Words from the (investment) wise 4.12.09

Words from the (investment) wise for the week that was (April 6 – 12, 2009)

Five in a row! Notwithstanding sentiment for equities waxing and waning for most of the Easter-shortened week, bourses closed strongly on Friday and capped a five-week winning streak – the first since October 2007 for the major MSCI and US stock market indices.

An encouraging pre-announcement of first-quarter results by Wells Fargo (WFC) provided some confidence for the nascent earnings season and gave a healthy boost to the financial sector and overall market.

On a related note, the Treasury Department is expected to announce the expansion of the Troubled Asset Relief Program (TARP) to aid ailing life insurance companies within the next few days, adding a third industry to the banks and automakers that have already received bailouts from the government.

Not only did global stock markets extend their gains last week, but the US dollar reclaimed a stronger footing as a result of heightened risk aversion during the earlier part of the week. Holiday-thinned trading in commodities ended with a mixed performance among the 19 constituents of the Reuters/Jefferies CRB Index. Government bonds, under threat of large-scale issuance in the coming months, also had a relatively quiet period.

The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.

Stock markets, led by financials, added to the gains of the rally that commenced on March 10 (see table below). The MSCI World Index gained 0.8% (YTD -6.4%) and the MSCI Emerging Markets Index 2.5% (YTD +11.6%). These indices have risen by 25.1% and 30.4% respectively since the low of March 9.

Returns around the globe ranged from top-performers Ukraine (+19.4%), Egypt (+9.7%) and Russia (+8.5%) to Côte d’Ivoire (-4.3%), Macedonia (-4.1%), Norway (-3.9%) and the United Kingdom (-3.4%), which were languishing in the red. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

Among the major US indices, the Nasdaq Composite Index (+4.8%) is the only index in positive territory for the year to date. Although not yet claiming this feat, US small caps have also been running hard over the past few weeks, as can be seen from the rising trend line of the S&P 600 Small Cap Index relative to the S&P 500 Large Cap Index since the March 9 lows. The fact that small companies are now outperforming the larger ones is an indication that investors are becoming less risk averse – a positive sign for equities in general to improve further.

Source: StockCharts.com

As far as leadership since the start of the five-week old rally is concerned, the rebounding Financial SPDR (XLF) is by far the top performer among the economic sector exchange-traded funds (ETFs). Interestingly, cyclical sectors such as the Consumer Discretionary SPDR (XLY), Industrial SPDR (XLI), Materials SPDR (XLB) and Technology SPDR (XLK) all outperformed the S&P 500, whereas the traditional defensive sectors like the Utilities SPDR (XLU), Energy SPDR (XLE), Consumer Staples SPDR (XLP) and Health Care SPDR (XLV) were all lagging the broader market. This is the type of pattern one would typically expect to emerge during a market base formation development.

Source: StockCharts.com

John Nyaradi (Wall Street Sector Selector) reports that the strongest ETFs on the week were the Merrill Lynch Regional Bank Holders (RKH) (+16.2%), iShares Cohen & Steers Realty (ICF) (+15.8%) and Financial Select Sector SPDR (XLF) (+14.2%). On the other end of the performance scale the Market Vectors Gold Miners (GDX) (-10.9%), iShares Silver Trust (SLV) (-4.7%) and United States Natural Gas (UNG) (-4.6%) performed poorly – in tandem with natural gas and precious metals retreating.

Next, a quick textual analysis of my week’s reading. No surprises here with key words such as “market”, “prices”, “economy”, “financial” and “banks” featuring prominently.

On the question of whether the current rally has more steam left, Kevin Lane, technical analyst of Fusion IQ, said: “It is a very fine line between a rally extension call and a retest call, though we are leaning towards the former after a pullback/pause. However, since both calls – rally or retest – are plausible we continue to suggest investors tighten up stops and portfolio VAR (Value At Risk) until more evidence unfolds. Until more clarity occurs either technically or fundamentally, I can think of worse things in the world than locking in some gains or getting stopped out at a profit on trailing stops.

“So over the next few sessions watch the skew of decliners to advancers and down to up volume. As long as we don’t get ratios of 5 to 1 or higher on both indicators the likelihood of a retest in the near term is lessened.”

As shown in the table below, the 50-day moving averages have been cleared comfortably by all the major US indices and the early January highs are the next important targets. As a matter of fact, the Nasdaq Composite Index is already one point above this level and has to rise by a further 9.0% in order to reach the key 200-day moving average – an indicator often used to distinguish between primary bull and bear markets. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to endure.

Although he still maintains that stock markets are witnessing nothing more than a bear market rally, Richard Russell, doyen of newsletter writers and author of the 50-year old Dow Theory Letters, on Friday said. “I was wrong. It looks as though this rally has legs. Lowry‘s Selling Pressure Index has stopped rising and now appears to be topping out. At the same time, Lowry’s Buying Power Index is in a rising trend. The look of the Lowry’s chart suggests that the [short-term] direction of least resistance is up.”

From London, David Fuller (Fullermoney) opined: “… consistent and persistent trends, such as we have seen over the last five weeks, are often important trends. This continues to look like the first psychological perception stage of a new bull market – lows are rising over time, indicating that demand has the upper hand, but most people do not believe in the market’s recovery. Consequently, the perception is of high risk, while it is actually low, given all the cash available to fuel an additional advance.

“… Asian emerging and South American resources markets are currently carrying our preferred secular themes higher. The tech and telecom cyclical theme is also performing well. These look like new bull markets.

“Europe and the USA, T&T excepted, continue to underperform, not surprisingly given the economic problems. Wall Street still has the capacity to be a spoiler because we do not yet have confirmation that the early March lows will hold. Technical confirmation of a new bull market, as we have often said, comes later and requires a break above the 200-day moving average, which then also turns upwards.”

The CBOE Volatility Index (VIX) (green line in the chart below) is another indicator heading in the right direction for equity bulls, having declined from the 80s in October and November to 36.5 on Friday – its lowest close since late September, just ahead of the stock market meltdown. This is comforting as the VIX is the market’s main gauge of fear and usually moves in the opposite direction of the S&P 500 (red line).

Source: StockCharts.com

Bill Fleckenstein, well-known perma-bear who announced late last year that he was closing his short-only hedge fund as a result of the reduced number of attractive shorting targets, said: “Now that stocks have rebounded as far as they have, the upcoming earnings season will be particularly interesting – and potentially dangerous – but it will offer information as to the sustainability of the recent advance. If stock prices can shrug off the news, then the market may be headed higher still.”

On the topic of earnings, in the coming week all eyes will be on announcements by Goldman Sachs (GS) (Tuesday), JPMorgan Chase (JPM) (Thursday) and Citigroup (C) (Friday), especially with Goldie mulling a multi-billion dollar equity offering.

For more discussion about the direction of stock markets, also see my recent posts “Video interview: ‘The tide is turning,’ says Prieur du Plessis“, “Emerging-market equities show leadership“, “Technical talk: Sentiment review“, “Video-o-rama: Five in a row for stock markets“, and “Picture du Jour: It’s earnings, stupid!“.

I regularly post short comments (maximum 140 characters) on topical economic and market issues on Twitter. For those not doing so already, you can follow my “tweets” by clicking here. The Twitter posts also appear on my Facebook page and in the sidebar of the Investment Postcards site.

“Business pessimism remains deep and widespread across all industries and regions of the globe,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Sales remain extraordinarily soft and pricing power continues to weaken.” However, it is encouraging that the Survey found that businesses were becoming steadily less negative about the economy’s prospects later this year and that the index had inched up very recently, as shown in the graph below.


But although the rate of decline in a number of economic indicators seems to be moderating, the fallout of the financial crisis has clearly not been fully arrested as gleaned from the International Monetary Fund’s (IFM) new forecast that toxic debt racked up by banks and insurers could spiral to $4 trillion. According to Times Online, the IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia.

