Words from the (investment) wise August 30, 2009

Words from the (investment) wise for the week that was (August 24 – 30, 2009)

Stock markets, in general, again logged gains last week as pundits perceived economic data to be better than expected. But the recovery path is not home and dry yet, as shown by declines in crude oil, a number of emerging stock market indices, small cap indices and high-yield corporate bonds. All said, risky assets displayed some fatigue despite positive economic reports.

Caution remained over the robustness of any economic upswing, as reflected by the solid performance of government bonds, with safe-haven currencies such as the US greenback and the Japanese yen also edging up.

As expected, Federal Reserve Chairman Ben Bernanke was appointed by President Barack Obama on Tuesday to serve a second term. “Mr Obama is said to credit Mr Bernanke with a leading role in helping to avert economic catastrophe. By reappointing Mr Bernanke – who worked in the Bush White House – Mr Obama can also emphasize his bipartisan credentials at a time when he is embroiled in a fiercely partisan battle over healthcare reform,” commented the Financial Times.


Source: LOLFed.com

However, critics of Obama’s decision were plentiful and Morgan Stanley’s Stephen Roach, blaming Bernanke for his pre-crisis actions, said (via the Financial Times): “It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure. Maybe the patient needs a new doctor.” Bill King (The King Report) ascribed the stock market rising subsequent to Obama’s announcement to a “thank God it’s not Larry Summers” rally.

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers showing both the S&P 500 Index and government bonds rising, indicating an expectation of a subdued economic recovery and that the Fed’s monetary policy will stay easy for an extended period of time.


Source: StockCharts.com

A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

The MSCI World Index (+1.3%) and MSCI Emerging Markets Index (-0.2%) again followed separate paths last week as China, Hong Kong and Brazil underperformed. Mature stock markets have recorded gains for a straight seven weeks, whereas emerging markets have seen two back-to-back weeks of declines. The end result is that emerging markets have now underperformed developed markets for four weeks running. Could this be a sign of a retrenchment in risk appetite?

The major US indices extended their gains to two consecutive weeks, including eight straight up-days in the case of the Dow Jones Industrial Index, before getting snapped by a decline on Friday. The year-to-date gains are as follows: the Dow Jones Industrial Index +8.7%, the S&P 500 Index +13.9% and the Nasdaq Composite Index +28.6%. With declines on three days, the Russell 2000 Index was the odd index out last week, but still boasts a respectable +16.1% gain since the beginning of 2009.

Click here or on the table below for a larger image.


Top performers in the stock markets this week were Lithuania (+28.2%), Estonia (+17.3%), Latvia (+12.6%), Egypt (+9.6%) and Iceland (+9.1%). The top three positions were all occupied by eastern European countries where worries over the risk of some economies collapsing have receded. At the bottom end of the performance rankings, countries included Nepal (-4.0%), China (-3.4%), Kenya (-2.7%), Uganda (-2.6%) and Bangladesh (-1.8%).

The Chinese Shanghai Composite Index recorded its fourth consecutive down-week as investors remained concerned about how long China’s exceptionally loose monetary policy will continue. The banking regulator has already instructed lenders to raise reserves to 150% of their non-performing loans by the end of this year – up from 134.8% at the end of June, and the central bank has increased money-market rates to drain liquidity.

However, US Global Investors opines that historically sustainable market rallies out of a cyclical trough usually start with an expansion in valuation multiples followed by a recovery in earnings. “China may be poised to enter this second stage against a favorable macro backdrop. With surging money supply and significantly lower commodity prices from a year earlier, corporate earnings in China could produce upside surprises going forward,” said the report.


Source: US Global Investors – Weekly Investor Alert, August 28, 2009.

Of the 96 stock markets I keep on my radar screen, 77% (last week 47%) recorded gains, 18% (47%) showed losses and 5% (4%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included CurrencyShares Russian Ruble (XRU) (+5.0%), First Trust Amex Biotechnology (FBT) (+4.8%), iShares MSCI Australia (EWA) (+4.5%) and iShares Silver Trust (SLV) (+4.2%).

On the losing side of the slate, ETFs included Claymore/AlphaShares China Real Estate (TAO) (-4.2%), Market Vectors Coal (KOL) (-3.1%), SPDR KBW Regional Banking (KRE) (-3.1%) and iShares MSCI Brazil (EWZ) (-3.0%).

As far as credit markets are concerned, Bloomberg reported that banks were increasing lending to buyers of high-yield company loans and mortgage bonds at what might be the fastest pace since the credit-market debacle began in 2007. “Federal Reserve data show the 18 primary dealers required to bid at Treasury auctions held $27.6 billion of securities as collateral for financings lasting more than one day as of August 12, up 75% from May 6. The increase over that 14-week stretch is the biggest since the period that ended April 2007, three months before two Bear Stearns Cos. hedge funds failed because of leveraged investments.” This is a sign of credit markets moving towards normalization.

Referring to the mind-boggling US budget deficit, the quote du jour this week comes from 85-year old Richard Russell, author of the Dow Theory Letters. He said: “Comes the dawn – and the penalty. There’s a price to be paid for Bernanke’s all-out battle to thwart the bear market. And now it’s being told. Yesterday the White House itself admitted that the budget deficit over the next 10 years would be $2 trillion above their original outrageous estimate of $7 trillion dollars.

“As I said all along, it would have been better to have allowed the bear market to run its course to conclusion. That would have been extremely painful, but the US would have recovered. However, deficits in the trillions could ultimately ‘break’ this nation. I can’t imagine how Bernanke-Obama plan to handle the coming mind-blowing deficits, plus the interest on those deficits.

“The pressure will be on the reserve status of the dollar, the level of the dollar compared to other international currencies, interest rates, and the standard of living of all of us living in the new ‘banana republic’, the United States of ‘bankrupt’ America.

“When you take all this in, you can begin to see how this bear market could end with stocks selling below known values and people despising the stock market and capitalism.”

Other news is that the Fed must for the first time identify the companies in its emergency lending programs – created to address the financial crisis – after losing a Freedom of Information Act lawsuit against Bloomberg. The Fed is likely to appeal against the order on the grounds that such disclosure would threaten the companies and the economy.

Also, the Federal Deposit Insurance Corporation (FDIC) on Thursday said (via the Financial Times) the number of “problem banks” had grown from 305 to 416 during the second quarter, representing total assets of $299.8 billion. In the meantime, the FDIC’s deposit insurance fund, which insures up to $250,000 per depositor in each bank, had fallen to just $10.4 billion – the lowest level since March 1993 – as a result of all the bank failures, tallying 84 so far in 2009.

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “market”, “Fed”, “bank”, “prices”, “rates” and “economy” featured prominently. Interestingly, “recovery” is still moving up the ranks as the global economy seems to have turned the corner.


The key moving-average levels for the major US indices, the BRIC countries and South Africa (from where I am writing this post) are given in the table below. With the exception of the Chinese Shanghai Composite Index, which fell below its 50-day moving average about two weeks ago, all the indices are trading above their respective 50- and 200-day moving averages. The 50-day lines are also in all instances above the 200-day lines and therefore not threatening the bullish “golden crosses” established when the 50-day averages broke upwards through the 200-day averages.

The August 17 lows that represent short-term support levels for the major US markets and are as follows: Dow Jones Industrial Index (9,135), S&P 500 Index (980) and Nasdaq Composite Index (1,931).

Click here or on the table below for a larger image.


For more on key levels and some ideas regarding the short-term direction of the S&P 500 Index, Adam Hewison’s (INO.com) short technical analysis provides valuable insight. Click here to access the presentation.

The chart below, courtesy of Bespoke, shows that the average short interest as a percentage of float for stocks in the S&P 1500 is currently at 6.9% – the lowest level since February 2007 when the average was 6.6%. “In 2008, it was the bulls who argued that high levels of short interest were a reason the market should rally. With the recent data, however, it is now the bears who will argue that low levels of short interest suggest that investors are now too bullish,” remarked Bespoke.


Source: Bespoke, August 26, 2009.

