Words from the (Investment) Wise August 9, 2009

Words from the (investment) wise for the week that was (August 3 – 9, 2009)

Risky assets last week again marched higher to the tune of economic data supporting the argument of a global economic recovery. A realization among investors that the economic transition from recession to recovery was gaining momentum resulted in many global stock markets and commodities scaling fresh peaks for the year.

Source: Steve Breen

The S&P 500 Index closed the week above the psychological 1,000 level, marking its highest level since November and capping four consecutive weeks of gains. And more upside lies ahead, said Abby Joseph Cohen, Goldman Sachs’ market strategist, who expects the Index to reach the 1,100 point by year end. (Is this a contrary indicator coming from a permabull?)

Many commodities such as crude oil, copper, aluminum, nickel, lead and zinc hit their highest levels of the year, not to mention sugar recording a 28-year peak. “The financial crisis has been addressed, the commodity crisis has not,” warned Goldman Sachs (via the Financial Times), predicting that this year’s rise in prices was “just the beginning” of another rally that was “ultimately likely to be even more extreme” than those seen in the past. However, the Baltic Dry Index – a measure of freight rates for iron ore and bulk commodities that correlates very well with base metal indices – has broken technical support on the downside and short-term weakness in metals prices looks likely, possibly as a result of the Chinese buying frenzy having come to an end.

While high-yielding commodity-linked and emerging-market currencies were in favor, the US greenback dropped to its weakest level since October before staging a rally on Friday after the announcement of the US employment data had pleased some traders (see comments in the “Economy” section below). Government bonds (with the exception of emerging markets) again sold off as the bond vigilantes cottoned on to the improved economic outlook.

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers that indicates continued investor appetite for risky assets (albeit with investment-grade and high-yield corporate bonds taking a breather).

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 (+1.8%) and MSCI Emerging Markets Index (+1.1%) both made headway last week to take the year-to-date gains to +15.5% and an impressive +50.4% respectively. The US and other markets extended their rallies to four straight weeks in most instances, although some weakness crept in among developing countries such as China, India, Singapore and Taiwan. It is also noteworthy that emerging markets underperformed developed markets for the first time since the beginning of May. Could this be a first sign of a retrenchment in risk appetite?

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

Stock market returns for the week ranged from top performers such as Bulgaria (+15.5%), Romania (+8.3%), Lithuania (+8.2%), Kazakhstan (+8.1%), Estonia (+8.0%) and the Czech Republic (+7.1%). These are all Eastern Europe countries playing catch-up as pundits came to the conclusion that the initial doomsday scenario for the region’s debt situation was not as bad as predicted. At the bottom end of the performance ranking, countries included Malta (_5.8%), China (-4.4%), Singapore (-4.1%), Côte d’Ivoire (-3.9%), Greece (_3.6%) and India (-3.3%).

After almost doubling since the beginning of the year and notching up seven straight weeks of gains, the Chinese Shanghai Composite Index declined by 4.4% last week – its worst performance for five weeks. The Index has broken its first level of support and it would not come as a surprise if lower Chinese equities serve as the catalyst for a pullback in global stock markets.

Source: I-Net Bridge

Of the 96 stock markets I keep on my radar screen, a majority of 74% (last week: 74%) recorded gains, 21% showed losses and 5% 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 were dominated by real estate funds, including iShares FTSE NAREIT Industrial/Office (FIO) (+19.0%), Cohen & Steers Realty Majors Index (ICF) (+17.8%) and SPDR DJ REIT Index (RWR) (+17.1%).

On the losing side of the slate, ETFs included ProShares Short Financials (SEF) (-10.2%), Vanguard Extended Duration Treasury (EDV) (-6.7%) and iShares Lehman 20-year Treasury Bond (TLT) (-4.6%). As a sector, biotechnology fared badly, as seen from the performance of iShares Nasdaq Biotechnology (IBB) (-3.5%).

As far as the credit markets are concerned, after having peaked at 4.82% on October 10, the three-month dollar LIBOR rate declined to a record low of 0.46% last week. LIBOR is therefore trading at 21 basis points above the upper band of the Fed’s target range – almost back to normal when compared to an average of 12 basis points in the year before the start of the credit crisis in August 2007.