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

April 9
• Significant improvement in trade balance a big plus for Q1 GDP
• Initial Jobless Claims – glimmer of hope?

April 8
• Minutes of March 2009 FOMC meeting – highlight concerns that led to further expansion of Fed’s balance sheet
• Wholesale inventories – drop in inventories-sales ratio a positive signal

April 7
• Consumer credit – households are parsimonious, not a surprise

April 6
• Price-to-rent ratio – pace of decline in home prices to moderate
The minutes of the Federal Open Market Committee’s (FOMC) March 17-18 meeting show that members downgraded forecasts for GDP growth in the second half of 2009 and into 2010, adding that they expect growth “to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease.”

George Soros is more pessimistic on the outlook (as reported by CNBC), saying: “I don’t expect the US economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown.” He added that there might be “something” in terms of US growth in 2010. The recovery will look like ‘an inverted square root sign’, Soros said. “You hit bottom and you automatically rebound some, but then you don’t come out of it in a V-shape recovery or anything like that.”

On a more upbeat note, Bespoke highlights that the Investors Business Daily’s survey of economic optimism has increased for the second month in a row and is now at its second highest level (49.1) since the start of the recession. Although the indicator has shown steady improvement since the July low, the current level of below 50 indicates that consumers remain pessimistic on a net basis.

Another glimmer of hope is the ECRI Weekly Leading Index that has leveled off since the beginning of the year. “Since 1970, a significant upturn in the index has preceded the end of a recession by an average of two months. While the Index has dropped more than during any other period on record (since peaking in June 2007), the Index has been relatively flat since early December and has been moving up over the past four weeks,” said Chart of the Day. We’ll be watching this space.

Pulling it all together, BCA Research commented: “Now the focus has shifted to whether or not positive second-half growth will provide the base for a solid recovery next year. There is plenty of fiscal and monetary stimulus in the pipeline, but the headwinds and risks highlight that the recovery will be fragile. Much will depend on the apparent success or failure of the bank stress tests and the Treasury’s plan to relieve banks of their legacy assets. Both are wild cards that could reverse the recent improvement in investor sentiment. Moreover, consumer fundamentals remain grim due to high debt levels, falling home prices and massive payroll cuts.

“Bottom line: A bottoming in growth suggests that we have seen the lows in the equity market, but a sustainable uptrend may take time to develop and could be very choppy.”

Back to the global economy, according to George Soros, China will be the first country to emerge from recession, probably this year, and will spearhead global growth in 2010. He said world policymakers are “actually beginning to catch up” with the crisis and efforts to fix structural problems in the financial system.

Meanwhile, China’s passenger car sales increased by 10% year on year in March, thanks to sales tax cuts and other government subsidies. Also, as reported by US Global Investors, explosive new loan growth in China has prompted its banking regulator to review whether it is necessary to restrain lending practice. “According to the latest unofficial estimate, new bank loans may have reached 1.87 trillion yuan in March. This makes the first quarter’s total lending almost as much as the government’s full year target.”


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


Apr 7

3:00 PM

Consumer Credit






Apr 8

10:00 AM

Wholesale Inventories






Apr 8

10:30 AM

Crude Inventories






Apr 9

8:30 AM

Export Prices ex-agriculture






Apr 9

8:30 AM

Import Prices ex-oil






Apr 9

8:30 AM

Initial Claims






Apr 9

8:30 AM

Trade Balance






Apr 10

2:00 PM

Treasury Budget





Source: Yahoo Finance, April 10, 2009.

In addition to Fed Chairman Ben Bernanke speaking at the Fed Conference (Friday, April 17), the US economic highlights for the week include the following:

Source: Northern Trust

Click the links below for the following reports:

Wachovia’s report on the “State of the Global Economy”

Wachovia’s Monthly Economic Outlook (April 2009)

Wachovia’s Global Chartbook (April 2009)

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, April 10, 2009.

Friend Kevin Lane said: “Hope is a slippery slope and greed is not a trustworthy steed (i.e. horse), so work on removing emotion and bias from your investing/trading as much as possible. Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers with taking well-informed and unemotional investment decisions.

Wishing you and your families a pleasant time during what remains of the Easter weekend.

That’s the way it looks from Cape Town (where I will be spending the next two weeks before heading back to America for a brief visit).

Cartoon from 1934 Chicago Tribune – looking familiar?

Hat tip: Charleston Voice

CNBC: El-Erian – investors be wary of stocks, Treasurys
“Investors can still lose a lot of money in the stock market, but US government bonds aren’t the solution either for those seeking safe havens, Pimco’s co-CEO and co-chief investment officer Mohammed El-Erian told CNBC. ‘Certain bonds aren’t worth owning, like government bonds for instance,’ El-Erian said, adding that gaping deficits will force governments issue more debt.
“I am very underweight equities,” he said, adding that he has cut his exposure to stocks to 30% compared with around 60% in normal market conditions. Pimco is the world’s biggest bond fund.

“‘Fundamentally we are in a volatile journey to what we call the new normal, the new destination. The world is changing,’ El-Erian said.

“People have to adjust to the fact that wealth has been destroyed, and the fact that there are more than 5 million unemployed in the US shows how serious the situation is, he added.

“‘The American consumer will return but will be a saner consumer … worried about their savings, worried about their retirement. That is a good adjustment. The problem is that it doesn’t happen overnight,’ El-Erian said.

“Asked whether he believed the stock market can re-test the March lows, he said: ‘The intellectually honest answer is we don’t know. I have a fear right now that people are sucked into the equities market … go in as long as you can afford to lose that money,’ he added.

“Two out of four conditions need to be met for an economic recovery to begin, according to El-Erian: house prices need to stabilize, banks must start lending again, the consumer must start spending again and the rest of the world must pick up.

“For the moment, only the fourth condition is partly fulfilled, with timid signs of recovery in China emerging, he said.

“Asked about attractive areas of investment, El-Erian listed mortgages, municipal bonds and corporate bonds, especially instead of stocks.

Source: CNBC, April 7, 2009.

CNBC: Pimco’s power player
“The markets are on a volatile journey to a ‘new normal’, says Mohamed El-Erian, Pimco CEO.”

Source: CNBC, April 7, 2009.

Times Online: Toxic debts could reach $4 trillion, IMF to warn
“Toxic debts racked up by banks and insurers could spiral to $4 trillion, new forecasts from the International Monetary Fund (IMF) are set to suggest.
“The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia.

“Banks and insurers, which so far have owned up to $1.29 trillion in toxic assets, are facing increasing losses as the deepening recession takes a toll, adding to the debts racked up from sub-prime mortgages. The IMF’s new forecast, which could be revised again before the end of the month, will come as a blow to governments that have already pumped billions into the banking system.

“Paul Ashworth, senior US economist at Capital Economics, said: ‘The first losses were asset writedowns based on sub-prime mortgages and associated instruments. But now, banks are selling ‘plain vanilla’ losses from mortgages, commercial loans and credit cards. For this reason, the housing market will play a crucial part in how big the bad debt toll is over the next year or two.’

“The IMF’s jump will come as little surprise to economists who have suggested that the bad debts will be much higher than anticipated. Nouriel Roubini, chairman of RGE Monitor, expects bad debts from US-originated assets to reach $3.6 trillion by the middle of next year. This figure is expected to rise when bad debts from assets elsewhere are calculated, he said.”

Source: Gráinne Gilmore, Times Online, April 7, 2009.

Guardian: US watchdog calls for bank executives to be sacked
“Elizabeth Warren, chief watchdog of America’s $700 billion bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration’s approach to saving the financial system from collapse.
“Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government’s Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be ‘wiped out’. ‘It is crucial for these things to happen,’ she said. ‘Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade.’

She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173 billion in bailout money, and banking giant Citigroup, which has had $45 billion in funds and more than $316 billion of loan guarantees.