Doug Kass (The Street.com) said: “The authorities have created a sugar high for speculation, with a Federal Reserve that has maintained interest rates so low that there is no return on savings and with an Administration that promises to provide stimulus until it manufactures economic growth. My view is that investors will shortly see through the current sugar high and the better-than-expected earnings cycle and will begin to look over the valley at the chronic and secular issues that have emerged from the past cycle and from policy decisions aimed at returning the domestic economy toward self-sustaining growth.”

The last words on equities go to Jeff Saut, investment strategist of Raymond James, who said “‘Breakout or fake out?’ is the question du jour. Yet as market maven Arthur Zeikel wrote decades ago, ‘Despite what theoreticians tell us, investing – particularly at the margin – is not the product of rational and objective analysis, but an emotional relative analysis – anxiety about the future.” My colleague Bob Ferrell put it this way: ‘Emotions are simply stronger than reason; people do not change and people make markets!’ Indeed, fear, hope and greed are only loosely connected to the business cycle. And, at session 30 in the ‘buying stampede’, we are clearly in the ‘greed phase’. We continue to invest, and trade accordingly.”

For more discussion on the direction of financial markets, see my recent posts “Stages of a secular bear market“, “The lie of the investment land, according to Hugh Hendry“, “Picture du Jour: Stock market rally long in the tooth” and “RGE: Impact of China on financial markets“.

“Global business confidence remained positive last week for the third straight week. The last time confidence was consistently positive was nearly a year ago,” said the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses are responding most positively to broad assessments of the current economic environment and the outlook into early 2010; they are as strong as they have been since the financial crisis first hit in the summer of 2007.” The Survey results suggest that the global recession is coming to an end, but isn’t quite over yet.


Source: Moody’s Economy.com

The German economy expanded in the second quarter of 2009 with real GDP rising by 0.3% on a seasonally adjusted basis from the previous quarter. Also, the Ifo Business Survey reported that German business confidence improved to an 11-month high in August, indicating a further improvement in GDP in the second half of 2009.


Source: Ifo, August 27, 2009.

Heading home from Jackson Hole a week ago, the world’s central bankers seemed in no hurry to start increasing interest rates – intent on not repeating the monetary policy tightening mistakes of the Great Depression. As reported by the Financial Times, Martin Feldstein, a Harvard professor, thought it would be possible to have “two years or more of very low interest rates” without risk of excess inflation, given the labor and factory capacity in the economy.

Meanwhile, after keeping the interest rate at a record low of 0.5% from April to July 2009, the Bank of Israel (BoI) became the first central bank to raise interest rates in this cycle, increasing the benchmark rate to 0.75%. Analysts believe Australia and Norway will tighten first among the G-10 central banks in 2010, as reported by RGE Monitor.

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

Friday, August 28
• “Cash for clunkers” lifts consumer spending in July

Thursday, August 27
• Jobless claims decline, but continuing claims including special programs advance
• Q2 real GDP unchanged at -1.0%

Wednesday, August 26
• Sales of new homes advanced, inventories are shrinking
• Defense and aircraft orders lift durable goods in July

Tuesday, August 25
• Case-Shiller Home Price Index and FHFA House Price Index – noteworthy recovery
• Gain in consumer confidence during August nearly erases losses of prior two months

Monday, August 24
• Chicago Fed National Activity Index – confirms positive signals of other reports

The S&P/Case-Shiller Home Price Index for June showed its second straight monthly increase. According to Bespoke, the last time home prices increased two months in a row was back in the summer of 2006 at the end of the last housing boom. “June’s 1.4% monthly gain was also the largest monthly increase since June 2005. There’s no denying that these numbers are showing considerable improvement.”


Source: Bespoke, August 25, 2009.

The White House confirmed on Tuesday that the US deficit would be wider than they had previously estimated. The graph below, courtesy of Clusterstock – Business Insider, shows that although the budget deficit as a percentage of GDP has been revised down for 2009 – due to less bailout spending – it has been increased for every year through 2019.


Source: Clusterstock – Business Insider, August 25, 2009.

“The longest and deepest recession of the postwar era has ended,” said IHS Global Insight chief economist Nariman Behravesh (via MarketWatch). However, he expressed concern that the recovery could lose steam in a few quarters, warning: “A sustained, robust global recovery depends on renewed growth in consumer spending and capital investment. The coming expansion will be restrained by cautious consumers in the United States and Europe, who are saving to rebuild depleted assets and reduce debt burdens.”

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


Time (ET)

Statistic For


Briefing Forecast

Market Expects


Aug 25

08:30 AM

Durable Orders Jul




Aug 25

09:00 AM

Consumer Confidence Aug




Aug 25

09:00 AM

S&P/Case-Shiller Home Price Index Jun





Aug 26

08:30 AM

Durable Orders Jul





Aug 26

08:30 AM

Durables, Ex Transportation Jul





Aug 26

10:00 AM

New Home Sales Jul





Aug 26

10:30 AM

Crude Inventories 08/21





Aug 27

08:30 AM

Initial Claims 08/22





Aug 27

08:30 AM

Q2 GDP – Preliminary Q2





Aug 27

08:30 AM

GDP Deflator Q2





Aug 28

08:30 AM

Personal Income Jul





Aug 28

08:30 AM

Personal Spending Jul





Aug 28

08:30 AM

PCE Core Jul





Aug 28

09:55 AM

Michigan Sentiment Aug





Source: Yahoo Finance, August 28, 2009.

Click here for a summary of Wells Fargo Securities’ weekly economic and financial commentary.

The European Central Bank (ECB) will make an interest rate announcement on Thursday (September 3). US economic data reports for the week include the following:

Monday, August 31
• Chicago PMI

Tuesday, September 1
• Construction spending
• ISM Index
• Auto sales

Wednesday, September 2
• ADP employment
• Productivity
• Factory orders
• FOMC minutes

Thursday, September 3
• Initial jobless claims
• ISM services

Friday, September 4
• Nonfarm payrolls
• Unemployment rate

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


Source: Wall Street Journal Online, August 28, 2009.

“Great minds talk about ideas. Average minds talk about events. Small minds talk about people,” said Eleanor Roosevelt. Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist Investment Postcards readers to generate money-making ideas that look past the noise investors so often wave to wade through.

For short comments – maximum 140 characters – on topical economic and market issues, web links and graphs, you can also follow me on Twitter by clicking here.

That’s the way it looks from Cape Town (from where I am leaving on a business trip to Slovenia in five days’ time – let me know if you are in Ljubljana at the time and would like to meet).


Source: Nate Beeler, August 28, 2009.

Clusterstock: The great banking recovery or next bubble?
“Should we be happy that the value of investments owned by commercial banks has begun to rapidly climb? Or should we be worried that the value is climbing at such a rapid clip that it looks a bit like an unsustainable bubble? Or is it just evidence of banks hoarding money and refusing to lend it out, holding Treasuries and securities instead?”


Source: John Carney and Rory Maher, Clusterstock – Business Insider, August 26, 2009.

Bloomberg: World economy emerging from worst recession since World War II
“The global economy may be coming out of the worst recession since World War II as record-low interest rates and trillions of dollars in fiscal stimulus spur demand.

“Sales of existing US homes jumped in July to the highest level since August 2007, and German service industries expanded this month for the first time in almost a year, reports yesterday showed. The Japanese economy grew for the first time in five quarters, according to a report earlier this week.

“‘There is no question the global economy is healing and emerging from recession,’ Kenneth Rogoff, a Harvard University professor and former chief economist for the International Monetary Fund, said in a Bloomberg Television interview yesterday.

“Federal Reserve Chairman Ben Bernanke and other global policy makers cautioned that the recovery is likely to be muted, indicating they would not soon remove all the stimulus injected into the financial system.

“‘Strains persist in many financial markets across the globe,’ Bernanke said in a speech yesterday at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. ‘The economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels.’

“The US housing market, which led the way into the recession, is showing signs of righting itself after almost four years of declines. The 7.2% rise in sales of existing homes last month was the biggest since the National Association of Realtors began keeping records in 1999.

