Words from the (investment) Wise 2.22.2009

Words from the (investment) wise for the week that was (February 16 – 22, 2009)

A perfect storm of a deepening global recession and banking woes last week battered equities and supported the safe havens of the US dollar, government bonds and gold bullion.

A dismal corporate earnings outlook, fears about bank nationalizations, especially Bank of America (BAC) and Citigroup (C), and a warning by Moody’s Investors Service of possible downgrades of European banks exposed to the slumping economies of Central and Eastern Europe, stoked investors’ fears.

Few stock markets escaped the selling pressure as summarized by the week’s movements of the MSCI Global Index (-7.7%, YTD -16.0%) and the MSCI Emerging Markets Index (-9.3%, YTD -11.4%). Venezuela (+6.7%), Pakistan (+6.1%) and Morocco (+3.7%) were the top three performers, whereas potential debt defaulters – Russia (-17.1%), Ukraine (-12.5%) and Hungary (‑12.4%) – occupied the bottom end of the ranking (data courtesy of Emerginvest).

The major US indices suffered their worst weekly losses this year (to record six losing weeks out of seven): Dow Jones Industrial Index -6.2% (YTD ‑16.1%), S&P 500 Index -6.9% (YTD -14.7%), Nasdaq Composite Index ‑6.1% (YTD -8.6%) and Russell 2000 Index -8.3% (YTD -17.7%).

Negative sentiment dragged the S&P 500 to seven points below its October 2002 low, whereas the Dow stopped only 80 points short of this key level. It is noteworthy that it took five years for the latter to increase from 7,286 to 14,165, but only 16 months to wipe out the entire 2002-2007 advance.


Source: StockCharts.com

With the bears prowling Wall Street, none of the main economic sectors registered positive returns on the week. Among exchange-traded funds (ETFs), the KBW Bank Index ETF (KBE) and the Financial Select Sector SPDR ETF (XLF) lost 16.6% and 15.9% respectively. However, as highlighted by John Nyaradi (Wall Street Sector Selector), inverse exchange-traded funds (ETFs) such as ProShares Short S&P 500 (SH) (+6.8%), ProShares Short Dow30 (DOG) (+5.8%) and Short QQQ ProShares (PSQ) (+5.1%) gained handsomely.

As was the case the previous week with the announcement of Treasury Secretary Timothy Geithner’s financial stability plan, last week’s mortgage relief plan, designed to stem the foreclosure crisis, also made scant impression on the stock market. President Barack Obama earmarked $275 billion to help reduce mortgage payments for up to nine million struggling borrowers and enable Fannie Mae and Freddie Mac to keep mortgage rates down.


Jeff Randall (Telegraph) wrote: “… we are in denial about the causes of recession and therefore cannot face up to the action required to lift us out of it. As Niall Ferguson, professor of history at Harvard University, wrote: ‘The reality being repressed is that the Western world is suffering a crisis of indebtedness.’ In which case, pumping out yet more debt will not be the answer. It is simply a short-term fix that in the long run creates an even bigger disaster, like giving a shivering alcoholic a case of Special Brew.” (Also read RGE Monitor’s recent guest post on the US’s financing needs.)

Barry Ritholtz (The Big Picture) has an interesting post up that lists the names of those favoring and opposing nationalization of the bigger US banks. Yes, I know it is a politically controversial issue, but rather get it over and done with than pussyfooting with “behind-the-curve” measures as being experimented with by the policymakers week after week. If nationalized banks are still alive once the toxic junk has been marked to market, they can start acting like banks and stake their claim to be privatized once again in the next economic upswing.

Notwithstanding supply concerns, government bond yields in the US, UK and Germany declined as investors continued their flight to safety. Yields of 10-year Treasuries, Bunds and Gilts were down by 14, 12 and 12 basis points respectively.

Increasing financial turbulence also resulted in the gold holdings of the world’s largest bullion-backed ETF jumping to a record level. “The SPDR Gold Trust (GLD) holdings have risen by 228.6 metric tons so far this year, to a record 1,008.8 metric tons late on Tuesday, absorbing in the first seven weeks of the year about 10% of the world’s annual mine gold output,” reported the Financial Times. Gold bullion breached the $1,000 level on Friday and closed the week at $1,002 (+6.4%) – within striking distance of its record of $1,031 reached in March last year.

With the yellow metal behaving like “the last man standing”, David Fuller reminded us of the quote by the English poet Lord Byron: “O gold! I still prefer thee unto paper, which makes bank credit like a bark of vapour.”

Besides precious metals shining brightly, the other commodities performed poorly, as shown in the graph below. The Reuters/Jeffries CRB Index recorded a six-and-a-half year low as global growth deteriorated.


Next, a tag cloud of my week’s reading. This is a way of visualizing word frequencies at a glance. Key words such as “banks”, “China”, “financial” and “gold” featured prominently.


As far as the outlook for stock markets is concerned, the primary bear market was reconfirmed on Thursday, at least in terms of Dow Theory. Richard Russell (Dow Theory Letters) said: “The verdict, at long last, is in. Today the DJ Industrial Average closed below its November 20 bear market low. In so doing, the Dow confirmed the prior breakdown of the Transportation Average. The two Averages jointly closed at new lows today, thereby signaling that the great bear market remains in force.

“According to Dow Theory, neither the duration nor the extent of a bear market can be predicted in advance. However there are some useful hints. Most major bear markets end with stocks at ‘great values’. This has meant in the past that price/earnings (P/E) ratios for the Dow and the S&P have fallen to single-digit numbers. It has also meant that dividend yields have moved into the 5-6% zone.”

Standard & Poor’s estimated GAAP (or “as reported”) earnings of 32.3 cents for the S&P 500 for 2009 implies a ten-month prospective P/E ratio of 23.8. Hardly “great value”.

As mentioned above, the Dow and S&P 500 are floundering around the November 20, 2008 and October 2002 lows, as shown in the columns on the right-hand side of the table below.


Stock markets remain caught between the actions of central banks frantically trying to fend off a total economic meltdown on the one hand, and a worsening economic and corporate picture on the other. The next few days will tell whether the key chart levels will arrest the indices’ declines and the three-month trading range will hold, or whether more catastrophe lies ahead.