“She said she did not want to be too hard on Geithner but that he must address the issues in the report. ‘The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous.'”

Source: James Doran, Guardian, April 5, 2009.

The Wall Street Journal: US to offer aid to life insurers
“The Treasury Department has decided to extend bailout funds to a number of struggling life-insurance companies, helping an industry that is a linchpin of the US financial system, people familiar with the matter said.
“The department is expected to announce the expansion of the Troubled Asset Relief Program to aid the ailing industry within the next several days, these people said.

“The news will come as a relief to a number of iconic American companies that have suffered big losses made worse by generous promises to buyers of some investment products. Shares of life insurers have fallen more than 40% this year. Their troubles led to a string of rating-agency downgrades that, in a vicious cycle, made it more difficult for some insurers to raise funds.

“The life-insurance industry is an important piece of the US financial system. Millions of Americans have entrusted their families’ financial safety to these companies, so keeping them on solid footing is crucial to maintaining confidence. If massive numbers of customers sought to redeem their policies, it could cause a cash crunch for some companies. And because insurers invest the premiums they receive from customers into bonds, real estate and other investments, they are major holders of securities. If they needed to sell off holdings to raise cash, it could cause markets to tumble.”

Source: Scott Patterson, Deborah Solomon and Leslie Scism, The Wall Street Journal, April 8, 2009.

Financial Times: Derivatives sector answers critics
“The financial industry will on Wednesday overhaul how it writes contracts in the credit derivatives world – an effort to rebuff criticism that the vast sector could pose a systemic threat.
“More than 1,400 banks and asset managers will adopt a new ‘big bang’ protocol, which will make it easier for investors to know what will happen to credit derivatives contracts if debt defaults occur.

“The US market will also introduce a standardised pricing system for CDS contracts, which have hitherto been run on an unregulated, freewheeling basis.

“The moves follow mounting criticism of the credit derivatives world, which some regulators claim contributed to problems at AIG. The pressure for change was underscored at last week’s meeting of G20 leaders, which reiterated calls for more standardisation and transparency.

“Robert Pickel, head of the International Swaps and Derivatives Association, argued that the reforms showed the industry was responding to these calls. ‘These measures provide a framework – it will bring more order. It is a significant step,’ he said.

“Separately, TriOptima, a trade processing group, said it had removed $5,500 billion of redundant contracts from the market in the first three months of the year because banks had cancelled deals that offset each other. This process of ‘tearing up’ – or offsetting contracts – has already cut the estimated size of the sector to below $30,000 billion, less than half its level 18 months ago.”

Source: Anousha Sakoui, Michael Mackenzie and Nicole Bullock, Financial Times, April 7, 2009.

Forbes: The recovery begins
“The Federal Reserve is following possibly the most accommodative monetary policy of its 96-year history. The economy and stock market are floating on a sea of liquidity. That’s all that really matters right now.
“Through Friday, April 3, this sea of liquidity had lifted the Dow Jones Industrial Average by 22.5% in less than a month, with the NASDAQ up 27.8%, and the S&P 500 up 24.5%.

“For us, this is the real deal. But pessimism is so rampant that it is hard for many investors to believe that this rally can last. When it was reported on Friday that the US lost 663,000 jobs in March, it was almost too much for many investors to take. Since December 2007 the US has lost 5.1 million jobs. These job losses have pushed the unemployment rate up from 4.9% to 8.5% – the highest since 1983.

“The horrible jobs data have many asking: How can any kind of economic recovery take hold? How can stock prices continue to rise? The thinking is that with people losing jobs, spending will fall, which will lower production causing more layoffs, sending the economy down again.

“But this is not the way the economy works. If jobs were the catalyst for all economic change, then the economy would never stop expanding as jobs increased, nor would it ever stop contracting as jobs fell.

“Don’t take this as a sign that we do not care about job losses – they hurt. They are personal. And when unemployment rises above 7% or so, just about everyone knows someone who has lost a job. But in the past the unemployment rate has been much higher than it is today, and yet the economy recovered and the stock market boomed anyway. Unemployment is a lagging indicator.

“In fact, the best historical precedent for what the US economy is living through today is the mid-1970s. Between December 1973 and May 1975, the unemployment rate jumped from 4.9% to 9%. This recession included a 43% drop in the S&P 500 during the bear market of 1973 to 1974.

“But the stock market bottomed in December 1974, and even though the unemployment rate increased from 7.2% to 9% in the first five months of 1975, the S&P 500 jumped 34%.

“The major factor behind all that volatility in the economy and the stock market was the Federal Reserve’s monetary policy. The Fed hiked the federal funds rate from 3.3% in early 1972 to 12.9% in July 1974. Then the Fed reversed course and cut the funds rate to 5.2% by May 1975. This roller-coaster monetary policy caused a bust and then a boom.”

Click here for the full article.

Source: Brian Wesbury and Robert Stein, Forbes, April 7, 2009.

CNBC: Soros – US recovery is far off, banks are “basically insolvent”
“The US economy is in for a ‘lasting slowdown’ and could face a Japan-style period of relatively low growth coupled with high inflation, billionaire investor George Soros said on Monday.
“Soros, speaking to Reuters Financial Television, also warned that rescuing US banks could turn them into ‘zombies’ that draw the lifeblood of the economy, prolonging the economic slowdown.

“‘I don’t expect the US economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown,’ Soros said, adding that in 2010 there might be ‘something’ in terms of US growth.

“Soros’ view contrasts with the majority of economists, who expect the US economy to stop contracting in the third quarter and resume growing in the fourth quarter, according to the latest monthly poll of forecasts conducted by Reuters.

“The recovery will look like ‘an inverted square root sign,’ Soros said. ‘You hit bottom and you automatically rebound some, but then you don’t come out of it in a V-shape recovery or anything like that. You settle down – step down.’

“The healing of the banking system and housing markets is crucial to recovery. ‘The banking system, as a whole, is basically insolvent,’ Soros said.

“What’s more, the Treasury’s Public-Private Investment Fund is going to work but it won’t be enough to recapitalize the banks in a way that they are able to or willing to provide credit.

“‘What we have created now is a situation where the banks who will be able to earn their way out of a hole, but by doing that, they are going to weigh on the economy,’ he said. ‘Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive. This is the zombie bank situation.'”

Click here for the full article.

Source: CNBC, April 6, 2009.

Asha Bangalore (Northern Trust): FOMC minutes highlight concerns that led to further expansion of Fed’s balance sheet
“The March 17-18 FOMC meeting concluded with the federal funds rate left unchanged – no surprises there. However, the policy announcement indicated that the Fed would increase its balance sheet by another $1.15 trillion ($750 billion MBS + $100 billion agency debt + $300 billion Treasury securities) – this was the surprise.
“The minutes succinctly state the reason for the bold and outsized move: ‘In light of the economic and financial conditions, meeting participants viewed the expansion of the Federal Reserve’s balance sheet that might be associated with these and other programs as appropriate in order to foster the dual objectives of maximum employment and price stability. Several members felt that the significant deterioration in the economic outlook merited a very substantial increase in purchases of longer-term assets.’

“In addition, ‘participants expressed concern about downside risks to an outlook for activity that was already weak.’ The precise quantity and types of securities purchased appears to be a compromise because the minutes note that members had different preferences about both aspects.

“As part of the extensive discussion about the Fed’s balance sheet, ‘members agreed that the monetary base was likely to grow significantly as a consequence of additional asset purchases; one, in particular, stressed that sustained increases in the monetary base were important to ensure that policy was consistently expansionary.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 8, 2009.

Financial Times: Downbeat outlook prevails inside Fed
“The Federal Reserve sharply downgraded its economic outlook at its latest meeting only three weeks ago, minutes released on Wednesday revealed, challenging the view that green shoots of recovery are now plain to see.
“‘The staff’s projections for real GDP in the second half of 2009 and 2010 were revised down,’ the minutes say. Fed staff no longer expected growth would recover this year, and instead forecast that output would ‘flatten out gradually’ in the second half and then ‘expand slowly next year’.