“In Germany, Europe’s largest economy, ‘business sentiment among service providers strengthened in August and was the most positive since January 2006,’ Markit Economics said yesterday, pointing to its purchasing managers’ survey.

“‘The recession is over,’ said Klaus Baader, chief European economist at Societe Generale SA in London, who called the Markit data an ‘incredible reading’.

“Japan’s economy is also being boosted by government measures ahead of an election. Prime Minister Taro Aso, whose party is trailing in opinion polls before the August 30 parliamentary elections, has put forward a 25 trillion yen ($265 billion) stimulus plan.

“The 3.7% rise in Japanese gross domestic product in the second quarter followed an 11.7% contraction in the first three months of the year. Exports led the revival of the world’s second-largest economy last quarter, jumping by 6.3%.”

Source: Rich Miller and Alison Sider, Bloomberg, August 22, 2009.

Nouriel Roubini (RGE Monitor): The exit strategy from the monetary and fiscal easing – damned if you do, damned if you don’t
“In the last few months the world economy has been saved from a near depression. That feat has been achieved by a range of extraordinary government stimulus measures: In the US and in China, and to a lesser extent in Europe, Japan and other countries, governments have pumped liquidity, slashed policy rates, cut taxes, primed demand and ring-fenced and back-stopped the financial system. All of this has worked, but it has worked at a cost. Governments have been spending and borrowing like never before. The question now is: how do they stop?

“This is not a simple problem. Restore normality too soon and the risk is that a weak recovery will double dip into a second and deeper recession. Restore it too late and inflation will already be ingrained.

“The second quarter GDP estimates for the US show just how significant this aggressive front-loaded policy stimulus has been. While total GDP growth was sharply negative in the first quarter – around -5.6% – the rate of decline in the second quarter had moderated to around -1.5%. Credit this relative improvement to governmental monetary, fiscal and financial stimulus. The private components of GDP, private demand and capex, were actually still very weak. But government spending rose by 5.6%, breaking what otherwise would have been another quarter of headlong GDP contraction.

“Necessary as the stimulus has been, it cannot go on indefinitely. Governments cannot run deficits of 10% or more of GDP, and they cannot go on doubling the monetary base, without eventually stoking inflation expectations, pushing up long term interest rates and eventually eroding their very viability as sovereign borrowers. Not even the US can do that.”

Click here for the full article.

Source: Nouriel Roubini, RGE Monitor, August 24, 2009.

Financial Times: Central bankers content to keep rates low
“The world’s central bankers were in no hurry to start raising interest rates as they headed home on Sunday from the US Federal Reserve’s annual retreat in Jackson Hole, Wyoming.

“In private and in public, most officials indicated they believed that rates could be maintained at ultra-low levels for a considerable time without generating excess inflation, in spite of better economic data and a return of ‘animal spirits’ in financial markets.

“Some used the platform of the conference to push back against calls for early implementation of ‘exit strategies’ that would reverse the current extraordinary degree of monetary stimulus.

“‘There is no reason to re-assess our monetary policy stance,’ Erkki Liikanen, Finland’s central bank governor, told Bloomberg news agency. Ewald Nowotny, Austria’s central bank chief, said he did not favour adding a surcharge to the European Central Bank’s next offer of one-year loans to banks – a view shared by some other European officials in Jackson Hole.

“If the ECB simply offers the money at its current policy rate, the market is likely to interpret this as a signal that it does not expect to raise interest rates for 12 months.

“Federal Reserve officials have edged up their assessment of economic conditions but have not significantly revised 2010 forecasts. They are encouraged by the shares rally, and see scope for this to support economic activity by restoring lost wealth and improving confidence, but are not betting too much on this.

“Don Kohn, vice-chairman of the Fed, said he saw no contradiction between its commitment to keep rates low for an ‘extended period’ and the desire to keep inflation at moderate levels – though he emphasised that this was a conditional commitment that could change if the economic outlook changed.

“Martin Feldstein, a Harvard professor, thought it would be possible to have ‘two years or more of very low interest rates’ without risk of excess inflation, given the spare capacity in the economy.

“Rick Mishkin, a former Fed governor, told the Financial Times the Fed would be easing policy further if it were not for the costs associated with monetising government debt.

“‘Optimal policy suggests more Treasury purchases would make sense. But that ignores the fiscal situation,’ he said. ‘The Fed is absolutely right to get off that programme – it cannot be seen to be accommodating the government deficit.’

“Jean-Claude Trichet, president of the European Central Bank, meanwhile spoke against a return to complacency and a failure to follow through on financial reforms, even though ‘we are a little bit out of the current episode’.”

Source: Krishna Guha, Financial Times, August 23, 2009.

The Wall Street Journal: Policy makers seek to learn from 1937’s stalled comeback
“A few months ago, Obama administration officials were sounding the alarm about another 1929. These days, it’s 1937 that has them in a sweat.

“The Great Depression was W-shaped. The stock-market collapse led to a steep economic decline. But by 1933, the economy had rebounded. Then a series of monetary and fiscal blunders drove the country back into a deep recession at the end of 1937.

“That episode is at the heart of the debate over how quickly the government and the US Federal Reserve should unwind the emergency measures they have taken to fend off a Depression-like contraction.

“For the administration, the answer is clear: Err on the side of continued expansionary policies. ‘What you learned from that episode in 1937 is that it’s not enough to be recovering,’ says Christina Romer, chairman of the president’s Council of Economic Advisers and an expert on the Great Depression. ‘You don’t want to do anything when you start recovering that nips it off too soon.’

“For fiscal conservatives, the answer is equally clear: Start cutting the federal deficit and slowing the growth in the money supply now, before the binge generates a burst of inflation.

“Ms. Romer is ‘sending the absolutely wrong message – that we can’t do anything to worry about inflation until the recovery is locked in because of concern for unemployment,’ says Allan Meltzer, a political economist at Carnegie Mellon University. ‘The reason economists and central bankers have two eyes is so they can do two things at once.’

“The economy was recovering briskly during Franklin D. Roosevelt’s first term in the White House. The jobless rate, which had peaked at 25% in 1933, fell to 14% in 1937 – not exactly cause for celebration but a relief nonetheless.

“The comeback stalled in 1937. Banks, nervous about the fragile recovery, were holding huge amounts of cash in reserve at the Fed. Fearing an inflationary surge should the banks decide to lend that money out to businesses and individuals, the Fed – which had made the mistake of tightening monetary policy soon after the 1929 stock-market crash – miscalculated again. The Fed ratcheted up banks’ reserve requirements three times, starting in 1936. The banks reacted by cutting lending even further.

“‘There’s no doubt that [Fed Chairman Ben] Bernanke is heavily influenced by these two mistakes of the Fed during the Depression and is absolutely intent on not repeating them,’ says Alex J. Pollock of the American Enterprise Institute, a free-market think tank in Washington.”


Source: Michael Phillips, The Wall Street Journal, August 24, 2009.

Financial Times: Obama to offer Bernanke second term
“Ben Bernanke is to be reappointed by President Barack Obama for a second four-year term as chairman of the Federal Reserve, according to a White House official.

“Mr Obama will make the announcement on Tuesday in Martha’s Vineyard, where he is on holiday with his family. The decision is the ultimate seal of approval for the Fed chairman, who was originally appointed by George W Bush, the Republican former president, and whose reappointment was seen as far from guaranteed.

“It follows Mr Bernanke’s extraordinarily aggressive efforts to fight the economic crisis, including radical interest rate cuts, loans to non-bank financial institutions, Fed-led bailouts of Bear Stearns and AIG and gigantic asset purchases – exploiting the Fed’s powers to their legal limits in a bid to prevent a second Great Depression.

Economists, investors and fellow central bankers overwhelmingly favour Mr Bernanke’s reappointment. However, disquiet in Congress over the exercise of extraordinary Fed powers has raised a cloud over his future.

“The Fed chairman’s reappointment still has to be approved by the Senate, but his prospects look good. Chris Dodd, chairman of the Senate banking committee, on Monday said that ‘reappointing Chairman Bernanke is probably the right choice’, though he promised a ‘thorough and comprehensive confirmation hearing’.