For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Stocks between a rock and a hard place” and “Bennet Sedacca: Free Fallin’???“. (And do make a point of listening to Donald Coxe’s weekly webcast, which can be accessed from the sidebar of the Investment Postcards site.)

Back to Richard Russell, 84-year old writer of the Dow Theory Letters. Business partner John Mauldin (Thoughts from the Frontline) is organizing a “Richard Russell Tribute Dinner” for April 4 in San Diego. This will be a night of memories and good fun with fellow writers and long-time readers of Richard’s newsletter. I will be making the trip from Cape Town and would encourage you, if at all possible, also to attend this very special event. You can register here.

A grim picture regarding the global economic situation emerges from the latest Ifo World Economic Survey (WES), showing that the World Economic Climate has declined to a record low in the first quarter of 2009. The deterioration is affecting all major economic regions and the export and import expectations indicate a clear decline in world trade in the first half of 2009.


Source: Ifo, February 18, 2009.

Further evidence of the economic malaise is provided by the GDP-weighted graphs of the global manufacturing Purchasing Managers’ Index and global services PMI.


Source: Plexus Asset Management


Source: Plexus Asset Management

A snapshot of the week’s US economic data is provided below. (Click on the dates to see Northern Trust‘s assessment of the various data releases.)

February 20
• CPI report – underlying trend of deflation will fade only later

February 19
• Index of Leading Indicators improved, but wait before taking a leap
• Wholesale prices moved up, but inflation is a non-issue, for now
• Jobless Claims – dismal labor market conditions persist

February 18

• Industrial Production plunges, factory operating rate at record low
• Construction of new homes at new low
• Import prices – sixth consecutive monthly decline

February 17
• Housing Market Index – showing signs of stability?
• Foreign appetite for Treasury securities remains in place for moment

Given the nature of economics reports of recent months, the minutes of the Federal Open Market Committee (FOMC) meeting of January 27-28 come as no surprise. Asha Bangalore (Northern Trust) said: “The FOMC is more bearish about the economy compared with the forecast published in October 2008. The US economy is predicted to contract in 2009 (-1.3% to -0.5%) on a Q4-to-Q4 basis.

“The consensus forecast among the Blue Chip Survey participants is a 1.9% drop in real GDP on an annual average basis in 2009. We are predicting a 2.7% decline in real GDP … So, there is a general expectation of a significant weakening of business conditions during 2009.”

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


Time (ET)




Briefing Forecast

Market Expects


Feb 17

8:30 AM

Empire State Mfg.






Feb 17

9:00 AM

Net Long-Term TIC Flows






Feb 18

8:30 AM

Housing Starts






Feb 18

8:30 AM

Building Permits






Feb 18

8:30 AM

Export Prices ex-agriculture






Feb 18

8:30 AM

Import Prices ex-oil






Feb 18

9:15 AM

Industrial Production






Feb 18

9:15 AM

Capacity Utilization






Feb 18

2:00 PM

FOMC Minutes

Jan. 28




Feb 19

8:30 AM

Core PPI






Feb 19

8:30 AM







Feb 19

8:30 AM

Initial Claims






Feb 19

10:00 AM

Leading Indicators






Feb 19

10:00 AM

Philadelphia Fed






Feb 19

11:00 AM

Crude Inventories






Feb 20

8:30 AM

Core CPI






Feb 20

8:30 AM







Source: Yahoo Finance, February 20, 2009.

In addition to Fed Chairman Bernanke’s semi-annual testimony on monetary policy before the US Senate Banking Committee (Tuesday, February 24), the US economic highlights for the week include the following:


Source: Northern Trust

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

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, February 20, 2009.

“Analysts can tell you everything about the ship, the crew, the price – but they don’t let you know whether it’s in shallow water or is about to be hit by a tidal wave,” said Scott Cleland (hat tip: Charles Kirk). Hopefully the “Words from the Wise” reviews play a part in steering the portfolios of Investment Postcards‘ readers through the murky waters.

That’s the way it looks from Cape Town.


Bloomberg: Obama unveils $275 billion plan to shore up housing
“US President Barack Obama pledged $275 billion to cut mortgage payments for as many as 9 million struggling homeowners and enable Fannie Mae and Freddie Mac to keep loan rates down.

“The plan includes $75 billion to reduce monthly payments for borrowers, helps homeowners with loans owned or backed by Fannie Mae and Freddie Mac to refinance at lower rates and promises incentives to industry. Obama will double by $200 billion funding available for Fannie and Freddie to buy loans.

“‘It will give millions of families resigned to financial ruin a chance to rebuild,’ Obama said today in Mesa, Arizona. ‘By bringing down the foreclosure rate, it will help to shore up housing prices for everyone.’

“The program signals the Obama administration, which will release more details in two weeks, plans a more active stance to halt foreclosures than the Bush administration, which backed voluntary industry efforts. Record foreclosures in the past year are swelling the glut of properties on the market, forcing down home values and undermining homebuilders’ efforts to revive demand and lighten inventory by cutting prices.

“‘We tried voluntary, it didn’t work,’ Federal Deposit Insurance Corp. Chairman Sheila Bair said today at a briefing in Mesa before Obama spoke. Bair has pressed the banking industry to accelerate loan modifications to keep people in their homes.

“JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the Obama plan will help the bank expand its modification of mortgages. ‘The plan is good and strong, comprehensive and thoughtful,’ Dimon said in an interview today. ‘I think it will be successful in modifying mortgages in a way that’s good for homeowners.'”

Source: Alison Vekshin and Roger Runningen, Bloomberg, February 18, 2009.

CNBC: Santelli’s “rant of the year”
“CNBC’s Rick Santelli and the traders on the floor of the CME Group express outrage over the notion they may have to pay their neighbor’s mortgage, particularly if they bought far more house than they could actually afford, with Jason Roney, Sharmac Capital.”


Source: CNBC, February 19, 2009.

CNN: FDIC’s Bair speaks out on housing


Source: CNN, February 20, 2009.

Bill King (The King Report): Why have banks not been nationalized?
“There is a major reason why banks have not been nationalized. Too many solons and insiders will lose their equity and stock options. There will be no structural revival until crony capitalism ends.

“Here is a major reason why a bank bailout plan cannot be orchestrated: Banks do not, because they cannot, reveal the amount and magnitude of their toxic paper. We said this in October before TARP and we will reiterate again. The market cannot withstand full disclosure of crappy paper.”