“While Fed policymakers took note of some news that was better than expected on housing and consumer spending, they appeared reluctant to put much weight on this. Most ‘viewed downside risks as predominating in the near term’.

“Officials worried about ‘adverse feedback effects as reduced employment and production weighed on consumer spending’ and a ‘weakening economy boosted the prospective losses of financial institutions, leading to a further tightening of credit –conditions’.

“While there has been better news since the March 18 meeting, the tenor of the Fed discussion suggests most policymakers will treat this data with scepticism.”

Source: Krishna Guha, Financial Times, April 8, 2009.

Barry Ritholtz (The Big Picture): Getting worse more slowly
“Ever since Ben Bernanke’s 60 Minutes interview where he used the phrase ‘Green Shoots’, many of the key data releases have been misinterpreted. This has led to a robust debate as to whether the worst is behind us.
“In recent weeks, I have keyed in on four data points that the mainstream has spun positively, despite the actual data being horrific. These four factors include ISM data, New Home Sales, Existing Home Sales, and Non Farm Payroll.

“Coming off historical lows (and in some cases, all time lows) many data-points feels like things are getting better. In reality, things are getting worse, but more slowly. What is happening in the real world is the change in the rate of fall. The direction is still negative – the economy is still contracting – but it is doing so at a slower pace.

“You may have heard the phrase ‘second derivative’ bandied about; most users of the term fail to define it in plain English. Here’s my attempt: Imagine you jump from a airplane – for a while, you are free falling – accelerating downwards at increasing speeds. After a few thousand feet, you pull the rip cord and your parachute opens up. In terms of direction, you are still heading down; in terms of speed, however, even though you are falling, you are falling at a much slower rate. As the parachute deploys, you are decelerating – the rate of your fall is slowing.

“That pretty much sums up the economy lately – still contracting, but at a slower rate than the panic period from September to February. But this does not mean we are yet on the ground. And the economy is certainly not expanding. That is likely several quarters (or longer) away.

“And those investors who made recent bets that Green Shoots are a great entry for investing – well, they may be somewhat disappointed …”

Source: Barry Ritholtz, The Big Picture, April 8, 2009.

Asha Bangalore (Northern Trust): Significant improvement in trade balance a big plus for Q1 GDP
“The trade balance narrowed to $25.97 billion in February from $36.2 billion in January. The trade deficit has fallen $32.3 billion in a six-month period, the largest six-month change on record. The trade deficit in February is the smallest since December 2001!
“Exports of goods and services increased 1.6% after a string of six monthly declines. After adjusting for inflation, the 3.1% increase in exports of goods in February is the first monthly increase since August 2008. The 5.1% drop in imports of goods and services in February is a continuation of a declining trend which began in August 2008. Inflation adjusted imports of goods fell 5.3% in February.

“The sharp improvement in the trade deficit is a big plus for first quarter GDP. We are working on the revision of our forecast of first quarter real GDP.”

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

The Wall Street Journal: V or L?: Economists debate recovery’s shape
“Two former chief economists of the International Monetary Fund disagreed Tuesday on whether the eventual global recovery will take the shape of a solid ‘V’ or weak ‘L’.
“Simon Johnson and Michael Mussa, both senior fellows at the Peterson Institute for International Economics, agreed that the world economic recession is likely to be the worst since World War II. However, they differed not just on the outlook for the economy – but on the fundamental nature of the crisis itself.

“Mussa, who served as chief economist for the IMF from 1991 to 2001, expects the world economy to remain true to the historical trend that when there is a steep downturn in growth, it is followed by a sharp upturn. Such recoveries are referred to as V-shaped due to how they look on a graph.

“Mussa foresees a 0.8% contraction in the world economy this year. But a recovery will likely be underway by year-end, he says, with global growth bouncing back at a pace of 3.7% next year.

“While the exact timing of the recovery may be debated, ‘when it starts, I think it is far more likely than not that the US economy and the world economy will see the V for victory,’ Mussa said at a Peterson Institute conference.

“But whereas Mussa sees the current downturn in the more traditional vein in which global demand snaps back from a negative shock, Johnson views the crisis as part of a more sinister story in which the power of international banks has distorted the business cycle.

“Johnson, who was the IMF’s chief economist in 2007 and 2008, argued that the amount of economic and political power the financial sector has amassed in the US is a ‘dangerous’ development that has put the global economy in uncharted waters.

“‘The industrial countries, particularly the US, have become a lot more like emerging markets than we’ve ever seen before,’ said Johnson.

“Thus, he sees the world economy struggling to recover over the next couple of years. For 2009, he foresees a 1% contraction, fourth quarter versus fourth quarter, with the economy remaining essentially flat in 2010.”

Source: Tom Barkley, The Wall Street Journal, April 7, 2009.

Reuters: CEO confidence hits record low
“Two-thirds of US chief executives plan additional layoffs and expect sales to decline in the next six months as their confidence in the economy continues to fall, according to a survey released on Tuesday.
“The Business Roundtable’s quarterly CEO Economic Outlook Index fell to negative 5 – the first negative reading in the survey’s six-year history – and down from a fourth-quarter reading of 16.5. A reading below 50 means CEOs expect economic contraction rather than growth.

“The poll of 100 US CEOs found they now expect real US gross domestic product to decline 1.9% this year. That is below their December forecast, which anticipated flat GDP.

“The group’s head held out hope that the Obama administration’s efforts to shore up the financial system and buoy the economy with a stimulus program may be beginning to pay off. But other economists argued that it was too early to call a turnaround.

“‘While recently implemented policies need time to make an impact, they have already begun to restore confidence in our markets, which is obviously a critical first step,’ said Harold McGraw, who serves as Roundtable chairman and is also chief executive of publisher McGraw-Hill Cos.

“‘We are very close to a bottom, and the fourth quarter of last year and the first quarter of this year will probably be the most disappointing,’ McGraw said.

“Michael Goodman, an economist at the University of Massachusetts’ Donahue Institute, took issue with that view. ‘I don’t really see accumulating evidence that we’ve hit the bottom just yet,’ Goodman said. ‘The pace of the decline may slow in the future, but I think all the evidence is still clear that we can expect continued decline.'”

Source: Scott Malone, Reuters and Business Roundtable, April 7, 2009.

Bloomberg: Manhattan office rents fall most in quarter century
“Manhattan office rents fell the most in at least 25 years in the first quarter as financial companies slashed jobs and relinquished space in the US recession.
“Rents dropped 6% from the fourth quarter to $65.01 a square foot, commercial property broker Cushman & Wakefield said in a report today. The decline is the most in records dating back to 1984, Cushman said, and shows how much the fallout from the September bankruptcy of Lehman Brothers Holdings hurt the New York property market.

“‘It’s gone beyond the financial firms,’ Joseph Harbert, Cushman & Wakefield’s chief operating officer for the New York region, said in a telephone interview. ‘It’s broad across a lot of industries. Everybody has the same way of thinking, which is low confidence in job growth, consolidation, cutting expenses, not hiring unless you really have to.’

“The recession has eroded demand for commercial property as companies fire workers and consumers rein in spending. The Bloomberg REIT Office Property Index of 14 companies is down 28% this year. In New York, the amount of space available for sublease approached a five-year high in the first quarter, Cushman said.

“Space for sublease helped push the overall vacancy rate in Manhattan to 9.6% from 6.1% a year earlier, the highest since the third quarter of 2005, the report said.

“Rents are ‘falling faster than they did in the last two recessions,’ Harbert said.”

Source: David Levitt, Bloomberg, April 7, 2009.