“Mr Obama is said to credit Mr Bernanke with a leading role in helping to avert economic catastrophe. By reappointing Mr Bernanke – who worked in the Bush White House – Mr Obama can also emphasise his bipartisan credentials at a time when he is embroiled in a fiercely partisan battle over healthcare reform.”

Source: Krishna Guha, Financial Times, August 25, 2009.

The Wall Street Journal: Bernanke reappointment politically shrewd
“As President Obama trumpets the turnaround in the economy, WSJ’s Executive Washington Editor Gerald Seib says the reappointment of Federal Reserve chairman Ben Bernanke, therefore, is a politically shrewd move.”

Source: The Wall Street Journal, August 25, 2009.

Stephen Roach (Financial Times): The case against Bernanke
“Barack Obama has rendered one of his most important post-crisis verdicts: Ben Bernanke will be nominated for a second term as chairman of the Federal Reserve. This is a very shortsighted decision. While America’s head central banker deserves credit for being creative and courageous in orchestrating an unusually aggressive monetary easing programme, it is important to remember that his pre-crisis actions played an equally critical role in setting the stage for the most wrenching recession since the 1930s. It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure. Maybe the patient needs a new doctor.

“Mr Bernanke made three critical mistakes in his pre-Lehman incarnation:

“First, and foremost, he was deeply wedded to the philosophical conviction that central banks should be agnostic when it comes to asset bubbles.

“Second, Mr Bernanke was the intellectual champion of the ‘global saving glut’ defence that exonerated the US from its bubble-prone tendencies and pinned the blame on surplus savers in Asia.

“Third, Mr Bernanke is cut from the same market libertarian cloth that got the Fed into this mess.

“Notwithstanding these mistakes, Mr Obama may be premature in giving Mr Bernanke credit for the great cure. No one knows for certain as to whether the Fed’s strategy will ultimately be successful. The worst of the US recession appears to have been arrested for now – a fairly typical, but temporary, outgrowth of the time-honoured inventory cycle. But the sustainability of any post-bubble recovery is always dubious. Just ask Japan 20 years after the bursting of its bubbles.

“While financial markets are giddy with hopes of economic revival – in part inspired by Mr Bernanke’s cheerleading at the Fed’s annual Jackson Hole gathering – there is still good reason to believe that the US recovery will be anaemic and fragile. US consumers are in the early stages of a multi-year retrenchment as they cut debt and rebuild retirement saving. The unusual breadth and synchronicity of the global recession will restrain US export demand from becoming a new growth engine.

“It would be the height of folly to reward Mr Bernanke for the recovery that never stuck. Yet Mr Bernanke’s apparent reward is, unfortunately, typical of the snap judgments that guide Washington decision-making. In this same vein, it is hard to forget Mr Greenspan’s mission-accomplished speech in 2004 that claimed ‘our strategy of addressing the bubble’s consequences rather than the bubble itself has been successful’. Eager to declare the crisis over, the Obama verdict may be equally premature.”

Source: Stephen Roach, Financial Times, August 25, 2009.

The Wall Street Journal: Into the abyss – budget deficit deepens
“The White House has released its budget deficit estimates and the news is grim, WSJ’s Deborah Solomon reports. With economic output tipped to fall by almost 3% this year, the US economy is facing more tough times.”

Source: The Wall Street Journal, August 25, 2009.

Bill King (The King Report): Withholding taxes down
“For all the hope and hype of recovery, withholding taxes keep making new lows (via Matt Trivisonno’s blog).”


Source: Bill King, The King Report, August 28, 2009.

Asha Bangalore (Northern Trust): Q2 real GDP decline unchanged
“The real gross domestic product (GDP) of the economy declined at an annual of 1.0% according to the preliminary estimate, unchanged from the advance report. The revisions offset each other to leave the headline unchanged.


“The upward revisions of consumer spending (-1.0% vs. -1.2% in advance estimate), residential investment expenditures (-22.8% vs. -29.3% in the advance report), equipment and software spending (-8.4% vs. -9.0% in advance estimate) led to an upward revision of real final sales (+0.4% vs. -0.2% in advance report), which is the first gain after two quarterly declines.

“Exports were also revised up which led to a smaller trade gap than previously estimated. The decline in inventories (-$159.2 billion vs. -$141.1 billion) is larger than the earlier estimate, implying a big addition to inventories in the second-half of the year. The US economy is projected to show a mild recovery in the second-half of the year.

“The overall GDP price index was revised down to a flat reading but the core personal consumption expenditure price index was left unchanged at a 2.0% increase.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 27, 2009.

MoneyNews: Fed official – real unemployment at 16%
“The real US unemployment rate is 16% if persons who have dropped out of the labor pool and those working less than they would like are counted, a Federal Reserve official said Wednesday.

“‘If one considers the people who would like a job but have stopped looking – so-called discouraged workers – and those who are working fewer hours than they want, the unemployment rate would move from the official 9.4% to 16%, said Atlanta Fed chief Dennis Lockhart.

“He underscored that he was expressing his own views, which ‘do not necessarily reflect those of my colleagues on the Federal Open Market Committee,’ the policy-setting body of the central bank.”

Source: MoneyNews, August 27, 2009.

ViktorCapitalist: US – 34% of workers have one week or less of savings
“An online survey reveals the thin savings cushion of American:

“(Mish’s Global Economic Trend Analysis) … Over a one week period beginning July 6 and running through July 13, more than 16,000 visitors to Monster.com participated in the Monster Meter Poll question ‘If you were laid off without severance, how long would your savings cover your living expenses?’

* One Week or Less: 34%
* 2-4 Weeks: 16%
* 1-2 Months: 16%
* 3-5 Months: 14%
* 6 Months or Longer: 20%

“Creating three broad groups, 50% have less than a month of savings, while only 20% have 6 months or more.”

Source: ViktorCapitalist, August 26, 2009.

Asha Bangalore (Northern Trust): “Cash for clunkers” lifts consumer spending in July
“Nominal consumer spending increased 0.2% in July, after a 0.6% gain in June. In July, the ‘cash for clunkers’ program accounted for the 1.3% increase in purchases of durables (mostly cars). After adjusting for inflation, consumer spending moved up 0.2% in July vs. a 0.1% increase in June. Outlays on non-durables dropped 0.3% in July and purchases of services rose 0.1%. Real consumer spending has now registered three consecutive monthly increases. The “cash for clunkers” program should raise consumer spending in August, albeit a large increase compared with July. The main implication is that consumer spending in the third quarter is most likely to grow around a 2.0% annualized rate after a 1.0% drop in the second quarter. This supports forecasts of an increase in real GDP in the third quarter.


“Personal income held steady in July, following a 1.1% drop in June and a 1.4% increase in May. Personal income data reflect the impact of the American Recovery and Reinvestment Act of 2009 in the past few months, with large transfer payments leading to the wide swings in personal income. Focusing on wages and salaries gives a better picture of earnings. Wages and salaries rose 0.1% in July, this is noteworthy because it is the first monthly increase recorded since October 2008.

“Personal saving as a percent of disposable income was 4.2% in July, down from 4.5% in June. It appears that the saving trajectory is close to 4.0% after excluding the distortions from transfer payments related to the American Recovery and Reinvestment Act. The personal saving rate was 1.7% and 2.6% in 2007 and 2008, respectively.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 28, 2009.

Standard & Poor’s: S&P/Case-Shiller Home Price Indices – home prices on an upswing in the second quarter
“Data through June 2009, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of US home prices, show that the US National Home Price Index improved in the second quarter of 2009.


“The chart above depicts the annual returns of the US National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller US National Home Price Index – which covers all nine US census divisions – recorded a 14.9% decline in the 2nd quarter of 2009 versus the 2nd quarter of 2008. While still a substantial negative annual rate of return, this is an improvement over the record decline of 19.1% reported in the 1st quarter of the year. The 10-City and 20-City Composites recorded annual declines of 15.1% and 15.4%, respectively. These are also improvements from their recent respective record losses of -19.4% and -19.1%.