Source: Bill King, The King Report, February 17, 2008.

Bloomberg: Shiller says US needs long-term plan to exit crisis
“Robert Shiller, chief economist at MacroMarkets LLC and an economics professor at Yale University, talks with Bloomberg’s Kathleen Hays about the need for a long-term US strategy to emerge from the financial crisis. Shiller also discusses the US’s efforts to stem the crisis and the outlook for the housing market.”


Source: Bloomberg, February 20, 2009.

Financial Times: US carmakers to seek $21.6 billion in funds
“General Motors and Chrysler presented long-awaited plans to return to viability on Tuesday, but said they would need up to $21.6 billion more in federal funds between them to carry them out.

“The two Detroit carmakers made the plea as part of tougher new plans to restructure and downsize their businesses in submissions to the government required as a condition of the $17.4 billion of emergency bridge loans they received in December.

“Their request for more funds reflects more pessimistic assumptions about global demand for cars and credit market conditions than Chrysler and GM presented to Congress on December 2.

“It raises the ante for President Barack Obama’s administration as it juggles demands for federal aid from banks and other constituencies and prepares to implement its $787 billion stimulus bill.”

Source: John Reed, Bernard Simon and Andrew Ward, Financial Times, February 18, 2009.

Ifo: Indicator for the World Economic Climate falls further
“The Ifo World Economic Climate has worsened further in the first quarter of 2009. The indicator has fallen to a new historic low. The decline is solely the result of more unfavourable assessments of the current economic situation; the expectations for the coming six months have improved somewhat.

“The deterioration of the Ifo World Economic Climate has affected all major economic regions. The export and import expectations of the WES experts indicate a clear decline in world trade in the first half of 2009.

“Average inflation expectations for 2009 are clearly lower than the inflation rates of the previous year (3.3% versus 5.4%). Moreover, price increases will continue to weaken in the course of the next six months in the opinion of the WES experts. The decline in inflation will be particularly strong in Western Europe and North America.

“In light of the recessionary tendencies and the clear slowing of price increases, a further decline in central bank interest rates is expected nearly everywhere. Also long-term interest rates are expected to fall in the coming six months, according to the WES experts, albeit less than short-term interest rates.

“After the strong increase in value of the Japanese yen, for the first time since 2002 it is no longer regarded as undervalued but now as slightly overvalued. On the other hand, after the clear weakening in past months the British pound is now viewed as undervalued. The US dollar is largely seen as properly valued, and correspondingly, WES experts anticipate a stable dollar in the coming six months.”


Source: Ifo, February 18, 2009.

BCA Research: Financial crises and public finances – where is the greatest risk?
“Our fixed income team has just published a Special Report comparing 22 developed government debt in the face of the current financial crisis.

“The Special Report reviewed the vulnerability of these markets to rating downgrades as well as focused on the risks and potential costs associated with stabilizing their banking systems (after analyzing 150 banks around the world). A further loss of as little as 3% on total bank assets would wipe out most, if not all, of the remaining tangible bank capital in the countries we analyzed.

“UK, Ireland, Denmark and Switzerland have the greatest risk of widespread nationalization (outside of Iceland). When the other main factors that determine overall sovereign credit risk are included (e.g. economic structure and prospects, monetary flexibility, fiscal flexibility, and external liquidity dependence) Iceland, Portugal, Ireland, Spain, Italy and the UK are at the top in terms of the risk of downgrades.

“The cost of cleaning up the US banking system will also be painful, although the risk of a sovereign downgrade is less than in most of the other developed countries.”


Source: BCA Research, February 18, 2009.

Word Net Daily: Federal obligations exceed world GDP
“As the Obama administration pushes through Congress its $800 billion deficit-spending economic stimulus plan, the American public is largely unaware that the true deficit of the federal government already is measured in trillions of dollars, and in fact its $65.5 trillion in total obligations exceeds the gross domestic product of the world.

“The total US obligations, including Social Security and Medicare benefits to be paid in the future, effectively have placed the US government in bankruptcy, even before new continuing social welfare obligation embedded in the massive spending plan are taken into account.

“The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the ‘2008 Financial Report of the United States Government’ as released by the US Department of Treasury.

“The difference between the $455 billion ‘official’ budget deficit numbers and the $5.1 trillion budget deficit cited by ‘2008 Financial Report of the United States Government’ is that the official budget deficit is calculated on a cash basis, where all tax receipts, including Social Security tax receipts, are used to pay government liabilities as they occur.

“But the numbers in the 2008 report are calculated on a GAAP basis (‘Generally Accepted Accounting Practices’) that include year-for-year changes in the net present value of unfunded liabilities in social insurance programs such as Social Security and Medicare.

“Under cash accounting, the government makes no provision for future Social Security and Medicare benefits in the year in which those benefits accrue.”


Source: Jerome Corsi, World Net Daily, February 13, 2009.

Bloomberg: Roubini says Europe’s banking system faces growing risks
“Nouriel Roubini, the New York University economist who predicted the global financial crisis, talks with Bloomberg’s Erik Schatzker and Julie Hyman about the growing risks facing Europe’s banking system. Roubini also discusses the outlook for a ‘massive’ increase in the US deficit, the need to nationalize insolvent banks and the importance of global cooperation in financial regulation.”


Source: Bloomberg, February 20, 2009.

Asha Bangalore (Northern Trust): Minutes of January FOMC meeting
“The FOMC is more bearish about the economy compared with the forecast published in October 2008. The US economy is predicted to contract in 2009 (-1.3% to -0.5%) on a Q4-to-Q4 basis. The unemployment rate is predicted to advance higher than previously predicted and the inflation is expected to hold below the level seen in the October forecast.

“The direction of revisions to the Fed’s projections is not a surprise given the nature of the economic reports of recent months. The consensus forecast among the Blue Chip Survey participants is a 1.9% drop in real GDP on an annual average basis in 2009. We are predicting a 2.7% decline in real GDP on an annual average basis during 2009. So, there is a general expectation of a significant weakening of business conditions during 2009.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 18, 2009.

Asha Bangalore (Northern Trust): Index of Leading Indicators advances in January, but wait before taking a leap
“The Index of Leading Economic Indicators (LEI) increased 0.4% in January after a revised 0.2% gain in December, previously reported as a 0.3% increase. The index of LEI has moved up for two straight months. Historically, the LEI has been a reliable indicator warning about turning points of the economy ahead of other economic indicators.

