 8% growth, believing the $586 billion stimulus package it announced in November will boost the world’s fourth-biggest economy.

Citigroup agrees. ‘The most important reason supporting our confidence about 8% growth is the government’s will and ability,’ says Huang Yiping, the bank’s chief Asia-Pacific economist in Hong Kong.

That’s the problem. Chinese officials have done a masterful job generating growth, creating jobs and reducing poverty. They have done so with impressive regularity and earned the trust of many economists and investors. It’s important to remember, though, that external trends made China’s success possible.

There’s no doubt that China’s leaders have the will to support growth. The question is their ability to do so while all of the world’s economic engines sputter. Yes, all.”

Source: William Pesek, Bloomberg, January 7, 2009.

US Global Investors: Below-trend economic growth in store for China
“2008 could register the first below-trend economic growth for China after five straight years of supernormal expansion. Based on China’s post-reform history, however, a cyclical downturn would typically last more than four years on average, which means a potential, multiyear cycle of growth moderation has yet to arrive.”

Source: US Global Investors – Weekly Investor Alert, January 9, 2009.

Reuters: What is Russia’s end-game in gas row?
“Russian Prime Minister Vladimir Putin raised the stakes in his gas conflict with Ukraine by slashing supplies to Europe, a measure that has left some EU states struggling to heat homes in sub-zero temperatures.
Russian gas export monopoly Gazprom said it was forced to take that step because Ukraine – locked in a dispute with Moscow over gas pricing – was stealing gas being pumped across its territory for customers in Europe.

What was Putin seeking to achieve by reacting in this way? There is so far no consensus among diplomats and analysts about what Russia’s end-game is.

The Kremlin started out with the modest aim of persuading Ukraine to pay closer to market prices for its gas, but has now been out-manoeuvred by Kiev.

‘Russia and Gazprom have walked into a trap,’ said Fyodr Lukyanov, editor of the journal Russia in Global Affairs.

He said Ukraine – desperate not to pay more for its gas because of the fragile state of its economy – seized the initiative from Moscow by endangering exports to Europe.

‘They are calculating, and I think not without basis, that the longer this drags on the more the blame will be laid at Moscow’s door,’ said Lukyanov.

He said Gazprom, under pressure from a Europe angry its supplies are being disrupted and fearful for its reputation as an energy supplier, will now be forced to cut the price it is demanding Ukraine pay for its gas. ‘Ukraine wants to go back to the negotiations from a position of strength … And it is working,’ he said.”

Source: Reuters, January 7, 2009.

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