“‘For the second month in a row, we’re seeing some positive signs,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s. ‘The US National Composite rose in the 2nd quarter compared to the 1st quarter of 2009. This is the first time we have seen a positive quarter-over-quarter print in three years. Both the 10-City and 20-City Composites posted monthly increases, as did most of the cities. As seen in both seasonally adjusted and unadjusted data, as well as the charts, there are hints of an upward turn from a bottom. However, some of the hardest hit cities, especially in the Sun Belt, show continued weakness.'”

Source: Standard & Poor’s, August 25, 2009.

Asha Bangalore (Northern Trust): Sales of new homes advanced, inventories are shrinking
“Sales of new single-family homes rose 9.6% in July, after upward revisions for May and June. Purchases of new homes have risen in five of the first seven months of the year. Sales of new single-family homes are now up roughly 32% from a record low reading of 329,000 units registered in January 2009. On a regional basis, sales of new homes rose in the Northeast (+32.4%) and South (+16.2%), fell in Midwest (-7.6%) and was nearly steady in the West (+1.0%). The $8,000 credit for home buyers appears to have raised sales of new and existing single-family homes. Breakdowns of new home sales based on price ranges show a small increase in purchases of homes prices upwards of $400,000 and below $750,000.


“From a year ago, sales of new single-family homes are down only 9.3%; it is a significant improvement compared with double digit declines seen in recent months. The largest drop in the median price of a new single-family home for the cycle was in January 2009 (-45.5%).

“The inventories-sales ratio is encouraging because it declined to a 7.5-month mark, down from a cycle high of 12.4-months in January 2009. The median of this ratio during 1963-2000 is 6-month supply.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 26, 2009.

Clusterstock: New foreclosures dwarf new home sales
“New home sales are ticking up again, bringing some much-needed relief to the beleagured homebuilders. But watch out. Mark Hanson produced this chart, showing foreclosure starts against new home sales. As you can see, the new foreclosure starts jumped even more in July than new home sales, meaning trouble down the road for homebuilders – especially once that $8,000 first-time homebuilder tax credit runs out.”


Source: Joe Weisenthal and Rory Maher, Clusterstock – Business Insider, August 27, 2009.

Asha Bangalore (Northern Trust): Defense and aircraft orders lift durable goods
“Orders of civilian aircraft (+107%) and defense items (+14.8%) led to the 4.9% jump of bookings of durable goods during July. Excluding aircraft and defense, orders of durable capital goods fell 0.3% in July after a 3.6% increase in June and a 4.3% gain in May.

“The main message from the ISM manufacturing survey, industrial production report, and orders of durable goods is that the factory sector is moving toward a complete recovery.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 26, 2009.

Financial Times: US “problem” bank list hits 15-year high
“The number of US banks at risk of failure is at a 15-year-high while the fund protecting depositors is at its lowest level since 1993, according to figures that highlight the spread of the crisis to the lower reaches of the financial system.

“The Federal Deposit Insurance Corporation, a banking regulator, on Thursday said the number of ‘problem banks’ had risen from 305 to 416 during the second quarter. The FDIC does not name the lenders on the ‘problem list’ but said that total assets of that group had increased from $220 billion to $299.8 billion in the three months through June.

“That relatively low figure suggests that after hitting large institutions which traded complex securities, the financial crisis and the recession are taking a toll on smaller banks that lend to businesses and consumers.

“Sheila Bair, the FDIC chairman, said on Thursday that while earlier losses in the industry were related to troubled residential loans and complex mortgage-related assets, there were now problems with more conventional types of retail and commercial loans that have been hit hard by the recession. ‘These credit problems will outlast the recession by at least a couple of quarters,’ she said.

“Thursday’s news of a sharp fall in the FDIC’s deposit insurance fund, which insures up to $250,000 per depositor in each bank, underscored the problems faced by regulators when contemplating the rescue or wind-down of institutions with trillions of dollars on their balance sheets.

“The agency said its fund had fallen to just $10.4 billion from $13 billion in the quarter, the lowest level since March 1993 when the US was in the middle of the savings and loans crisis. The fund has been depleted by bank failures: regulators have shut 81 banks this year.

“‘In many important respects, financial markets are returning to normal,’ said Ms Bair. ‘Combined with the positive economic news in recent weeks, we’re hopeful that this will lead to a moderation in credit problems in coming quarters. But, as our report shows, cleaning up balance sheets is a painful process that takes time.'”

Source: Joanna Chung and Francesco Guerrera, Financial Times, August 27, 2009.

Asha Bangalore (Northern Trust): Some market spreads are widening again
“At the short end, financial market spreads continue to narrow. However at the long end, the situation is different. Two representative long end market spreads – Moody’s Baa less 10-year Treasury note yield and junk bond yield less 10-year Treasury note yield – have both widened during August 11-20. The reasons are not clear as economic reports strongly suggest that underlying fundamentals are improving. Concern about the nature of economic recovery and projected status of balance sheets of banks could be factors influencing these spreads.”



Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 24, 2009.

Bloomberg: Leverage rising on Wall Street at fastest pace since ’07 freeze
“Banks are increasing lending to buyers of high-yield company loans and mortgage bonds at what may be the fastest pace since the credit-market debacle began in 2007.

Credit Suisse Group AG and Scotia Capital, a unit of Canada’s third-largest bank, said they’re offering credit to investors who want to purchase loans. SunTrust Banks Inc., which left the business last year, is ‘reaching out to clients’ to provide financing, said Michael McCoy, a spokesman for the Atlanta-based bank. JPMorgan Chase & Co. and Citigroup Inc. are doing the same for loans and mortgage-backed securities, said people familiar with the situation.

“‘I am surprised by how quickly the market has become receptive to leverage again,’ said Bob Franz, the co-head of syndicated loans in New York at Credit Suisse. The Swiss bank has seen increasing investor demand for financing to buy loans in the past two months, he said.

“Federal Reserve data show the 18 primary dealers required to bid at Treasury auctions held $27.6 billion of securities as collateral for financings lasting more than one day as of August 12, up 75% from May 6.

“The increase suggests money is being used for riskier home-loan, corporate and asset-backed securities because it excludes Treasuries, agency debt and mortgage bonds guaranteed by Washington-based Fannie Mae and Freddie Mac of McLean, Virginia or Ginnie Mae in Washington. Broader data on loans for investments isn’t available.”

Source: Kristen Haunss and Jody Shenn, Bloomberg, August 28, 2009.

Bill King (The King Report): Foreign assets in the US


“The above chart illustrates why the dollar is under severe pressure and the US financial and economic system is on life-support from the Fed as well as why Bernanke and his ilk will not divulge its records, ways and means to the public.

“It also shows that the Fed is between a rock and a hard place because as the Fed increases its life support (balance sheet/debt monetization) it will increase the desire of foreigners to jettison dollar-denominated assets. This is why there is no exit strategy for the foreseeable future.”

Source: Bill King, The King Report, August 27, 2009.

Eoin Treacy (Fullermoney): Stock markets – give upside benefit of doubt
“There has been considerable debate about how the excess liquidity permeating rallies across asset classes and borders will be withdrawn. What seems clear is that changes will be made cautiously and economic recovery will be given precedence over worries about future inflation.

“The S&P 500 accelerated lower from September, lost consistency at the penultimate low and finally bottomed in March. It encountered brief resistance in the region of 1,000 and is now pulling away from that area. For months we have felt that the S&P’s bull market hypothesis was more faith based than analytical because it had not yet completed its base like so many of the leading markets. This is no longer the case. Current action is consistent with bull market type activity..

“In the short-term, a sustained move back below 1,000 would be needed to check momentum. A fall back below 975 would break the progression of higher lows and pull into the previous May-June range. A sustained move below 900 would indicate an increased likelihood of base formation extension. In the absence of any of these factors, the upside can continue to be given the benefit of the doubt. As stock markets advance, 10,000 points on the Dow Jones Industrials is the next potential area of resistance.