“The two consecutive monthly gains of the index have to be interpreted with caution. Inflation adjusted money supply has made hefty positive contributions for five straight months and the interest rate spread is another component that has been an advancing component for several months. Both of these components have risen for reasons that do not reflect bullish economic conditions. Inflation adjusted money supply is advancing because currency, demand and saving deposits have risen sharply. At the same time, bank lending has contracted. The two signals are inconsistent and they do not denote the underlying conditions that suggest a revival of economic activity.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 19, 2009.

Asha Bangalore (Northern Trust): Industrial production plunges
“Industrial production fell 1.8% in January, following a downwardly revised 2.4% drop in the prior month. If utilities production had not advanced at a rapid clip of 2.7%, the headline would have been weaker. The 23.4% decline in auto production from extended shutdowns of auto plants subtracted more than one percentage-point from the change in industrial production. Manufacturing output fell 2.5% in January; excluding autos, factory production dropped 1.4%, which is indicative of widespread weakness in the factory sector.

“On a year-to-year basis, factory production fell 12.9% and excluding autos it declined 10.8% in January.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 18, 2009.

Asha Bangalore (Northern Trust): Construction of new homes at new record low
“Construction of new homes fell to a record low of 466,000 in January, which is down 79.5% from the peak in January 2006. The 16.8% drop in housing starts during January reflects a 12.2% decline in starts of new single-family homes and a 27.9% decline in starts of multi-family homes.

“The grim news has a positive aspect because in an environment of a rising inventory of unsold new homes (12.9-month supply, record high in December 2008) a reduction in the construction of new homes is necessary to reduce the supply of new homes and bring about stability in the housing market.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 18, 2009.

Asha Bangalore (Northern Trust): Housing Market Index showing signs of stability?
“The Housing Market Index (HMI) of the National Association of Home Builders inched up to 9.0 in February from 8.0 in January. It is a small but noteworthy improvement because a decline of the same magnitude would be seen in a different light. Also, it is necessary to note that this is a single monthly reading. Additional gains of the index in the months ahead will be necessary to confirm that the housing market has turned the corner.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 17, 2009.

Asha Bangalore (Northern Trust): Wholesale prices moved up in January, but not problematic
“The Producer Price Index (PPI) for Finished Goods rose 0.8% in January, following a string of five monthly declines. The major culprit was a 3.7% jump of the energy price index which had declined for six consecutive months and a 0.4% increase of the core PPI, which excludes food and energy. The food price index fell 0.4% in January after a 1.4% drop in the prior month. Higher energy prices in February point to another monthly gain of the energy price index.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 19, 2009.

Asha Bangalore (Northern Trust): January CPI report – underlying trend of deflation will fade only later
“The Consumer Price Index (CPI) rose 0.3% in January, the first increase since July 2008. The CPI is unchanged from a year ago, the lowest reading since August 1955. The core CPI, which excludes food and energy, moved up 0.2% after a steady reading in December. On a year-to-year basis, the core CPI advanced 1.7% in January, the lowest since August 2004. Although these headlines take the edge off concerns about deflation temporarily, the underlying trend of deflation will fade only much later in 2009.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 20, 2009.

Bespoke: Up days – the scarcest commodity of all
“While the world suddenly finds itself with a glut of oil and other related commodites, one thing that is certainly in short supply so far this year is an up day in the market. So far this year, the Dow has finished the day higher on 36.7% of the 32 trading days (through Wednesday). We all know that it has been a bad year, but this is down right depressing!

“In the table below, we highlight the 15 prior years where the Dow started off the year with 40% or less of the first 32 trading days finishing higher. You have to go all the way back to 1984 to find a year that started off with an even greater frequency of down days. As shown below, the rest of the year is hardly anything to get excited about. While the last three occurrences have been positive, the overall average return for the rest of the year is a decline of 2.1%.”


Source: Bespoke, February 19, 2009.

Bespoke: Fourth quarter earnings season – one we’d all like to forget
“The unofficial fourth quarter earnings season came to an end yesterday, and the numbers show that it’s one we’d all like to forget. From Bloomberg, diluted year-over-year earnings for the S&P 500 are down 36% with 80% of the reports in. As shown in the chart below, analysts were expecting an increase of 30% from Q4 ’07 to Q4 ’08 back in October.


“And on a sector basis, three sectors saw earnings decline more than the index as a whole, while seven came in better than the index. In the chart below we have excluded Financials because its declines were off the charts (-272%). Materials saw the second biggest decline in earnings at -78%, followed by Consumer Discretionary, Energy, and Technology. Three sectors did see year-over-year increases in earnings, however. Utilities were up 6.1%, Consumer Staples were up 9.6%, and Health Care was up 9.9%.”



Source: Bespoke, February 18, 2009.

Carl Swenlin (Decision Point): Earnings are crashing
“The real P/E for the S&P 500 is based on ‘as reported’ or GAAP earnings (calculated using Generally Accepted Accounting Principals), and it is the standard for historical earnings comparisons. The normal range for the GAAP P/E ratio is between 10 (undervalued) to 20 (overvalued). Market cheerleaders invariably use ‘pro forma’ or ‘operating earnings’, which exclude some expenses and are deceptively optimistic. They are useless and should be ignored.

“The following are the most recently reported and projected twelve-month trailing (TMT) earnings and price/earnings ratios (P/Es) according to Standard and Poors. I have highlighted GAAP earnings. Note that projected earnings for 2009 Q2 are $15.90. Keep in mind that the last earnings peak of $84.92 was for 2007 Q3. That’s a drop of over 80%!


“Based upon projected GAAP earnings the following would be the approximate S&P 500 values at the cardinal points of the normal historical value range. They are calculated simply by multiplying the GAAP EPS by 10, 15, and 20. I have highlighted the overvalued values. Note that the S&P would have to drop to 554 just to be overvalued based on 2008 Q4 earnings projections. The outlook by 2009 Q2 is much worse.


“Of course, the market doesn’t always follow these projections, but they are reasonable targets based upon the best fundamental estimates we have available.”

Source: Carl Swenlin, Decision Point, February 13, 2009.