The TED spread (i.e. three-month dollar LIBOR less three-month Treasury Bills) is a measure of perceived credit risk in the economy. Since the peak of the TED spread at 4.65% on October 10, the measure has declined to a 14-month low of 0.29% – a vast improvement and now actually below the 38-point average during the 12 months prior to the start of the crisis.

Source: Fullermoney.com

Still on credit, Floyd Norris said on his blog in The New York Times: “It is with a great sense of joy that I read today that Donald Trump is almost back in the casino business. So why do I feel joy at the news? If a casino company run by Mr. Trump can get credit, then the credit crunch must surely be over.”

The quote du jour this week concerns the US dollar and again comes from Richard Russell (Dow Theory Letters). He said: “Build a brick house. Then pull the bottom row of bricks out of the house, and what have you got? A wobbly wreck. The dollar is comparable to the bottom row of bricks in the US economy. Everything in this fair land from houses to stocks and bonds is denominated in dollars. But now the dollar is weak.

“The US Dollar Index is trading at a new low for the move – below its declining blue 50-day moving average. Worse, the 50-day average is well below its declining red 200-day average. Not a pretty technical picture. The BIG question: Is the dollar on its way to a major down-leg, or is the dollar just temporarily slipping? If it’s a big down-leg coming up, there’s going to be trouble, and the trouble will start with the bonds and with interest rates.”

Source: StockCharts.com

Other news is that the US Senate on Thursday approved a $2 billion extension of the government’s car sales incentive program, “Cash for Clunkers”, while the Federal Deposit Insurance Corp (FDIC) closed two more banks on Friday, bringing the tally of US bank failures in 2009 to 71 (96 since the beginning of the recession).

Also, according to the Financial Times, Bank of America is to pay $33 million to settle claims by US regulators that it made “materially false and misleading claims” to shareholders about bonuses that were paid by Merrill Lynch last year. Meanwhile, General Electric agreed to pay $50 million to settle the fraud charges brought by the Securities and Exchange Commission (SEC), accusing the company of bending its financial statements in 2002 and 2003 to boost its reported earnings, reported MarketWatch.

Next, a quick textual analysis of my week’s reading. No surprises here with the usual suspects such as “bank”, “market”, “prices”, “economy”, “government” and “recession” featuring prominently.

The key moving-average levels for the major US indices, the BRIC countries and South Africa (where I am based) are given in the table below. 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.

Although these figures support the bullish case, one should bear in mind that some of the movements have been quite extreme, as borne out by the following:

• As far as mature markets are concerned, 76% are trading more than two standard deviations above their 50-day averages and 56% more than two standard deviations above their 200-day lines.

• Among emerging markets, 59% are trading more than two standard deviations above their 50-day averages and 68% more than two standard deviations above their 200-day lines.

These figures argue that some degree of reversion to mean is probably overdue. This could take the form of either a pullback or a consolidation (i.e. ranging) pattern. The June highs and July lows are also given in the table, as these levels define a support area for a number of the indices.

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

Referring to my earlier comments about China, the graph below illustrates that for the fist time since mid-1999 emerging Asian stocks are trading at a premium of more than 35% to the 200-day moving average. This represents an overbought situation that is clearly not sustainable.

Source: US Global Investors – Weekly Investor Alert, August 7, 2009.

Considering the S&P 500’s ten economic sectors, Bespoke provides very useful “sparklines” from which one can see at a glance where sectors are trading relative to their normal ranges – one standard deviation above and below the 50-day moving average – over the last year. As shown below, nine out of ten sectors are currently trading in overbought territory, with most having just recently hit their most overbought levels of the last year. The energy sector is the only one not yet overbought, but getting close. “As you can see in the sparklines, most sectors hit their most oversold levels over the last year nearly ten months ago. It’s hard to believe that it has already been nearly a year since the crazy times of last September and October,” said Bespoke.

Source: Bespoke, August 4, 2009.

Turning to fundamentals, with the bulk of the Q2 earnings reports in the US now in, 67.9% of the companies have beaten earnings estimates and 37.6% both earnings and revenue estimates. But, according to Bespoke, the most bullish aspect of this earnings season has been guidance. “After three quarters where companies guiding lower far outnumbered companies guiding higher, the trend has reversed to the positive side. As shown, 8.4% of companies reporting earnings have raised guidance in Q2, while 6.1% of companies have lowered guidance. Just two quarters ago, 15.7% of companies lowered guidance, while just 2.7% raised guidance.”