Asha Bangalore (Northern Trust): Consumer credit – households are parsimonious, not a surprise
“Consumer credit fell at an annual rate of 3.5% in February, after a 3.8% increase in January. This is not a surprise because households are financially strapped and employment conditions are bleak. With the exception of a decline in January 1998, consumer credit has risen every month from April 1993-July 2008. In other words, a fifteen-year stretch of consumer borrowing that has stopped abruptly.
“The jobless rate was 8.5% in March 2009 and an unemployment rate of 10% is the projected high for the current downturn. Therefore, it should not be surprising to see a further contraction in consumer credit. The parsimonious behavior of households needs an offset to rejuvenate consumer spending. This is another aspect that justifies the fiscal stimulus put in place.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 7, 2009.

Asha Bangalore (Northern Trust): Price-to-rent ratio – pace of decline in home prices to moderate
“At the end of 2008, the price-to-rent ratio (i.e. ratio of the Case-Shiller Home Price Index and the Owners’ Equivalent Rent of the Consumer Price Index) showed a noticeable improvement, with the ratio in the fourth quarter of 2008 (107.97) closer to the long-term average of 98.05.
“The fourth quarter price-to-rent ratio is well within the range of the mean (109.77) of the entire historical period (1987-2008) which includes the go-go years of 2001-2008. The main take-away from this chart is that home prices are most likely to decline in the months ahead, given the elevated level of inventories; but the pace of decline will be assuredly small.”

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

Bloomberg: Soros sees “signs” US housing market is hitting bottom
“Billionaire investor George Soros talks with Bloomberg’s Kathleen Hays about the outlook for the US housing market. Soros also discusses the US government’s efforts to rescue the US banking system and the Financial Accounting Standards Board’s decision to relax fair-value accounting rules.”

Source: Bloomberg, April 6, 2009.

Floyd Norris (The New York Times): Will job numbers keep being revised down?
“Here are the total job losses reported for recent months, as originally reported and as shown in the latest revisions.

August 2008: Initially 84,000, revised to 175,000
September 2008: Initially 159,000, revised to 321,000
October 2008: Initially 240,000, revised to 380,000
November 2008: Initially 533,000, revised to 597,000
December 2008: Initially 524,000, revised to 681,000
January 2009: Initially 598,000, revised to 655,000
February 2009: Initially 651,000, as released today.
“On average, from August through January, the first estimate was too optimistic by 112,000 jobs.”
Source: Floyd Norris, The New York Times, April 6, 2009.

BCA Research: ISM Manufacturing – bottomed, but what next?
“With more evidence of a bottoming in global growth, investor attention has shifted to the strength of the recovery.
“Evidence continues to accumulate that the worst of the recession is over. The US leading economic indicator and a few of our global leading indicators appear to have bottomed. Even some global coincident economic data have bounced off of their respective lows.

“In the US, the ISM new orders index rose above 40 for the first time in seven months, although this has not fed through to production as firms struggle to get inventories under control.

“The S&P 500 celebrated the shift in tone in the economic data, posting a solid 8.5% gain in March (its best monthly performance since an 8.6% gain in October 2002).

“Now the focus has shifted to whether or not positive second-half growth will provide the base for a solid recovery next year. There is plenty of fiscal and monetary stimulus in the pipeline, but the headwinds and risks highlight that the recovery will be fragile. Much will depend on the apparent success or failure of the bank stress tests and the Treasury’s plan to relieve banks of their legacy assets. Both are wild cards that could reverse the recent improvement in investor sentiment. Moreover, consumer fundamentals remain grim due to high debt levels, falling home prices and massive payroll cuts.

“Bottom line: A bottoming in growth suggests that we have seen the lows in the equity market, but a sustainable uptrend may take time to develop and could be very choppy.”

Source: BCA Research, April 3, 2009.

News N Economics: Federal mortgage relief programs – troubling statistics
“Delinquency rates are surging, up 7.88% in the fourth quarter of 2008 (Q4 2008) according to the Mortgage Bankers Association (MBA). Both the quarterly change and the share of delinquencies are the highest since the series was first measured in 1972. Furthermore, troubling statistics at the Office of Thrift Supervision show that government interventions through Q4 2008 have failed to halt mortgage default rates.

“Delinquency rates are making records across all loan types, with prime delinquencies hitting 5.1% in Q4 2008. The delinquency data include loans that are at least one payment overdue and not yet in the foreclosure process; clearly some of these loans will enter the foreclosure process soon.

“Foreclosures in 2008 were up 225% since 2006, and according to the delinquency rates, that number is set to worsen in 2009.”

Source: Rebecca Wilder, News N Economics, April 6, 2009.

News N Economics: Failed bank list surprises – consolidation?
“The number of (or lack of) bank failures in 2008 and 2009, 46 total, is shocking: world bank losses near $1.3 trillion; the US economy enters its 16th month of recession; default rates surges (from student loans and credit cards to mortgages and corporations); and the G-20 Leaders move forward on tightening global financial regulation.
“In shoring up the banking system, the Fed and the Treasury likely enabled the economy to skirt a depression-sized disaster. However, since there are so many banks left standing – in a perfectly efficient situation more would have fallen by now – there is probably still a long way to go on the road to recovery. Consolidation is likely inevitable. This is inefficient, and government intervention is using resources to push aside a natural market response: the consolidation of the banking industry.

“The chart below illustrates the number of bank failures and the magnitude of bank failures, as measured by the population. In the Great Depression, the number of bank failures peaked at 112 in 1938; and during the saving and loan crisis, the number of failures hit 211 in 1987 and 1988. However, according to the size of the population, the magnitudes of the bank failures in 1934 and 1988 were similar in size (clearly, the economic response was not).

“In 2008 and 2009, the banking system has averted mass closure with the various government intervention efforts, where only 46 banks total have failed – minuscule compared to the previous two crises. Massive government interventions are pushing back banking reform; and in its effort to preserve the financial system, the consolidation of the banking system is inhibited by allowing weak banks to survive.

“The market response requires consolidation – wonder when that is going to happen.”

Source: Rebecca Wilder, News N Economics, April 3, 2009.

Casey’s Charts: Cross-border investment shrinking
“The latest US Treasury International Capital (TIC) report shows the January outflow of foreign private investments was $158 billion. Since June of 2007, there has been a massive flight of foreign capital from the United States, though the impact has been mitigated by a collapse in US investments abroad.
“Nonetheless, the exodus reveals increasing unease by foreign capital holders about the US’s economic future, especially troubling at a time when the government needs to finance a $3 trillion budget. The outlook for the dollar is not so good.”

Source: Casey’s Charts, April 7, 2009.

Vicktor Capitalist: High-yield default rate to reach 53% over five years
“About 53% of US companies that issued high-risk, high-yield bonds will default over the next five years, according to Jim Reid at Deutsche Bank.
“The figure compares with a 31% five-year rate in the early 1990s and 2000s, and as much as 45% ‘in a very, very different market in the Great Depression’, Reid, the London-based head of fundamental credit strategy, wrote in a note to clients today. The estimate is based on the premium investors demand to hold the notes and assumes recoveries from the defaults will be zero, Reid wrote.”

Source: Vicktor Capitalist, April 7, 2009.

Bespoke: Rally check-up
“The S&P 500 broke above its highs from last week today, which confirms a continuation of the uptrend that started back on March 9. Since then, the S&P 500 is up 25.5%.
“Five sectors have outperformed the overall market since March 9, while five have underperformed. Financials are up the most at 60.3%, followed by Consumer Discretionary (36.3%), Industrials (34.4%), Materials (32.1%), and Technology (29.8%). All of the outperforming sectors are cyclical in nature.

“Health Care has rallied the least at just 11.9%. Consumer Staples, Energy, Utilities, and Telecom are the other four sectors that have underperformed the S&P 500 during the rally.”

Source: Bespoke, April 9, 2009.