David Fuller (Fullermoney): Invest in creditor nations
“The US has elected an interesting, intelligent and charismatic new president. This will help the country in terms of international relations. However, debt-laden economies and the USA in particular, given its size, remain at the epicentre of global economic risk. In a best-case scenario, the economic outlook might show some evidence of improvement during the secondhalf of 2009. I hope so but even in this event, global investment remains an international beauty contest.

“The investment question for all of us, I suggest, is would we rather back the debtor or creditor nations. Some may see this as a rhetorical question. Run it through a price chart filter showing relative strength since the climactic selling in October, and the choice becomes even easier for me. Not all creditor nations are doing well, but Fullermoney themes such as Brazil and especially China (note also the strength of A-Share Banks) certainly are.

“I do not doubt that if Wall Street experiences a new down leg of consequence, that its leash effect would pull other stock markets lower as well. This is an ongoing risk. However, it might not drag today’s better performers to new bear market lows. More importantly, I have already seen enough to feel confident that among larger countries, China and Brazil will be upside leaders in the next significant stock market recovery. This will occur sooner rather than later if, and this is a big IF, Obama’s policies can help the S&P 500 Index to remain within its current trading range.”

Source: David Fuller, Fullermoney, February 16, 2009.

Bespoke: Default risk ticks higher, but still below prior highs
“Below is a price chart of a North American investment grade credit default swap index that measures default risk for 125 companies. As shown, default risk peaked in early December 2008 and has declined somewhat since then, but it just broke above a short-term trading range today. This isn’t surprising given the recent troubles in equity markets, and from a technical perspective, this breakout doesn’t bode well for the market going forward.”


Source: Bespoke, February 18, 2009.

CEP News: Fed’s Bullard says buying Treasuries still not off the table
“Federal Reserve Bank of St. Louis President James Bullard said the possibility of the Federal Reserve making outright purchases of Treasuries is not off the table, but this may not take place until the spring.

“Speaking in New York, Bullard said there is effectively no large difference between buying agency debt – which the Fed is already doing – and long-term Treasuries.

“Bullard said it is fair to say the world is entering a period of exceptionally low interest rates.

“He said the global recession will carry through until at least the first half of 2009. As for the US, he expects the first half of 2009 to see employment and output continue to deteriorate.

“On inflation, Bullard said the risks of disinflation and even deflation are real, with core inflation close to zero. He advocated an unofficial inflation target rate of 2%. The most recent reports showed headline inflation at -0.7%.

“Bullard noted that the Fed’s recent efforts to expand its balance sheet have done nothing to prevent deflation.

“Bullard also said the Federal Reserve needs to find a way to keep monetary base growth rates high. He said there is no way to predict the pace of growth of the monetary base.”

Source: CEP News, February 17, 2009.

Asha Bangalore (Northern Trust): Foreign appetite for Treasury securities remains in place, for now
“The tremendous supply of US Treasury securities in the pipeline is cited as a factor that may deter foreign appetite for US Treasury securities. In December, net private sector purchases of US Treasury securities were $11.1 billion putting quarterly net purchases at $45.5 billion. Net purchases of Treasury securities were higher in the second ($86.7 billion) and third ($67.7 billion) quarters of 2008. Net official purchases of Treasury securities increased $3.9 billion in December, after two monthly declines. In the fourth quarter, official purchases of Treasury securities declined.

“In 2008, private sector net purchases of Treasury securities stood at $239.4 billion versus $195 billion during 2007, while official purchases were $76.6 billion in 2008 versus $3.0 billion in 2007.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 17, 2009.

CNN Money: Who will buy all those Treasuries?
“Chinese doubts about the value of US Treasury bonds highlight a crucial question: Who will buy the estimated $2.7-4.2 trillion of debt expected to be issued over the next two years?

“With annual foreign purchases accounting for less than a tenth of the low end of that range, and domestic investors unable to bridge the gap, the Chinese are right to worry.

“Yu Yongding, former adviser to the People’s Bank of China, recently demanded guarantees for the value of China’s $682 billion of Treasury securities. Then Luo Ping, director of the China Banking Regulatory Commission, said that China had misgivings about the US economy, but despite this it would continue to buy Treasuries.

“The two statements appear designed to raise the issue non-confrontationally before new chief US diplomat Hillary Clinton’s visit to Beijing on February 20.

“China worries about the dollar’s value against other currencies, particularly the yuan. With US interest rates so low, the dollar’s value may slide. However, President Barack Obama has repeatedly said he wants a strong dollar, and indeed its trade-weighted value rose 13.9% between April and December 2008.

“The other area of concern for China is the value of its Treasuries. Given the US borrowing requirement and its lax monetary policy, T-bond yields could well rise sharply, causing a corresponding price decline.”

Source: Martin Hutchinson, CNN, February 13, 2009.

Bespoke: The curious case of the US dollar
“As equity markets test their November lows, the US Dollar index is testing its November highs. The US Dollar has been a peculiar ‘risk-flight’ trade throughout the credit crisis, as global investors have flocked to the currency with the belief that other sovereign nations are even worse off than the US. This comes at a time when gold is also rallying to new highs, and the US money supply is increasing at an astounding rate.”


Source: Bespoke, February 17, 2009.

Michael Metcalfe (State Street Global Markets): The yen is heading for a fall
“The yen is overvalued and its status as a ‘safe haven’ currency is likely to come under scrutiny, says Michael Metcalfe, head of global macro strategy at State Street Global Markets.

“He argues that analysts typically fall back on either current account positions or, better still, net foreign asset positions as a guide to which currencies should perform in times of heightened risk aversion.

“‘The rationale is that investors respond to reduced risk appetite by cutting their exposure to international investments,’ Mr Metcalfe says.

“This theory appears to be supported by the fact that Japan has one of the largest surpluses on its net foreign asset position – and therefore the biggest potential for repatriation flows – and the yen has appreciated strongly.

“But Mr Metcalfe points out the Japanese are not repatriating. ‘Indeed, quite the reverse. Money is flowing out of Japan into foreign bonds and, more unusually, foreign equity markets too. This implies it has been the perception of – or potential for – repatriation that has drawn investors into bets that the yen will rise.’

“He says both speculative and institutional investors now hold significant long positions in the yen.