“The Nasdaq has been trending consistently higher from the March lows and appears to be in the process of completing another small range. A sustained move below 1,560 would be needed to question the consistency of the advance.

“Favourable stock market conditions are evident all over the world with an impressive number of markets moving to new recovery highs this week. The FTSE-100 consolidated above the 4,500 for much of the month and broke upwards last week. A sustained move back into the base, with a fall below 4,500 would be required to hinder upside potential. Germany’s DAX has a similar pattern with 5,000 being the operative level.”

Source: Eoin Treacy, Fullermoney, August 25, 2009.

Richard Russell (Dow Theory Letters): Are we in a new primary bull market?
“The stock market is at all times subject to three trends (1) the primary or great tidal sweep of the market which can be likened to the tide of the ocean. (2) The secondary trend of the market, which can be compared with the waves in the ocean. And (3) The daily action, which can be likened to the ripples on the waves.

“Right now we are at a most unusual and rare juncture. I say this because at this time there are questions and arguments regarding both the primary trend of the market and the secondary trend.

“Are we in a new primary bull market now? Personally, I doubt it.

“As for the secondary trend, I’m having some second thoughts about the secondary trend. On July 23, 2009, the Transports finally confirmed the Dow in closing above its June 11 high. This was a signal that the secondary trend of the market had turned bullish. From July 23 onward, the market gathered strength as the secondary trend continues to extend.

“At this point, it’s obvious that the secondary trend of the market remains strongly bullish. How far this counter-trend rally will carry is unknowable. I’ve been reluctant to recommend investing heavily in what I believe is a bear market rally or a correction against the prevailing primary trend. The great values haven’t been there, and playing bear market rallies can be dangerous and stressful.”

Source: Richard Russell, (Dow Theory Letters), August 25, 2009.

Brian Belski (Oppenheimer Asset Management): Reasons to be cheerful
“History shows that September is customarily the weakest month of the year for US equities – but this does not necessarily hold true following positive stock market performances during the summer, says Brian Belski, chief investment strategist at Oppenheimer Asset Management.

“He says that since the second world war, the S&P 500 has suffered an average September fall of 0.5%. But there has been a decided shift in seasonality patterns in the past 15 years.

“‘Given the dramatic change in the financial system during this period, we believe the new pattern provides a more relevant comparison,’ he says.

“‘Seasonal patterns actually favour the market in the current environment. We have found that Septembers that follow positive summer months, such as the one we have seen this year, exhibit positive S&P 500 performance, on average.

“‘In addition, the fourth quarter is typically a period of strength for the market regardless of summer performance.’

“Mr Belski notes that many investors are now anticipating a sizeable correction in the stock market following its strong ascent since March.

“‘While we do not completely discount the possibility of some sort of market pullback given recent gains, we remain optimistic regarding market performance in the months ahead and expect the S&P 500 to finish the year above current levels.”

Source: Brian Belski, Oppenheimer Asset Management (via Financial Times), August 24, 2009.

Bespoke: Missing in action – short sellers
“Last night [Wednesday] after the close, the major exchanges released their mid-month short interest data, or as some would say, their lack of short interest data. As shown in the chart below, the average short interest as a percentage of float for stocks in the S&P 1500 is currently at 6.9%. This is the lowest level since February 2007, when the average was 6.6%. In 2008, it was the bulls who argued that high levels of short interest were a reason the market should rally. With the recent data, however, it is now the bears who will argue that low levels of short interest suggest that investors are now too bullish.”


Source: Bespoke, August 26, 2009.

Bespoke: Investors Intelligence hits most bullish level since January 2008
“… short interest as a percentage of float is currently at its lowest level since 2007. Another group of investors who have turned decidedly less bearish are newsletter writers. According to the weekly data from Investors Intelligence, bullish sentiment among newsletter writers is at its highest levels since January 2008. At the other end of the spectrum, bears are practically in complete hibernation. At a level of 19.8%, bearish sentiment is at its lowest level since late 2007. While it is still far from standing room only, the bullish camp is starting to attract a crowd.”


Source: Bespoke, August 26, 2009.

Bespoke: Individual investors not as bullish as the pros
“In the last few days, we have noted how short interest is at multi-year lows and newsletter writers are more bullish than at any other time since the start of 2008. While the so-called pros are bullish, individual investors apparently need more convincing. According to this week’s survey of the American Association of the Individual Investors (AAII), only 1/3 of investors surveyed are currently bullish, while nearly half (49%) are bearish. Based on these surveys at least, not everyone is bullish.”


Source: Bespoke, August 27, 2009.

MoneyNews: Roubini missed the stock rally
“While perennial pessimist Nouriel Roubini has been prescient in predicting recent economic woes, investors sticking to his forecasts have suffered dearly since March.

“That’s because he’s been warning about continued problems in the economy while stock prices have soared.

“The New York University professor has been arguing for weeks that the economy is in danger of suffering a double-dip recession. And he hasn’t yet recommended that investors plunge into stocks, Bloomberg notes.

“Yet the Standard & Poor’s 500 Index has soared 53% from its March low.

“When the rally began, Roubini called it a ‘dead-cat bounce’, and in May he said the ascent may ‘fizzle’, Bloomberg reports.

“On March 9, Roubini said the S&P 500 was headed down to 600. Instead it has jumped 71% to 1,027 as of Wednesday morning.

“‘We’re looking at a bull cycle in phase one,’ investment guru Laszlo Birinyi told Bloomberg.

“‘No one wants to come out and say, ‘This is a bull market.’ Everyone’s just dancing around the term.’

“Birinyi says Roubini may have missed the upward move because he concentrates on the economy rather than stocks.

“Roubini certainly isn’t the only bear.

“Market sage Robert Prechter told Yahoo! News that recent stock gains represent a bear market rally and that the next wave will be down.

“‘I think we’ll definitely break the March 2009 lows, and I think the bear market will extend well into the next decade,’ he says.”

Source: Dan Weil, MoneyNews, August 26, 2009.

Clusterstock: The trashiest stocks are on fire
“Since the market hit its lows in early March, the trashiest, most beaten-down stocks have been the big winners. Some are arguing that the trash stocks have to slow down soon. But in the meantime, it looks like investors are reaching for the trashiest of the trash. Check out the crazy runs in Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG) and even the soon-to-be-liquidated GM over the last few weeks. This is the kind of behavior that might foretell the end of the junk rally.”


Source: Joe Weisenthal and Rory Maher, Clusterstock – Business Insider, August 24, 2009.

Eoin Treacy (Fullermoney): Carry trades being reopened
“The unwinding of the yen carry trade, from September, forced large positions in speculative assets all over the world to be sold, contributing to the synchronous decline in the price of most financial assets and the corresponding advance of the yen and the dollar. This tumultuous event is now part of our history and conditions, particularly since March, have been conducive to carry trades being reopened.

“Investors in speculative higher yielding assets have seldom been provided with such a wide menu of potential carry trade currencies. Interest rates in the Eurozone, UK, USA and Japan are all at historically low levels. While we tend to concentrate on the main currency cross rates it is evident from a perusal of the major currencies that some classic destinations for carry trades such as New Zealand (USD, GBP, EUR, JPY) or Brazil (USD, GBP, EUR, JPY) have currencies that are appreciating in all four potential carry currencies.

“In the past, a US, UK or European investor would have had to borrow Japanese yen and invest them in a third country. This exposed them to currency fluctuations in two crosses. The current environment is simpler, exposing a domestic investor in one of these countries to a single cross rate.

“We have long said that in the competitive world of globalisation, no country wants a strong currency but some are more motivated to have a weak currency than others. The strength of carry trade destination currencies will increasingly become a political issue. New Zealand’s government has already commented on the strength of Kiwi. The Kiwi has appreciated significantly in all of the crosses mentioned above but has only broke to new highs against the pound. This would suggest that the easiest part of the advance has already occurred and further improvement will have a greater near-term associated risk of reversion.