Source: Bespoke, August 7, 2009.

The actual level of earnings nevertheless remains depressed, causing David Rosenberg (Gluskin Sheff & Associates) to comment as follows: “Based on past linkages between earnings trends and the pace of economic activity, believe it or not, the S&P 500 is now de facto discounting a 4.25% real GDP growth rate for the coming year. That is what we would call a V-shaped recovery. While it is possible, though in our opinion a low-odds event, it is doubtful that the economy is going to be better than that. So we have a market that is more than fully priced for a post-recession world – any further gains would suggest that we are moving further into the ‘greed’ trade.”

Looking at the next few weeks, my assessment remains as stated a few days ago: “I am of the opinion that stock markets have run away from fundamental reality and that a pullback/consolidation looks likely. Taking a slightly longer-term view, I think we are in a (possibly lengthy) bottoming-out phase as far as slow-growth (OECD) countries are concerned, but already in new (potentially volatile) uptrends regarding high-growth emerging and commodities-related markets.” Caution seems to be in order.

For more discussion on the direction of financial markets, see my recent posts “Global stock market moving averages hit full house“, “Bob Farrell’s 10 rules for investing“, “Bullion regains its glitter“, “Technical Talk: Balance bullish breadth with weak seasonal trends“, “Picture du Jour: Keep a close eye on lending standards“, and “Video-o-rama: Stabilization benefits risky assets“.

Economy
Business sentiment is continuing to improve across the globe. The results of last week’s Survey of Business Confidence of the World achieved its best level since early October, reported Moody’s Economy.com. Businesses’ broad assessments of current conditions and the outlook into 2010 have brightened meaningfully. However, despite the steady improvement in confidence, businesses are still very cautious and the Survey results remain consistent with a global economy that is still in recession.

Source: Moody’s Economy.com

“Global manufacturing is clearly on the rebound, with survey reports on Monday showing activity contracting at a significantly slower pace in the US and continental Europe, and UK industry back on a growth path. The upbeat results added to evidence that the world’s main economic regions stabilized in July, bringing closer the prospect of growth resuming,” said the Financial Times.

Considering hard data, the surplus on Germany’s foreign goods trade account rose to €11 billion on a seasonally adjusted basis in June, from a revised €10.2 billion in the previous month, according to the Federal Statistics Office. Exports rose at the fastest pace in almost three years. Although the surplus remains below the €18 billion recorded in June 2008, the outcome added to signs that Europe’s largest economy was emerging from recession.

The European Central Bank (ECB) left its monetary policy unchanged at a historical low of 1% in August, while the Bank of England (BoE) Monetary Policy Committee held its key repo rate steady at an all-time low of 0.5%, but increased the size of its asset purchase program by an additional £50 billion to £175 billion.

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 7, 2009
• July employment report – moderation of jobless is noteworthy

Thursday, August 6, 2009
• Jobless claims data are mildly positive

Wednesday, August 5, 2009
• ISM Non-manufacturing Index shows mild decline
• Factory orders higher

Tuesday, August 4, 2009
• June pending home sales – more evidence that trough in sales is behind us
• Real consumption expenditures in reverse in June

Monday, August 3, 2009
• ISM Manufacturing Index – overall tone is positive
• Construction spending rebounds in June

Regarding Friday’s employment report being treated as a “green shoot” of major proportions, David Rosenberg said: “While it was by far the best jobs performance of the year, much of the better-than-expected tally in nonfarm payrolls reflected the bounce in auto production as well as the distortion from the federal census workers. Combined, these two influences effectively ‘added’ 100,000 to the headline number, so net-net, the consensus view of _325,000 was not as far off the mark as the market believed at first glance. It may be dangerous to extrapolate today’s report into a view that we are about to fully turn the corner on the job market front.”

Subsequent to the jobs report, interest rate futures moved to reflect a 25 basis-point increase in the Fed funds rate at the January meeting of the Federal Open Market Committee (FOMC). Markets are also pricing in a first quarter point rate hike for the BoE and the ECB by January and February respectively.

Nouriel Roubini (RGE Monitor) pointed out a few bright spots amid the global recession, as reported by Forbes. He said: “All economies have been affected by the crisis, but a combination of policy responses and strong fundamentals has given some countries, especially some emerging-market economies, a relative edge. These same strengths could lead these countries to perform better as the global recovery begins.