“‘The question is whether investors will hang on to these bets, as the reality is that the yen is overbought and overvalued and Japan’s economy is sinking fast. It has the potential to be a safe haven, but the reality may prove different if Japanese investors keep buying foreign assets.'”

Source: Michael Metcalfe, State Street Global Markets (via Financial Times), February 17, 2009.

Business Intelligence: Jim Rogers advises Gulf states to get rid of dollar peg
“The Gulf countries’ currency peg to the dollar is a ‘terrible mistake’ and will cause problems for the region as the US currency is expected to decline, Jim Rogers said.

“The six Gulf Cooperation Council states should form a joint currency as soon as possible, the chairman of Singapore-based Rogers Holdings said at a conference in Dubai Monday.

“The new currency shouldn’t be linked to any other as the region has enough foreign reserves and oil to back it up.

“‘You’ve got good foreign exchange reserves and a lot of oil’ to back a common currency, Rogers said during a banking conference in Dubai.

“Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman agreed in 2001 to form a European Union-style monetary union by 2010 to boost regional trade. Oman later pulled out.

“Kuwait is the only Gulf Arab state to have dropped its currency peg to the dollar, giving it some control over monetary policy.

“Gulf Arab leaders in December approved an agreement to create a central bank and single currency for the region to boost trade and strengthen monetary policy.

“A single currency would allow the Gulf states to stop pegging their currencies to the dollar and implement independent monetary policy.

“Rogers said the dollar will suffer because the US government’s bailout plans and the economic stimulus will increase the US debt, weakening the US currency.”

Source: Business Intelligence, February 17, 2009.

Bloomberg: StockCharts’ John Murphy – gold to outshine


Source: Bloomberg (via YouTube), February 14, 2009.

David Fuller (Fullermoney): Gold bullion in solid uptrend
“The USD’s firmness had masked some of gold’s strength, until recently. However many other charts of bullion have been showing significant breakouts and resumptions of the long-term bull market for some time. You can see this in terms of bullion’s performance against most currencies, including: EUR, CHF, GBP, RUB, AUD, SGD and ZAR.

“How high will gold move on this particular run?

“I have no idea, particularly in this environment, and neither does anyone else. Targets are always pure guesswork, not least because the outcome depends on so many variables.

“However, we know what gold has done on its earlier advances during this decade. Once it began to appreciate against all currencies, it subsequently also moved to new all-time highs against all of them. These moves occurred in medium-term trends persisting for at least six months from the last reaction low in the prior trading range. If that consistency was repeated in the current cycle, gold should rally well into March. The best clue of a pending peak, which you can see on the charts and which veteran subscribers will certainly remember, has been clear evidence of trend acceleration.”

Source: David Fuller, Fullermoney, February 17, 2009.

Richard Russell (Dow Theory Letters): Potential buyers of gold?
“Here are some figures, the first number is the nation’s holding of gold and the second figure is the percentage that gold is of their reserves. Nations with low percentages of gold in their reserves may be expected to be potential buyers of gold.

US — owns 8,135 metric tons of gold … Gold makes up 64.4% of US reserves. The US will not sell any of its gold.
Germany — 3,412 … 64.4% of reserves
IMF — 3,217 …
France — 2,508 … 58.7%
Italy — 2,451 … 61.9%
Switzerland — 1,040 … 23.8%
Japan — 765.2 … 1.9% (a potential gold-buyer)
China — 600.0 … 0.9% (should be a big buyer)
Russia — 495. 9 … 2.2% (is a buyer)
Taiwan — 422.2 … 3.6% (should be a buyer)
India — 357.7% … 3.0% (should be a buyer)
UK — 310.3 … 14.5% (sold most of its gold at the low price)
Saudi Arabia — 143.0 … 11.4% (should buy gold)
South Africa — 124.4 … only 9.0%
Australia — 79.8 … 6.3%”

Source: Richard Russell, Dow Theory Letters, February 18, 2009.

Financial Times: Fund amasses bullion holding
“Gold holdings at the world’s largest bullion-backed exchange-traded fund jumped above 1,000 metric tons for the first time, the latest indication of investor demand for bullion amid increasing financial turbulence and economic slump.

“The SPDR Gold Trust holdings have risen 228.6 metric tons so far this year, to a record 1,008.8 metric tons late on Tuesday, absorbing in the first seven weeks of the year about 10% of the world’s annual mine gold output.

“The industry-backed World Gold Council said that gold consumption last year rose 4% to 3,658.6 metric tons as a 64% surge in investment demand was counterbalanced by a 11% drop in jewellery demand and a 7% fall in industrial consumption.

“Supply fell 1% last year compared with 2007 … a 42% drop in official sales from central banks and a 3% drop in mine output. Gold scrap supply jumped 17%.

“The WGC said that the extreme uncertainty that currently surrounds the global economy was unlikely to abate and should continue to underpin net investment demand, particularly for bars and coins. ‘However, we expect this to be partly offset by ongoing weakness in both industrial and jewellery demand,’ it added.”

Source: Javier Blas, Financial Times, February 18, 2009.

James Turk (GoldMoney): ETFs no alternative to owning physical gold
“There is one chart I would like to share with you. Bill Murphy presented it on Friday in his commentary. It’s another one of the informative charts prepared by Nick Laird of www.sharelynx.com. This chart plots both the gold price and the weight of gold recorded in GLD, the gold exchange traded fund (ETF).


“When I look at the above chart, one key question arises immediately. How can a 150-tonne increase in demand for metal in recent weeks translate into such a relatively small increase in the price of gold? This disparity raises more questions as to whether the ETF really owns the metal supposed to be backing the shares it issues.

“I’m no fan of the precious metal ETFs, and haven’t been since they were first launched.

“In short, the ETF is at best a trading vehicle, and not an alternative to owning physical gold. In this sense, the ETF is like a futures contract, which of course is not an alternative to owning physical gold either. With these trading vehicles you have exposure to movements in the price of gold, but they also come with counterparty risk, which should of course be avoided because of the ongoing economic and financial problems around the globe. The lessons in this regard were learned in September when Lehman collapsed and AIG was on the ropes, which caused numerous commodity ETFs in London to suspend trading.

“So if you want to trade the price of gold, trade futures or ETFs. But do not view futures or the ETFs as an alternative to owning physical gold and silver.