“Israel is the first country to raise rates following the credit crisis. Most of the potential carry trade funding economies are unlikely to raise interest rates before next year and when they do, rises are likely to be small and the pace slow. Destinations for carry trades are likely to be raising rates at the same time, and potentially faster, so the tightening of interest rate differentials is unlikely to be a major impediment to carry trades.

“Stocks, commodities and credits have all appreciated considerably over the last 6 months. While this move is not over, we are probably closer to the next larger reaction than we are to the next large advance. When some of the consistent trends that are currently evident roll over, profit taking may put upward pressure on carry trade currencies. Looking beyond a reversion to the mean, as long as interest rate differentials remain amenable and funding currencies relatively weak compared to their higher yielding counterparts, carry trades are likely to remain viable sources of funding.”

Source: Eoin Treacy, Fullermoney, August 27, 2009.

Financial Times: High prices necessary for producing Chinese commodities
“For mining companies, the drop in commodities prices earlier this year has been, ironically, good long-term news. True, in the short term earnings have suffered and share prices have tanked. The FTSE 350 Mining Index was down 45% between August 2008 and January this year.

“But amid all the negative news there was, nonetheless, an encouraging clue about the limits of China’s domestic commodities output that paints a brighter outlook for the natural resources sector.

“China’s geological endowment is critical for commodities companies as Beijing attempts to cap imports – and prices – supporting its domestic output. China is rich in iron ore, bauxite, zinc, nickel, coal and crude oil deposits.

“Although the size of the country’s geological endowment matters, what really makes a difference is the price at which Chinese companies can dig out the raw materials. Until this year, the country’s capabilities were mostly untested as most of the recent increase in output came on the back of rising global prices since 2002.

“The drop in global prices earlier this year has now revealed that China can only sustain high domestic production when global prices are near record highs.

“As raw materials prices declined in late 2008 and early 2009, output from Chinese mines plunged because their mines were uncompetitive. This forced the country to rely heavily on imports, mopping up global surpluses and boosting prices.

“The poor resilience of China’s local production to price crashes has been suspected for a long time. But the corroboration is great news for miners with high volume and low production cost assets, such as BHP Billiton and Rio Tinto.”

Source: Javier Blas, Financial Times, August 24, 2009.

Bespoke: Oil to national gas ratio highest ever
“With oil rallying and natural gas continuing to plummet on a daily basis, the ratio of oil to natural gas is at its highest level since at least 1990 at 26.35. When the line is increasing in the chart below, oil is outperforming natural gas, and as shown, it has been doing that now since the end of 2008. The ratio is currently in uncharted territory, so who knows when we’ll see some reversion to the mean.”


Source: Bespoke, August 24, 2009.

GoldSeek: GATA presses Fed to give up its golden secrets
“Yesterday GATA’s [Gold Anti-Trust Action] Washington-area law firm, William J. Olson P.C. of Vienna, Virginia filed with the Federal Reserve Board an administrative appeal of the Fed’s most recent refusal to grant us access to the agency’s records involving the US gold reserve.

“Really, why should any Federal Reserve record involving the national gold reserves be confidential, except perhaps records involving the most ordinary security of the reserve’s vaulting? Plainly the Fed has knowledge of something that has been done with the gold reserve that the US government does not want the American people and the financial markets to know.

“Further, GATA’s administrative appeal notes, the Fed’s search of its records in response to our request was negligent, insofar as it did not cite at least one document involving gold swaps that is posted and publicly accessible at the Fed’s own Internet site. That is, it seems that GATA’s lawyers looked harder for the relevant documents than the Fed itself did.

“It strikes GATA as remarkable that the financial market commentators who most often disparage suggestions that central banks are intervening surreptitiously as well as openly in the gold market never have tried to put a critical question about gold to any central bank. Even big financial news organizations have failed to do this when reporting on the gold market. But if they ever did start asking critical questions, they would have to report that the Fed has some big secrets about gold. It is more justification for US Rep. Ron Paul’s legislation to audit the Fed.”

Source: Chris Powell, GoldSeek, August 23, 2009.

TheStreet.com: Christian – gold will hit $1,000
“Jeffrey Christian, managing director of CPM Group, argues that once investment demand surges, gold will skyrocket to $1,000.”

Source: The Street.com, August 28, 2009.

Financial Times: The weather channel
“In the agricultural commodities market, nothing explains better the influence of weather than the difference between the price of tropical produce such as sugar and cocoa and crops such as wheat and corn.

“While sugar and cocoa hover at multi-decade highs, the price of wheat and corn is falling to its lowest since 2007.

“A poor monsoon in India and unseasonal rain in Brazil have hit sugar output in the world’s two largest producers. Cocoa prices have suffered because of poor weather in Ivory Coast, which produces 40% of the world’s cocoa.

“Meanwhile, the grains’ growing season in the US and Europe has been almost perfect – timely rains in the spring, and sunshine and warm temperatures during the summer – after a delayed start. Yields for wheat are, according to the International Grains Council, ‘unexpectedly good’.

“The corn harvest will not start until the autumn, but the scouters that check fields in the US midwest are reporting a large, if not record, crop.

“The fact that weather causes the price differences also helps to explain why hedge funds and investment banks have hired dozens of meteorologists in the past few years, seating them close to their traders.

“For agri commodities, weather research is now as important as research on consumption trends. Stay tuned to the weather channel.”

Source: Javier Blas, Financial Times, August 27, 2009.

Financial Times: China tightening
“Not for the first time, there is a gap between what China says and what China does. Premier Wen Jiabao warned this week that the ‘foundations of recovery are not stable _._._. _we cannot afford the slightest relaxation or wavering’. The subtext seemed obvious: that China’s exceptionally loose monetary policy will continue for the foreseeable future.

“But a subtle shift is already under way. Monetary policy in China is not qualitative but quantitative. The People’s Bank has a target interest rate but its focus is on economic growth and the assumed quantity of money needed to fund it. By that token, China has been tightening by stealth for a while.

“The banking regulator last month told lenders to raise reserves to 150% of their non-performing loans by the end of this year, up from 134.8% at the end of June. A communiqué last Friday canvassed views on deducting holdings of other lenders’ subordinated or hybrid debt from supplementary (non-core) capital.

“Then there are softer measures, such as reminding banks to ensure that loans for investment in fixed assets actually end up there. The central bank also has raised money-market rates to drain liquidity. The effects of all this can be seen in the M2 measure of money supply, which was up 28% at the end of July, year on year, but which fell 3 basis points from the end of June.

“This is how China tightens: imperceptibly, by degrees. As Goldman Sachs points out, China’s last tightening cycle began not when it raised rates in November 2004 but 18 months earlier when the central bank began to issue short-term bills to mop up excess cash. Listen to the rhetoric now, and you can almost hear the fluttering of doves. But look at the evidence, and it is obvious that hawks are gathering.”

Source: Ben McLannahan, Financial Times, August 25, 2009.

Financial Times: Troubling signs in Japan ahead of vote
“Japan’s consumer prices fell at a faster-than-expected pace in July and unemployment rose sharply, according to data released on Friday, as the country prepared to vote in a new government on Sunday to lead the economy’s recovery.

“The jobless rate jumped to 5.7% in July from 5.4% in June – the highest level since records began in 1960 – as businesses continued to cut their workforce and new graduates joined the labour market.

“Rising job insecurity continued to weigh on private spending. Japanese household spending fell 1.3% compared with June on a seasonally adjusted basis while worsening deflation could further dampen demand. Last month, core consumer prices, excluding fresh food, fell 2.2% from a year ago, compared with a drop of 1.7% in June. The decline was the worst since records began in the early 1970s.

“‘Much of the current bout of deflation is the result of huge falls in year-ago oil prices. However, these will dissipate, as oil prices have since risen. In fact, in six months time oil will likely be a strong positive contributor to headline inflation,’ said Daniel Melser, economist at Moody’s Economy.com.

“The economic data were worse than expected but unlikely to change the fact that most economists believe the economy has hit bottom.

“Japan, which emerged from recession in the second quarter, is expected to see another quarter of growth in the July to September period after volume of exports rose a seasonally-adjusted 2.3% in July from June.