Robert Buckland (Citigroup): Earnings outlook – don’t adjust your set
“Global stock markets have entered the ‘twilight zone’ – the phase of a recession when earnings keep falling but share prices stabilise, says Robert Buckland, equity strategist at Citigroup.
“‘The profits outlook for 2009 remains dire,’ he says. ‘The global recession has already driven trailing corporate earnings around the world down by 29% from the end-2007 high, but we think that this still represents only just over half the likely 50% peak-to-trough fall. We don’t expect this profits cycle to bottom until 2010.’

“He notes that Japan has overtaken the US as the leader in the global earnings downturn. ‘Partly due to the strong yen, Japanese earnings are now down 60% from the November 2007 global earnings peak. US earnings are down 37% and Europe ex-UK is down 34%. UK and emerging market earnings have held up best, partly as a result of higher weightings in commodity stocks. Sterling’s weakness has also helped prop up UK earnings.’

“‘But Mr Buckland suspects that global equity valuations are generally cheap enough to withstand this onslaught of bad news. Investors should not get too bearish when equities fall sharply or too bullish when they rise sharply.

“‘While it is sensible to gradually raise exposure to risk assets through the twilight zone, there is no rush. The time to turn a wholesale buyer of cyclicals and seller of defensives is when the earnings cycle bottoms.'”

Source: Robert Buckland, Citigroup (via Financial Times), April 8, 2009.

Clusterstock: 140 years of bull and bear markets
“Doug Short has created a nice snapshot of 140 years of market history. It’s a logarithmic chart, so it shows the impact of percentage rather than absolute price moves, and prices have been adjusted for inflation. Note that the chart is price-only: It does not include the impact of dividends.
“Key points:

• Bull and bear markets have always been with us (duh)
• The market spends about half the time above trend and half below trend (duh)
• The market has been above trend for about 20 years (ruh roh)
• The trough-to-peak 18-year bull market that peaked in 2000 (+666%) was the biggest in history by a mile (ruh roh)
• In the 5-year bull market in the middle of the Great Depression (1932-1937), the S&P jumped 266% (five years is a long time – don’t want to miss that)
• 20 years after the 1929 peak, the S&P traded at half its 1929 value (ruh roh)

And here are the moves in table form:

Source: Henry Blodget, Clusterstock, April 6, 2009.

Barry Ritholtz (The Big Picture): Rosenberg – rally too flashy for our liking
“David Rosenberg, the soon-to-be former economist for Merrill Lynch, had a very prescient commentary last week about the 25% four-week rally.
“As for this 25% rally in three weeks – the consensus has swung to the view that this is a real inflection point. One warning. We saw this happen in late 2001 and early 2002 too … big, big rally; early cyclicals flew; the markets thought we were in for a V-shaped recovery … it was longer away than many at the time believed and many were burnt as a result. And keep in mind that the ‘second derivative’ on growth began to improve in the fourth quarter of 2001, and the S&P 500 still did not bottom for another year.

“Currently, the equity market is priced for $70 on earnings on a going-forward basis, or a 75% rebound. And with retailing stocks up 30%, leisure/accommodation up 35%, and the homebuilders up 40%, the market is priced, amazingly, for a revival that is led by the consumer! (in fact, the only S&P sector that is now trading at P/E multiples that are at post-2001 highs is the consumer cyclical group). If we see that in the next year, we will be the first to hang up our Hewlett Packards. Being up 25% in a year and staying bearish … well, shame.

“Achieving that in less than a month – come on. Too flashy for our liking.

“In fact, let’s learn from history. The only times we have ever seen the stock market surge close to this much in such a short time frame were: December 1929, June 1931, August 1932, May 1933, July 1938 and September 1982.

“Only in September 1982 and in May 1933 was the equity market embarking on a new bull phase. But guess what? By the time the S&P 500 surged 25%, it had already crossed above its 200-day moving average. So call us when the S&P 500 crosses the 1,000 mark – another 20% to go. That is how deeply entrenched this particular bear market has been – that even after this massive rally, the onus is still on the bulls! Consider as well that on four of the six occasions that the equity market staged such a huge rally over such a short time period, it relapsed. So we are going to wait this out, acknowledging that we could be late to the party. We still feel the downside risks are too high to be involved.”

Source: Barry Ritholtz, The Big Picture, April 6, 2009.

Bespoke: Estimated Q1 ’09 earnings growth
“At the start of the last earnings season, estimates for Q4 ’08 YoY growth for the S&P 500 were at -20%. The actual number came in at close to -60%. For Q1 ’09, estimates are much more negative at -37.3%. The only question now is whether estimates are still too bullish or too bearish. As shown in the chart below, estimates for Q2 ’09 and Q3 ’09 get better but are still negative.

“Looking at Q1 ’09 sector estimates, Consumer Discretionary is expected to see YoY earnings decline by 103%. Materials are at -76%, followed by Energy (-58%) and Industrials (-39%). Utilities, Health Care, and Consumer Staples are all expected to see earnings decline by less than 10%.”

Source: Bespoke, April 7, 2009.

Los Angeles Times: Grim market milestone – dividend cuts outnumber increases
“A new measure of American shareholders’ pain in this bear market and recession: The number of US companies cutting cash dividend payments in the first quarter exceeded the number of firms that raised dividends, according to Standard & Poor’s.
“Since S&P began collecting dividend data in 1955, cuts have never outnumbered increases in any quarter – until now.

“A total of 367 companies reduced or eliminated their payouts last quarter, up 342% from the 83 reductions in the first quarter of 2008, S&P said.

“The number of firms increasing their dividends last quarter plunged to 283, down 53% from 598 a year earlier.

“S&P’s dividend survey covers about 7,000 US companies.

“Dividend payments are a function of current earnings and of companies’ faith in future earnings. On both counts, executives are sending a grim message by hacking their payouts or by holding back from raising dividends.

“The total reduction in payments in the first quarter amounted to an annualized $77 billion in lost income to shareholders.”

Source: Tom Petruno, Los Angeles Times, April 7, 2009.

Richard Russell (Dow Theory Letters): What are the markets trying to do?
“The market situation has seldom been more confusing. Many analysts are convinced that we are in a new bull market. Others (me included) believe we are in a bear market correction (rally).
“Because of the confusion, I’m going to step out and make a few guesses (might as well, since nobody really knows what’s going on).

“(1) I believe that we’re in a secondary (upward) correction of a bear market. I’m going to guess that this correction could rise further or at least last longer than most people are expecting. A bear market rally is supposed to convince the majority that a new bull market has started. The rally will often continue until a large number of investors are back on board, and then the bear will kill them as it fades away, leaving the new optimists high and dry and with losses.

“(2) Gold is in a downward correction of its primary bull market. Gold may decline or stall until it convinces the majority of gold-fans that the gold bull market has died. Holders of ‘paper gold’ and gold futures and options will be frightened out of their holdings. What we’re experiencing now is the big correction that often occurs prior to the third speculative phase in gold. Holders of physical gold (coins, bars) will do best, since they will tend to hold on to their gold positions no matter what.

“So what are the markets trying to do? They’re doing what they always do, keep investors in the equity bear market and keep investors out of the gold bull market. Why would they do that? Because that’s the very nature of markets. Markets tend to thwart the majority. And that’s logical and self-evident. If markets existed to make money for the majority, then most market participants would be millionaires, and we know that sadly, that is not the case.”

Source: Richard Russell, The Dow Theory Letters, April 7, 2009.

Reuters: Mobius sees China as good investment target
“Templeton Asset Management’s veteran fund manager Mark Mobius sees China as a good investment target because, besides its fast economic growth, China has treated smaller stakeholders in state-owned companies well …
“‘The Chinese government has shown itself very fair in its treatment of minority shareholders,’ Mobius told Reuters in an interview on Tuesday.

“‘When there was an acquisition from a parent company, they make sure there was a fair price and so forth.’

“Mobius also said there were opportunities in China because its economy is expanding the fastest among the BRIC nations, which refers to Brazil, Russia, India and China. He said he expected the Chinese economy to grow 7-8% this year.