“If you are still not convinced, or even if you are, I recommend reading an article by Jim Sinclair which questions the integrity of GLD and the other gold ETFs. His February 12th report is entitled ‘Where Do All The Gold ETFs Get Their Bullion From?‘.”

Source: James Turk, GoldMoney, February 15, 2009.

Financial Times: Are platinum, palladium and silver prices sustainable?
“Investors searching for a safe haven have pushed gold prices to $950 a troy ounce. In their rush to safety, they have also boosted the price of silver, platinum and palladium.

“In fact, the well-reported 7.5% rise in gold prices this year pales against the 20.5% gain in silver, 14.5% rise in platinum and 15.6% increase in palladium.

“Are the gains in these three precious metals sustainable? Part of the surge is a correction from last year’s crash, which saw platinum plunging from more than $2,000 an ounce to less than $800 in three months.

“Gold spikes traditionally boost other precious metals and this time is no exception, with a surge in exchange-traded funds’ holdings of silver, platinum and palladium. But investors should note that, even if usually grouped under the precious metals umbrella, these three resemble industrial metals more closely, albeit expensive ones.

“Platinum and palladium are used for catalytic converters in the automotive industry, accounting for 60% of their consumption. And for silver, electronics is a large consumer.

“For these three metals, demand for jewellery is less important than for gold. The supply side, which last year boosted prices – particularly for platinum – now looks less supportive, too. As HSBC says: ‘After many years of deficit, we anticipate that the platinum market will swing into a surplus  …  in 2009.’ Silver and palladium face a similarly loose market.

“Against that backdrop, investors will need to corner the market and sharply increase their holdings if silver, platinum and palladium prices are to sustain their upward trajectory. Further price gains are possible as long as the metals benefit from safe-haven buying. But without the support of industrial demand, any upside is probably limited.”

Source: Javier Blas, Financial Times, February 16, 2009.

Bloomberg: Shipping Index surge signals commodity currency gains
“Shipping costs have more than doubled this year, so it may be time to buy kroner, Aussies and loonies.

“The 147% jump in ocean-transport prices is evidence that China’s $580 billion stimulus plan will lift raw materials, said Ihab Salib, who oversees $3 billion at Federated Investments Inc. in Pittsburgh. That would benefit countries exporting them, so Salib is ‘actively trading’ Norway’s krone and Australian and Canadian dollars, nicknamed Aussies and loonies.

“Salib and other currency traders have started using the Baltic Dry Index’s global gauge of raw-material shipping costs to help make such decisions. The index and the value of a basket of those three resource-rich countries’ currencies are increasingly moving in tandem – 96% of the time in the past year, up from 84% in the past decade, data compiled by Bloomberg show.

“‘Historically, the Baltic Dry Index is a good leading indicator for commodity prices,’ said Salib, who declined to detail his investments. ‘Commodities are very depressed right now, and they offer good long-term value. Once they come back, these currencies should do well.’

“The shipping gauge is a sign that China’s stimulus spending on housing, highways, airports and power grids will have impact beyond its borders. By Feb. 28, it will have spent 25% of its stimulus budget, Deutsche Bank AG said, predicting the country’s economy will grow at a 12% annual rate between the fourth and first quarter, after shrinking 2.3% between the third and fourth.”

Source: Ye Xie and Candice Zachariahs, Bloomberg, February 17, 2009.

Financial Times: China/Russia oil deal
“China has what Russia wants: masses of US dollars. Russia has what China wants: energy, and lots of it. Hence Tuesday’s oil-for-loans agreement between Moscow and Beijing. Russia’s state-owned oil companies get 20-year loans to help them refinance while preserving capital spending; China gets cheap fuel for the duration.

“Bilateral deals happen all the time between countries. The difference here is that no one has tried to dress this up as a political or diplomatic event. This is an artifice-free exchange of one commodity for another.

“For their part, Russia’s national champions avert a nasty cash crunch. The world’s second-largest oil producer has been floundering amid depressed crude prices and declining production: aggregate volumes shrank by almost 1 per cent last year.

“China does very nicely too. 300,000 barrels a day amounts to about 4% of its total demand, or 8% of its total oil imports. Russia is paying 6% on the loans, implying that China is securing supplies at about $20 a barrel, according to UOB-Kay Hian, a Shanghai brokerage. As China buys most of its oil in the spot market, this is a significant saving.

“There are fringe benefits. Russia diversifies its customer base away from Europe, while China reduces its dependence on the Middle East. It also increases its chances of getting a stake in the long-term development of Russia’s fabled Siberian oil reserves – perhaps at the expense of Japan. But at bottom, this is barter. How very post-crunch.”

Source: Financial Times, February 18, 2009.

Financial Times: Brazil to supply oil to China for loans
“Brazil and China signed a landmark agreement on Thursday that will ensure long-term supplies of oil to China while delivering much-needed financing to help Brazil develop enormous reserves of oil and gas recently discovered in its coastal waters.”

Source: Jonathan Wheatley, Financial Times, February 19, 2009.

Financial Times: Japan growth plunges to a 35-year low
“Japan’s government faced pressure for another stimulus package on Monday after plunging exports pushed the country, the world’s second largest economy, into its worst slump in 35 years.

“Economists see little prospect for a quick rebound after a quarter-on-quarter fall of 3.3% in gross domestic product in the last three months of 2008.

“The decline was worse than economists had forecast and equivalent to an annualised fall of 12.7% – the steepest drop since 1974 when import-dependent Japan suffered because of soaring oil prices.

“This time, collapsing demand for exports and weak domestic consumption are to blame.

“‘This is the biggest economic crisis since the war,’ said Kaoru Yosano, minister for economic and fiscal policy.

“Government leaders have resisted announcing new action as a stimulus package drawn up last year, which includes a Y2,000 billion ($22 billion) cash handout, and the main budget for the year from April, move slowly through a parliament in which the opposition controls the upper house.

“The decline in GDP is fuelling calls for more aggressive measures from the government and the Bank of Japan.”

Source: Mure Dickie, Financial Times, February 16, 2009.

Financial Times: G7 softens tone on China
“The US and other Group of Seven industrialised countries have stepped back from criticism of China in a push for greater cooperation with Beijing and a more unified response to the global financial crisis.