“What do these countries have in common? One major theme is that they tended to have lower financial vulnerabilities due to more restrictive regulation and less developed financial markets, as well as larger and stronger domestic markets that sustained domestic demand. Moreover, they had the resources to engage in countercyclical fiscal and monetary policies – actions that were not possible in past crises.”

The countries identified by Roubini are Brazil, Australia, China, India, The Philippines, Indonesia, Poland, Norway, France, Canada, Egypt, Qatar and Lebanon.

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

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Aug 3	10:00 AM	Construction Spending	Jun	0.3%	-0.4%	-0.5%	-0.8%
Aug 3	10:00 AM	ISM Index	Jul	48.9	48.0	46.5	44.8
Aug 4	8:30 AM	Personal Income	Jun	-1.3%	-1.0%	-1.0%	1.3%
Aug 4	8:30 AM	Personal Spending	Jun	0.4%	0.2%	0.3%	0.1%
Aug 4	10:00 AM	Pending Home Sales	Jun	3.6%	0.5%	0.7%	0.8%
Aug 5	8:15 AM	ADP Employment Change	Jul	-371K	-365K	-350K	-463K
Aug 5	10:00 AM	Factory Orders	Jun	0.4%	-0.5%	-0.8%	1.1%
Aug 5	10:00 AM	ISM Services	Jul	46.4	48.5	48.0	47.0
Aug 5	10:30 AM	Crude Inventories	07/31	+1.67M	NA	NA	+5.15M
Aug 6	8:30 AM	Initial Claims	08/01	550K	575K	580K	588K
Aug 7	8:30 AM	Nonfarm Payrolls	Jul	-247K	-370K	-325K	-443k
Aug 7	8:30 AM	Unemployment Rate	Jul	9.4%	9.7%	9.6%	9.5%
Aug 7	8:30 AM	Hourly Earnings	Jul	0.2%	0.1%	0.1%	0.0%
Aug 7	8:30 AM	Average Workweek	Jul	33.1	33.0	33.0	33.0
Aug 7	3:00 PM	Consumer Credit	Jun	-$10.3B	-$5.0B	-$5.0B	-$5.4B

Source: Yahoo Finance, August 7, 2009.

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

The Bank of Japan and the FOMC will make interest rate announcements on Tuesday (August 11) and Wednesday (August 12) respectively. US economic data reports for the week include the following:

Monday, August 10
None

Tuesday, August 11
Productivity, unit labor costs and wholesale inventories

Wednesday, August 12
Trade balance and Treasury budget

Thursday, August 13
Export and import prices, initial jobless claims, retail sales and business inventories

Friday, August 14
CPI, capacity utilization, industrial production and Michigan sentiment

Markets
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 7, 2009.

“Everyone is wrong in the markets at times. The difference between the great traders and the unsuccessful ones is in how long they stay wrong,” said Brett Steenbarger, editor of the TraderFeed blog and author of the books The Psychology of Trading, Enhancing Trader Performance and The Daily Trading Coach. I have the privilege of meeting with Brett, arguably one of the leading trading coaches, during his visit to Cape Town later this week and look forward to exchanging ideas with him. In the meantime, let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will keep the portfolios of Investment Postcards readers on target.

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 (where plenty of sunshine makes it hard to believe that August is supposed to be a winter month).

Source: Tom Toles

Forbes: Are there bright spots amid the global recession?
“This week, I take a look at which countries have best weathered the global recession and credit crunch. All economies have been affected by the crisis, but a combination of policy responses and strong fundamentals has given some countries, especially some emerging market economies, a relative edge. These same strengths could lead the countries I highlight below to perform better as the global recovery begins, even if their growth rates remain well below 2003-07 trends.

“What do these countries have in common? One major theme is that they tended to have lower financial vulnerabilities due to more restrictive regulation and less developed financial markets, as well as larger and stronger domestic markets that sustained domestic demand. Moreover, they had the resources to engage in countercyclical fiscal and monetary policies, actions that were not possible in past crises. In contrast, countries that borrowed heavily to finance domestic consumption in the days of easy money are now facing sharp economic contractions. Despite the relative strength of these countries, however, their ability to return to sustained growth will depend on structural reforms that support consumption.”