“The long-ruling Liberal Democratic party is expected to face a landslide defeat in Sunday’s general election as Japanese voters demand for changes in the way the country is run.”

Source: Justine Lau, Financial Times, August 28, 2009.

Paul Biszko (RBC Capital Markets): Time up for Russia bears
“There is a growing sense that the worst is now over for Russia – but problems still lie ahead, says Paul Biszko, senior emerging markets strategist at RBC Capital Markets.

“‘In late 2008/early 2009 Russia looked vulnerable to a full blown crisis,’ he says. ‘Its externally over-leveraged private sector was hit by both a sharp credit squeeze and a commodity price collapse.’

“He says three factors have been critical to the country’s turnround.

“First, the risk asset rally and improved investor sentiment in the second quarter of this year helped halt capital flight and eased refinancing_problems.

“Second, the partial oil price recovery and commodity bounce has improved both government and corporate cash flow.

“Third, the government acted relatively effectively in confronting a deep domestic liquidity shortage and stemming rampant panic, largely as it had a strong balance sheet coming into the crisis.

“‘Although Russia’s cash reserve cushion has been cut by a third, it is still relatively large at $400 billion – this remains its key near-term anchor, which should allow it to cope with any second-round crisis aftershocks,’ Mr Biszko says.

“‘We are not turning outright bullish on Russia, rather less bearish, at least on a three- to six-month horizon.

“‘Our biggest concern is that Russia remains highly sensitive to recurring commodity price shocks, and its willingness/ability to reduce this vulnerability is questionable.'”

Source: Paul Biszko, RBC Capital Markets (via Financial Times), August 27, 2009.

Nationwide: UK house price bounce extends into August
“Commenting on the figures Martin Gahbauer, Nationwide’s Chief Economist, said:

“‘The price of a typical house rose for the fourth consecutive month in August, increasing by 1.6% on a seasonally adjusted basis. The 3 month on 3 month rate of change – generally a smoother indicator of the near term trend – rose from 2.7% in July to 3.3% in August, the highest level since February 2007. At

£160,224, the average price of a typical UK property is still slightly lower than 12 months ago. However, the annual rate of change rose further in August, from -6.2% to -2.7%. Over the first eight months of 2009, the seasonally adjusted index of house prices has risen by 3.2%, though relative to the October 2007 peak it is down by 14.4%.

“‘The exceptionally low level of interest rates offers some explanation for why house prices have not repeated the very sharp falls of 2008. There are two main channels through which the low level of interest rates has impacted the housing market. First, mortgage payments for existing homeowners – especially those with tracker or standard variable rate loans – have been reduced substantially. Before the MPC began cutting rates, the average interest and principal payment per mortgage holder represented about 38% of the average post-tax labour income. Following the steep cuts in base rate, this has fallen to just 28% of post-tax income, despite historically high levels of outstanding mortgage debt.

“‘The fall in debt servicing costs has meant that fewer homeowners are under immediate financial pressure to sell than might have been expected in a recessionary economic background with rising unemployment. Partly as a result, fewer second-hand properties have come onto the market than is normally the case in recessions, which has contributed to moving the balance of supply and demand more in favour of sellers over the course of 2009.

“‘In addition to limiting the supply of second-hand homes, lower interest rates have also had an impact on the demand side. Even though house prices remain high relative to earnings, the fall in interest rates has improved the affordability of mortgages for those looking to buy a home. This helps to explain the strong rise in new buyer enquiries reported by estate agents for most of 2009. Although not all of these enquiries are turning into sales, house purchase transactions have continued to slowly increase from the record lows reached in late 2008.

“‘At the moment, a rise in interest rates is probably still some way off. However, the eventual exit from exceptionally loose monetary policy could make the recovery in the housing market bumpier than some might expect after the last few months of price increases.'”


Source: Nationwide, August 27, 2009.

James Lord (Capital Economics): Israel’s monetary policy
“The Bank of Israel’s surprise interest rate rise on Monday is unlikely to send other central banks rushing to tighten – but the move is nevertheless of great interest, says James Lord at Capital Economics.

“‘Although Israel is a relatively small economy, the BoI’s response to the global crisis has been sophisticated,’ he says.

“‘It cut rates aggressively and implemented quantitative easing, leading to a large expansion of the monetary base.’

“Mr Lord also notes that Stanley Fischer, the BoI governor, is a former IMF deputy managing director and was US Fed chairman Ben Bernanke’s PhD supervisor. ‘Mr Bernanke is likely to watch closely given that his former tutor is implementing policies that may be relevant for the Fed’s own exit from quantitative easing.’

“Indeed, the BoI started to unwind quantitative easing last month, while the rate of interest payable on commercial bank reserves will now rise – which is Mr Bernanke’s preferred method for reversing any inflationary impact from the Fed’s unconventional easing, Mr Lord says.

“‘But we doubt the BoI’s move has implications for other central banks. The BoI made clear rates went up to help anchor local inflation expectations. In most major economies, inflation is expected to stay low_this year_and_next.

“‘Also, central bankers at Jackson Hole made it clear that ultra-accommodative policy is likely to remain in place in the major economies for some time.'”

Source: James Lord, Capital Economics (via Financial Times), August 25, 2009.

Bloomberg: Zuma may be African Lula as anti-inflation move lures investors
“South African President Jacob Zuma was propelled into office this year by union support. So far, it is investors who are reaping the benefit.

“Zuma, who campaigned on promises to create jobs and slash poverty, began by removing two union foes: Finance Minister Trevor Manuel and central bank governor Tito Mboweni. He then named replacements who once worked for Manuel and Mboweni and who have favored their predecessors’ economic policies, which labor officials say stifle growth and employment.

“That has some analysts comparing Zuma to Brazilian President Luiz Inacio Lula da Silva, who panicked investors with his anti-capitalist rhetoric when he came to power in 2003, only to implement market-pleasing measures later. Since Lula took office on January 1, 2003, Brazil’s gross domestic product has tripled to become the world’s eighth-biggest economy.

“‘Zuma is pulling a Lula,’ said Lars Christensen, head of emerging-market strategy at Danske Bank in Copenhagen. ‘Zuma is a pragmatist. I can’t see any big differences between Zuma’s policies and those of his predecessors. No one expected that.’

“The president has maintained the inflation-fighting policies of his predecessor, Thabo Mbeki, has met investors to reassure them, has said that public spending may need to be curbed and has commissioned a study on using tax revenue more effectively. Yesterday, Gwede Mantashe, secretary general of Zuma’s African National Congress, said labor unions have no undue influence over the president.

“South Africa’s rand is the second best-performing emerging market currency of the 26 monitored by Bloomberg this year. The first is the Brazilian real. Ex-union leader Lula kept spending in check and named as central bank president a FleetBoston Financial Corp. executive who resisted pressure from some members of Lula’s Workers’ Party to immediately cut rates.

“Almost four months into his term, Zuma is adhering to the free-market approach that angered his union backers when implemented by Mbeki. Investors who were irked by Zuma’s ties to labor now say Zuma’s South Africa is looking like a good bet.

“Since the April 22 election, the rand has gained 13% against the dollar, the benchmark South African stock index has advanced 26% and credit default swaps, the cost of protecting against a default, have dropped by more than a third.

“‘Zuma appears to be making very solid decisions,’ said Joseph Rohm, fund manager of the $300 million Africa & Middle East Fund at T Rowe Price International Plc in London. ‘We are encouraged that what was a business-friendly environment has been maintained.’ He said he has been buying South African assets, though he declined to be more specific.”

Source: Nasreen Seria, Bloomberg, August 28, 2009.

Financial Times: Ted Kennedy
“Edward Kennedy died on Tuesday night from the consequences of a brain tumour at the age of 77. He did not fulfil the ambitions of his dynastic family by becoming president of the United States, as one brother did and as another might have, both victims of the assassin’s bullets, but he became a lion of the US senate, liked and admired by friend and foe alike.”


Click here for the full article.

Source: Financial Times, August 26, 2009.

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