“In a communique issued following their meeting in Rome at the weekend, G7 finance ministers adopted milder language than recently regarding China’s handling of its currency. Tim Geithner, US Treasury secretary, also used a more conciliatory tone towards Beijing than he did last month, when he accused China of manipulating its currency to benefit exporters.

“Hillary Clinton, US secretary of state, will this week become the first senior member of the new administration to visit China as analysts look for clues as to how Washington will handle one of its most important economic relationships.

“In a speech before she left, she labelled a ‘positive, co-operative relationship’ between Beijing and Washington as ‘vital to peace and prosperity, not only in the Asia-Pacific region but worldwide’ and also announced the resumption of military contacts between the two nations.

“However, in a sign of potential for tension, China on Sunday hit out at a ‘Buy American’ provision in the $787 billion economic stimulus package approved by the US Congress last week. ‘History and economic theory show that in facing a financial crisis, trade protectionism is not a way out, but rather could become just the poison that worsens global economic hardships,’ the official Xinhua news agency said in a commentary.

“‘The G7 has realised that China needs to be brought into the fold of the global financial system rather than be treated as a pariah just because of currency inflexibility,’ UBS said in a note on Sunday on the meeting. ‘This is also a realisation that as the world’s largest foreign exchange reserve holder and the US’s largest creditor nation, China not only holds the purse strings but its continued growth is crucial to helping the world recover from the economic crisis.'”

Source: Guy Dinmore, Daniel Dombey and Kathrin Hille, Financial Times, February 15, 2009.

Jing Ulrich (JPMorgan): China urges spending
“While the first phase of China’s stimulus plans involved massive infrastructure projects and tax relief measures for manufacturers, the country’s leaders have now begun speaking with greater urgency on the need to encourage consumption, says Jing Ulrich, chairman, China equities at JPMorgan.

“Recently, Premier Wen Jiabao said bluntly that the trick to spurring consumer spending was not to engage in slogans, but to put money in people’s pockets.

“‘This principle has been applied literally in the issuance of consumption coupons by some local governments to low-income residents,’ Ms Ulrich says. ‘This practice is likely to become more common as an alternative to income tax cuts – which might only encourage greater savings.’

“She adds that the government is also turning to rural residents to help stimulate growth.

“‘Having launched a rural subsidy programme for household appliances and electronics, authorities are planning to introduce a similar scheme for lightweight vehicles.’

“But she acknowledges that while consumer stimulus plans will help support growth, China will remain heavily dependent on trade and fixed investments until headway is made in addressing a lack of confidence in the country’s social safety net.

“‘Towards this end, the State Council recently approved plans to spend $123 billion by 2011 to implement a basic universal healthcare system.'”

Source: Jing Ulrich, JP Morgan (via Financial Times), February 19, 2009.

BCA Research: Chinese exports – not as weak as they appeared
“The Chinese New Year effect is mainly to blame for China’s extremely weak trade numbers in January.

“Yesterday’s data release showed that Chinese exports tumbled by 17% in January and imports collapsed by 43% from a year ago. However, it is important to note that China’s macro data in the first two months of the year tend to be distorted by the Chinese New Year holidays. There is no question that January’s shocking trade data suggests that the economic environment remains highly challenging. Nonetheless, they are greatly exaggerated by fewer working days last month than January 2008.

“Adjusting for this factor, it is estimated that exports actually increased by 6% from a year ago, while imports dropped by 26%. The latter is also impacted by the tumble in commodity prices. The export sector performance is consistent with the most recent purchasing managers’ surveys, which show a slight improvement in both export orders and industrial production.”


Source: BCA Research, February 17, 2009.

Peter Attard Montalto (Nomura): The threat from emerging Europe
“One of the biggest threats to financial stability in the eurozone comes from the region’s exposure to central and eastern European banks, says Peter Attard Montalto, emerging Europe economist at Nomura.

“During the boom years, he says, high interest rates in emerging Europe led to a huge increase in foreign currency borrowing by households and companies – most notably in euros and Swiss francs. ‘Borrowers took the view that the foreign currency risk was low and offset anyway by the credit cost saving.’

“But not only did eurozone banks lend to these countries, they also took very large stakes in local institutions. ‘Indeed, more than 80% of emerging Europe bank assets are owned by western European banks,’ Mr Attard Montalto says.

‘”This was fine during times of easy credit when the region’s economies were growing strongly. However, widening spreads and a painful slowdown in growth now point to a serious risk to these exposures as non-performing loans may reach above 25%.

“‘This will have grave consequences for the central eastern European and Baltic economies as well as for the European banks that hold the ultimate risk.

“‘Market sentiment is currently very fragile but there is no clear agreement from the EU or other bodies about how to tackle this problem. Swift action is needed as CEE currencies continue to weaken. This issue is not going to go away on its own.'”

Source: Peter Attard Montalto, Nomura (via Financial Times), February 16, 2009.

Financial Times: No escape from the eastern pain
“Can western banks extricate themselves from the pain of an eastern European collapse?

“These eastern neighbours owe western banks – mainly in Austria, Italy, France, Belgium, Germany and Sweden – about $1,635 billion.

“Such a figure is almost equivalent to the entire balance sheet of a major bank in any one of these countries, so the question is not trivial.

“However, a better question might be: should western banks extricate themselves from eastern Europe?

“For this group of countries, where exposures are largest, is like the canary in the coalmine of European trade. But as Poland, the Czech Republic, Hungary, Romania and Croatia sicken, western Europe cannot hope to survive with a dash back to the clean air.

“Eastern Europe is at the sharp end of the new financial protectionism, a natural consequence of government involvement in banking.

“But it is also a big contributor to western Europe’s economies, accounting for almost one-quarter of German exports for instance.

“There has been a certain amount of vendor finance at work here. High local interest rates as governments tried to cool growth and move in line with the eurozone encouraged consumers to import first western debt in euros and Swiss francs, then more western goods. Sadly, they have also imported the credit crunch through the same channels.

“The quandary is not going unrecognised – Hungary has already had European Union support. But neither is it fully appreciated. Some believe the euro is doomed to trail after its poorer neighbours. The more the Polish zloty or Hungarian florint sicken, the worse the euro will feel. There is a credit trade choice to be made, too: should you buy protection on, say, Austria or Germany? As the canary chokes, the answer looks like the latter.”

Source: Paul Davies, Financial Times, February 17, 2009.

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