The countries are: Brazil, Australia, China, India, The Philippines, Indonesia, Poland, Norway, France, Canada, Egypt, Qatar and Lebanon.

Click here for the full article.

Source: Nouriel Roubini, Forbes, August 6, 2009.

Financial Times: Industrial output on the rebound
“Global manufacturing is clearly on the rebound, with survey reports on Monday showing activity contracting at a significantly slower pace in the US and continental Europe, and UK industry back on a growth path.

“The upbeat results added to evidence that the world’s main economic regions stabilised in July, bringing closer the prospect of growth resuming.

“‘Everyone is benefiting from improvements in all their export markets – so it is magnifying the impact,’ said Chris Williamson, chief economist at Markit, which produces purchasing managers’ surveys for Europe and Asia.

“However, a return to solid growth was still not certain in many parts of the world, economists warned. Much of the recent improvement reflected companies rebuilding inventories, and was boosted by China’s rebound, argued Marco Annunziata, chief economist at Unicredit. ‘I’m worried that the world economy doesn’t have the stamina to keep growing.’

“In the US, the July ISM manufacturing index rose 4.1 points to 48.94. This is the slowest pace of contraction since August 2008, before the collapse of Lehman Brothers, although still the 18th consecutive monthly decline. A figure below 50 marks the boundary between expanding and contracting activity.

“The eurozone manufacturing purchasing managers’ index was revised higher to show its second strongest rise since the survey began in 1998. But at 46.3 in July, up from 42.6 in June, the survey still suggested that recovery in the 16-country region was lagging behind that in the US and UK.

“Germany largely powered the eurozone’s improvement, reporting a record increase in its index and the first rise in new order volumes since June last year.

“But Markit described as ‘remarkable’ the turnround in the UK manufacturing index. The sector ‘has clearly pulled out of the nosedive it was in earlier this year’, said David Noble, chief executive of the Chartered Institute of Purchase and Supply, which co-produces the survey. The UK index rose from 47.4 in June to 50.8 in July, rising above the 50 level for the first time since March 2008.

“Japanese manufacturing is also expanding again, according to data last week, and Chinese manufacturing production rebounded further in July to rise at the fastest rate since May 2008, according to the country’s CLSA purchasing managers’ index. The index rose to 52.8 in July from 51.8 in June, marking the fourth consecutive month of expansion.”

Source: Ralph Atkins and Simone Baribeau, Financial Times, August 3, 2009.

Gillian Tett (Financial Times): The liquidity pipes remain clogged
“A decade ago, I was working as a reporter in Tokyo when I was asked to investigate the impact of Japanese-style quantitative easing. Back then, the Bank of Japan was pouring gazillions of yen into the money markets and politicians were angrily exhorting the Japanese banks to lend.

“Indeed, at one point, the Tokyo government even created quotas, which stipulated that banks should make a certain level of loans to worthy small enterprises to combat a pernicious credit crunch.

“But, when I examined what the Japanese banks were actually doing, the results were almost comical. In public the banks claimed they were lending to small enterprises; in reality some were only meeting the targets by lending to subsidiaries of Toyota.

“Faced with a political order to lend, in other words, Japanese banks were ducking round the rules – and the liquidity was notably not ending up where politicians (or central bankers) had hoped.

“Sound familiar? I am increasingly tempted to think so. In the last six months, European and US central banks have poured dizzying sums into the money markets and politicians have put pressure on the banks to lend. Last week, for example, Alistair Darling, UK chancellor declared his readiness to ‘get tough’ with banks that were failing to lend. On Thursday, the Bank of England triggered surprise by announcing an expansion of its quantitative easing scheme.

“But as I look at these endeavours, what springs to my mind is a vision of a plumber trying to force water into a domestic waterflow system whose pipes are badly clogged, if not broken. To be sure, liquidity is entering the banking pipes. Some is also trickling out at the end: banks still seem willing to lend to big, reputable companies (the Western equivalent of Toyota, as it were.)

“However, numerous small or risky corporate ventures in the west currently complain that they cannot get loans. Consumers are facing rising borrowing charges too. Thus, in the West, as in Japan a decade ago, the liquidity is still not necessarily flowing to those who need it most. Those pipes remain clogged, even as water is forced in.

“That, in turn, raises a fascinating question for investors and policy makers: where will all that ‘backflow’ of unusued liquidity, as it were, go? Right now, some seems to be sitting in a quasi stagnant pool, deposited into reserve accounts with central banks.