“China has a geographical advantage as it can obtain technology from Japan and Korea, he said. It can also rely on countries such as Australia, Indonesia, Vietnam and Thailand for natural resources to help grow its economy, he said.”

Source: Reuters (via Investorazzi), April 7, 2009.

Yahoo Finance, Tech Ticker: Soros – dollar’s strength a measure of system’s “sickness”, euro will remain viable
“George Soros is a man of many skills. The billionaire has been very successful as an author, philanthropist, and as a force in liberal politics.
“Arguably Soros’ greatest skill – and undoubtedly where he made his fortune – is as a speculator, specifically in the realm of currencies. Soros is best known as ‘the man who broke the Bank of England’ for his infamous short bet against the pound in 1992. Less known but nearly as successful was his 1985 ‘Plaza Accord’ bet that the dollar would fall against the yen.

“So when George Soros talks currencies, people listen. In the accompanying clip, he provides insights on three of today’s big currency questions:

Will the dollar maintain its status as the world’s reserve currency?

Is there are risk of a breakup of the Eurozone?

Is he still short the British sterling today?”

Source: Yahoo Finance, Tech Ticker, April 7, 2009.

John Authers (Financial Times): Falling yen – measure of risk-taking
“If you need a measure of how much optimism has returned to world markets, look at the yen, says John Authers.”

Click here for the article.

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

Financial Times: IMF urges eastern EU to adopt euro
“Crisis-hit European Union states in central and eastern Europe should consider scrapping their currencies in favour of the euro even without formally joining the eurozone, according to the International Monetary Fund.
“‘The eurozone could relax its entry rules so countries could join as quasi-members, without European Central Bank board seats, says the fund.

“‘For countries in the EU, euroisation offers the largest benefits in terms of resolving the foreign currency debt overhang [accumulation], removing uncertainty and restoring confidence.

“‘Without euroisation, addressing the foreign debt currency overhang would require massive domestic retrenchment in some countries, against growing political resistance.’

“Disclosure of the confidential report, prepared about a month ago, could reignite a fierce debate over strategies to assist central and east Europe.

“Even though global leaders hailed last week’s G20 summit as a success, eastern Europe’s challenges remain. The IMF report was compiled to support a campaign by the fund, the World Bank and the European Bank for Reconstruction and Development to persuade the EU and eastern European states to back a region-wide anti-crisis strategy, including a regional rescue fund. The campaign failed amid widespread opposition from both west and east European states.

“Eurozone members also oppose easing the eurozone’s entry rules, as does the ECB.”

Source: Stefan Wagstyl, Financial Times, April 5, 2009.

John Authers (Financial Times): Gold loses lustre
“Gold’s desirable properties are a part of popular culture. It is indestructible and, throughout recorded history, people have believed in it.
“But it yields nothing, making it hard to value or to compare with other assets. If its price moves sharply, those who want to know what it is worth have nothing to hold on to.

“Gold has just undergone a sharp correction, taking it down 14% from $1,000 per ounce, which it briefly hit in February, before a slight bounce on Tuesday. Why?

“Supply and demand have a role. Talk of International Monetary Fund gold sales at the G20 summit dented prices. So did anecdotal evidence that individuals were selling their gold, notably in India where there is heavy retail demand for gold and where gold in rupee terms rallied throughout the crisis, making sales attractive.

“Gold is an inflation hedge but inflation expectations cannot explain this sell-off as it has coincided with a rise in inflation expectations, as derived from prices of inflation-linked bonds.

“Much of the sell-off is down to returning risk appetite, which can also be seen in the equity rally. But comparisons with other commodities suggest there is more to gold’s sell-off.

“The oil price in gold terms has been stable over history but not recently – from the top of the oil bubble last year until the start of gold’s correction a few weeks ago, oil fell by some 77% relative to gold.

“Platinum, a precious metal that should have a lot in common with gold, dropped 55% in gold terms from its recent peak, while copper, an industrial metal, fell 66%. All remain significantly cheaper in gold terms than they were at the outset of the financial crisis almost two years ago.

“This suggests that the gold price had raced ahead of itself as investors looked for insurance during the crisis and also suggests that the correction could go further.”

Source: John Authers, Financial Times, April 7, 2009.

David Fuller (Fullermoney): Gold is in awkward phase
“I have previously mentioned that gold was in an awkward phase as the ‘Armageddon, economic collapse and mayhem’ buyers since October 2008 drift away and have yet to be entirely replaced by those who want a hard currency. Additionally, pending IMF sales have not helped sentiment recently.
“Also, with a stock market rally underway, and some appetite for risk returning, gold faces more competition. Additionally, people struggling to pay bills, not least those from India, Western Europe and the USA, have been swapping gold trinkets for ready cash. A metallurgist friend with a jewellery store in a prosperous section of Massachusetts says that the gold scrap trade has kept him in business over the last year. Lastly, this is a quiet time for gold, which tends to do best on average in 1Q and 4Q.

“The charts show that after encountering resistance near last year’s high, gold has broken some support near $900. It is also oversold on short-term stochastics and approaching the 200-day MA, which turned upwards not long ago. I do not know whether or not this will offer support as the overall pattern is rangebound, albeit within a long-term upward trend. Nevertheless, I have often mentioned that I personally regarded gold as a buy on easing.

“I will hold onto my personal gold investments, which include futures. I suspect that we have seen most of the correction. More importantly, an upward dynamic and sustained move back above $900 is currently required to signal that the gold price is rising once again.”

Source: David Fuller, Fullermoney, April 9, 2009.

Financial Times: Gold could “easily” return to $1,000
“Gold prices could ‘easily’ re-attain the $1,000 an ounce level this year and could even push through the $1,100 barrier, setting a new record high, according to GFMS, the precious metals research consultancy that released its Gold Survey 2009 today.
“GFMS said that it was ‘only a question of time’ before investment demand proved sufficiently powerful to overcome weak fabrication demand, particularly in the gold jewellery market, and surging scrap supplies, the twin obstacles which have managed to halt the advance in gold prices short of the $1,000 an ounce level.

“Although the spur for safe haven buying of gold from concerns over the stability of the banking sector might wane as the credit crisis eases, GFMS said investors would increasingly focus on a new worry: the probable inflationary consequences of the fiscal and monetary policies being adopted by governments in response to the global financial crisis.

“‘Investors who are currently sitting on record amounts of cash will be looking for a secure inflation hedge for which purpose gold fits the bill perfectly,’ said Philip Klapwijk, chairman of GFMS.

“Inflows into the gold market reached $26 billion last year, a relatively small amount compared to the flows into mainstream asset classes but enough to drive gold prices to record levels.

“Mr Klapwijk said last year’s inflows could be ‘dwarfed’ if gold’s appeal to investors widened substantially on the back of government’s willingness to attempt an inflationary solution to the current global economic crisis.

“… GFMS said the solidity of the US dollar was also likely to be questioned by investors concerned about the ability of the US authorities to finance the explosion in government debt

“Following the collapse of Lehman Brothers in September of 2008, GFMS said there had been a ground swell in investment in physical gold, reflecting distrust in financial institutions, and general desire for wealth preservation, with this buying centred on western Europe and North America.

“This desire for gold in physical form was illustrated by the 40% rise in minting of official coins last year while gold bar hoarding rose 62%.

“GFMS said there had been an explosion of buying interest in gold last year but this had been offset by the general sell-off across commodity markets that was prompted by fears global growth would slow dramatically and the need to raise cash to cover margin calls or losses elsewhere.

“‘Without these outflow from the OTC and futures markets, chiefly from hedge funds, gold prices might well have achieved fresh highs in the final months of 2008,’ said Mr Klapwijk.”

Source: Chris Flood, Financial Times, April 7, 2009.

CNBC: Oil headed to $40?
“Investors should brace themselves for the long aftershock of oil trending towards $40 a barrel, says Daniel Yergin, Cambridge Energy Research Associates chairman.”