“Much also seems to be leaking into the government bond markets, or moving directly there (as in the case of the British central bank’s direct purchase of gilts). That is helping to keep long-term yields low, echoing the pattern seen previously in Japan.

“But the longer that the banking pipes remain partly or fully clogged and the governments keep pouring water into the system, the more that investors and policy makers need to watch what this liquidity ‘backflow’ might do; and not just in the gilts market, but other, less obvious corners of the global asset markets too.”

Source: Gillian Tett, Financial Times, August 6, 2009.

Floyd Norris (The New York Times): Donald is back
“If Donald Trump can borrow money to finance casinos, then the credit crunch must really be over.

“It is with a great sense of joy that I read today that Donald Trump is almost back in the casino business.

“The article reports that Mr. Trump and his daughter, Ivanka, along with ‘an affiliate of Beal Bank Nevada’, have bid $100 million to take Trump Entertainment Resorts out of bankruptcy. Shareholders will get nothing, I am sure, and those who previously lent to Mr. Trump’s casino enterprise will suffer as well.

“My favorite paragraph in the article is:

“‘My previous investment in the company was destroyed by excessive and restrictive debt,’ Mr. Trump said. ‘This reorganization changes all that. I am pleased that the reorganization affords me an opportunity to make a new investment and help revive a company that has borne my name, but not performed to my standards.’

“I like the phrase ‘excessive and restrictive debt’, spoken as if Mr. Trump had nothing to do with the company being burdened by debt. As for restrictive, I’m sure he did chafe at any restrictions at all.

“So why do I feel joy at the news?

“If a casino company run by Mr. Trump can get credit, then the credit crunch must surely be over.

“Have you defaulted on a mortgage loan? Or maybe two? Fear not. That leaves you with a better record than Trump casino companies.”

Source: Floyd Norris, The New York Times, August 4, 2009.

Financial Times: “Cash for clunkers” gets $2 billion boost
“The US ‘cash for clunkers’ programme, which pushed July car sales higher after a record-breaking slump, tripled in size on Thursday as the Senate extended it by $2 billion.

“Hostile amendments were easily defeated in a final vote of 60-37, following sustained White House and industry pressure.

“President Barack Obama commended the Senate for ‘acting in a bipartisan way’ with the vote.

‘Now, more American consumers will have the chance to purchase newer, more fuel-efficient cars and the American economy will continue to get a much-needed boost,’ he said.

“‘Cash for Clunkers’ has been a proven success: the initial transactions are generating a more than 50% increase in fuel economy; they are generating $700 to $1,000 in annual savings for consumers in reduced gas costs alone.

“‘This programme gives a much needed jolt to our economy and our manufacturers at a critical time,’ said Harry Reid, Senate Majority leader, after the vote.

“The initial $1 billion allocated to the programme has been nearly exhausted just days after its start. The House of Representatives voted last week to boost it with energy efficiency funds from the $787 billion economic stimulus package – the measure under the Senate’s consideration on Thursday.”

“Under the scheme, customers trading in a vehicle for one with more miles per gallon can qualify for a government subsidy of up to $4,500.

“‘This is a wildly popular programme and enormously successful and it helps many segments of our economy,’ Ray LaHood, secretary of transportation, said this week, adding that more than $700 million had already been spent subsidising almost 200,000 new vehicles.

“The extra $2 billion will allow 500,000 more vehicles to be traded in for more fuel efficient replacements.”

Source: Daniel Dombey, Financial Times, August 6, 2009.

Clusterstock: Thanks Cash-for-Clunkers!
“It wasn’t pretty, and it wasn’t by much, but Ford managed to report year-over-year sales growth in July. It was the first such gain since 2006, and they were helped in large part by Cash-For-Clunkers, which powered blistering car sales in the final week of the month. Of course, all those sales will come out of future sales … but that’s another problem.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock – Business Insider, August 3, 2009.

Financial Times: Wall Street profits from trades with Fed
“Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.

“The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.

“However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.

“The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage. Barclays, for example, e-mails clients with news on the Fed’s balance sheet, detailing the share of the market in particular securities held by the Fed.

“‘You can make big money trading with the government,’ said an executive at one leading investment management firm. ‘The government is a huge buyer and seller and Wall Street has all the pricing power.’