Source: CNBC, April 6, 2009.

CEP News: Euro zone GDP falls by a record 1.6% in fourth quarter
“Overall economic activity in the euro zone fell at a faster rate than expected in the fourth quarter, with weakness reported across the board.
“According to Eurostat final estimates, euro zone GDP fell by a record 1.6% quarter-over-quarter in Q4, down from both the 1.5% decline expected and Q3’s 0.2% slide.

“Weakness was widespread, the statistics office said.

“Investment levels fell 4.0% in the fourth quarter, overshadowing both the 3.7% decline expected and preliminary estimates of -2.7%. Household consumption also lost ground, slipping 0.3% quarter-over-quarter. However, expectations had been for a more severe fall of 0.4%, up 0.5 percentage points from preliminary estimates.

“Exports declined 6.7% in quarterly terms, adding to the third quarter’s 0.2% slide, while imports decreased by 4.7%, reversing the previous period’s 1.3% rise.

“Conversely, government expenditure surprised to the upside, rising 0.4% in the fourth quarter. Preliminary estimates had suggested a decline of 0.6%.

“On an annualized basis, overall economic activity contracted 1.5% in the fourth quarter of 2008, revised down from preliminary estimates of -1.3%. In the previous quarter, GDP had increased 0.6% annually.

“Over 2008 as a whole, GDP rose 0.8% in the euro zone, down notably from 2007’s 2.6% increase.”

Source: CEP News, April 7, 2009.

Ambrose Evans-Pritchard: (Telegraph): Swiss slide into deflation signals the next chapter of this global crisis
“Swiss consumer prices fell 0.4% in March (year-on-year). Swiss CPI will be minus 1% at least by July, nearing the level where spending psychology changes. By the time you have a self-feeding spiral, it is too late.
“‘This is something that we must prevent at all costs. The current situation is extraordinarily serious,’ said Philipp Hildebrand, a governor of the Swiss National Bank.

“The SNB is not easily spooked. It is the world’s benchmark bank, the keeper of the monetary flame. Yet even the SNB’s hard men have thrown away the rule book, taking emergency action to force down the exchange rate of the Swiss franc.

“Here lies the danger. If other countries try to export deflation by this means, we will face a second phase of the global crisis. Taiwan is already devaluing. Korea, Singapore, and Sweden all seem tempted to follow. Japan is chomping at the bit.

“‘We don’t fully realise in the West what a catastrophic collapse Japan has suffered,” says Albert Edwards, global strategist at Société Générale. ‘The West has dumped a large part of its economic downturn onto Japan by devaluing against the yen.’

“This is about to go into reverse as Tokyo hits the ping-pong ball back across the net. ‘As the unfolding collapse in the yen gathers pace, the West will see its green shoots incinerated to dust,’ he said.

“Ultimately, I suspect this crisis may mark the moment when the Swiss franc loses its safe-haven role. Credit default swaps (CDS) measuring risk on five-year government debt have reached 127 for Switzerland, higher than Britain at 118. Norway has the world’s lowest CDS at 48, reflecting its status as a petro-democracy.

“Switzerland’s banks are over-leveraged. Loans to emerging markets equal 50% of GDP (half to Eastern Europe). Banking secrecy is dying. Fortunately for the Swiss, they have built up $700 billion in net foreign assets for a rainy day. What we risk now is a game of deflation “pass-the-parcel” worldwide. The economic establishment was caught off guard from 2003 to 2007 because it overlooked the way that Asia’s unbalanced relationship with the West was feeding a credit bubble. It may be caught again as the same warped structure leads to a chain of (panicked) devaluations.

“Enjoy the ‘bear-trap’ rally on global bourses this spring. But remember, we have only just begun to see the mass lay-offs and hardship caused by this slump. The politicians will act to save their skins. Markets may not like the result.”

Source: Ambrose Evans-Pritchard, Telegraph, April 5, 2009.

Financial Times: Ireland unveils emergency budget
“Ireland’s finance minister warned on Tuesday that the nation faced ‘the challenge of [its] life’, as he slapped higher taxes on the middle classes in an emergency budget aimed at tackling the spiralling economic crisis.
“Brian Lenihan outlined plans to set up a national asset management agency to take over an estimated €80-€90 billion of bad loans extended by local domestic banks to developers and property companies that now look as if they will not be able to repay.

“Bankers said Ireland would be the first European Union country to adopt a so-called ‘bad bank’ model to clean up the balance sheets of its main banks in the hope this would restore lending to the real economy.

“Mr Lenihan acknowledged that the move ‘will result in a very significant increase in gross national debt’. But he said the cost of servicing the debt would be met ‘as far as possible from income accruing from the assets of the new agency’.

“Forecasting an 8% fall in Ireland’s economic output this year, the finance minister said he had to tackle soaring government borrowing and called on political opponents to ‘set aside narrow sectional interests’ and support the tax increases.

“Referring to the Irish electorate’s shock rejection of the European Union’s Lisbon treaty last June, he said ‘economic success had fostered a false sense of invincibility’ and warned that the country was now facing ‘the challenge of this nation’s life’.

“Standard & Poor’s, the rating agency, last week downgraded Ireland’s sovereign debt. Even after Tuesday’s measures, Mr Lenihan forecast government borrowing would be the equivalent of 10.75% of gross domestic product – more than three times the limit on countries joining the euro.”

Source: John Murray Brown, Financial Times, April 7, 2009.

CEP News: China’s economy to bottom out in 2009, World Bank says
“Signs are emerging that China’s economy could be on track to reach a bottom by mid-2009, according to a report from the World Bank.
“A half-trillion dollar stimulus package announced by the Chinese government in November is expected to begin this year and fully take hold by 2010, fueling the country’s economic growth, the World Bank said in its semi-annual review of the region’s economic health.

“‘Thanks to the substantial policy stimulus, China’s economy should continue to grow significantly in a very challenging external environment,’ the report said.

“China’s economy is expected to grow by 6.5% in 2009, down from the 9% growth rate seen in 2008. The World Bank estimates the stimulus package will add 4.9 percentage points to GDP growth.

“The Chinese recovery could potentially lead to a regional stabilization, the report noted. However, it cautioned that China still heavily relies on exports to world markets that are still contracting, which would hinder a sustainable recovery.

“‘The measures the authorities have taken to counteract the crisis across the region are helping to cushion the impacts on the most vulnerable people,’ World Bank Vice President for the East Asia and Pacific region Jim Adams said in a release.

“The report warns that weaker growth in the region will slow the pace of poverty reduction, with indigence expected to increase in Cambodia, Malaysia and Thailand this year.”

Source: Stephen Huebl, CEP News, April 7, 2009.

Financial Times: Japan unveils $154 billion stimulus plan
“The Japanese government is to provide Y50,000 billion in loan guarantees to government affiliated financial institutions to buy stocks in the market as part of a record stimulus plan that will cost the government Y15,400 billion.
“The size of the new package, which amounts to 3% of GDP, highlights the government’s intention to act aggressively to combat the debilitating impact of the global recession on the Japanese economy.

“It will give ‘a large stimulus to the domestic economy’, said Richard Jerram, chief economist at Macquarie in Tokyo.

“The package also includes a tax break on up to Y40m of ‘gift’ money parents provide their children to buy a house.

“Details of the new stimulus plan, which also includes measures to stimulate solar energy, encourage more lending to corporations and support the unemployed, will be unveiled on Friday.

“Using fiscal policy aggressively ‘will damage the already poor fiscal position but tolerating extended deflation and recession would probably be worse for the path of government debt,’ he said.

“Takeo Kawamura, chief cabinet secretary told the Japanese media the government would likely have to issue construction bonds and deficit bonds of Y11,000bn to pay for the additional spending.”

Source: Michiyo Nakamoto, Financial Times, April 9, 2009.

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