“A former official of the US Treasury and the Fed said the situation had reached the point that ‘everyone games them. Their transparency hurts them. Everyone picks their pocket.’

“The central bank’s approach to securities purchases was defended by William Dudley, president of the New York Fed, which is responsible for market operations. ‘We believe that opting for transparency is a greater good,’ he said. ‘If we didn’t have transparency, we’d be criticised on other grounds.’

“Barney Frank, chairman of the House financial services committee, said the potential profiteering may be part of the price for stabilising the financial system.”

Source: Henny Sender, Financial Times, August 2, 2009.

Clusterstock: Finance jobs vanish into thin air
“The severe bloodletting in the construction industry is slowly waning. The pace of layoffs is coming well off its peak, according to ADP, probably since companies don’t have much more room to cut. But financial services? Despite the improved picture, the layoffs continue at a steady clip, with little month-over-month improvement.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock – Businessinsider, August 5, 2009.

CNN Money: Recession is over, says economist
“When economist Dennis Gartman told subscribers of his newsletter in the fall of 2007 that the US was entering a recession, the Dow was at 13,500, and the official government call wouldn’t come for another full year.

“Now he’s ahead of officials and forecasters again. According to Gartman, the US recession that started in December 2007 is done.

“‘We saw it happen two weeks ago – it’s over,’ he said in a recent interview.

“Other well-known economists and market watchers have recently been hinting at the same thing. NYU economics professor Nouriel Roubini, also known as ‘Dr. Doom’ for his prescient predictions of the worldwide downturn, says the US recession will end later this year. Treasury Secretary Timothy Geithner said last weekend that the recession is easing. And President Obama told Univision last week, ‘We maybe are beginning to see the end of the recession.’

“But Gartman says the Great Recession ended in July.

“‘Too many people get too arcane and have too many arguments about why an economy goes into or comes out of a recession,’ he says. ‘Having done this for 35 years, I’ve fallen into using just a couple of indicators that characteristically have done a very good job.”

“‘The first is a spike downward in the number of weekly jobless claims, which unlike the unemployment rate, focuses on newly laid off workers. Gartman doesn’t seek a specific percentage decline (such as when a 20% decline denotes a bear market), but instead he waits for a sharp downward trend. ‘It’s like the definition of pornography: I’ll know it when I see it,’ he says.

“Gartman then looks at a ratio from the Conference Board: the percentage of coincident economic indicators to lagging indicators. The ratio measures changes in the economy by dividing coincident (or real time) economic indicators like industrial production and personal income by lagging indicators, like the unemployment rate. So, if during a recession coincident indicators increase at a faster clip than lagging indicators, the economy is expanding and the ratio rises.

“As Gartman notes, that ratio has been rising three months in a row. It increased to 90.5 in June from 89.4 in March. According to Gartman and Conference Board data, the fall in jobless claims and a rise in the ratio correlate with the end of recessions since 1959.

“He expects economic indicators to slowly turn positive by October, but he’s careful to remind investors that ‘the news is horrible at the bottom of a recession. It’s going to be terrible for another couple months’. Because it’s a lagging indicator, Gartman expects unemployment to rise into 2010.”

Source: Scott Cendrowski, CNN Money, August 6, 2009.

MoneyNews: Greenspan – recession over, growth ahead
“Former Federal Reserve Chairman Alan Greenspan thinks the economy has already turned around.

“Greenspan told ABC News on Sunday he’s ‘pretty sure we’ve already seen the bottom’.

“Now, companies must restock quickly to get ahead of demand, which he sees spiking higher in the third quarter.

“‘It strikes me that we may very well have 2.5% in the current quarter,’ he said.

“The economic contraction slowed in the second quarter, to 1% annualized, down sharply from a 6.4% drop in the first three months of the year. Forecasters had expected negative 1.5% growth in the second quarter.”

Source: Greg Brown, MoneyNews, August 3, 2009.

Rebecca Wilder (News N Economics): The oddities of this recession
“It is not a rule that the personal saving rate rises during a recession, just in this one. Take a look at the cumulative trajectory of the personal saving rate for this Great Recession compared to its predecessors, as represented by the ‘average recession’ since 1960.

“The chart illustrates the cumulative growth of the saving rate throughout the recession period and during the twenty-four months (of recovery) following the recession for the current cycle and the average over the latest 7 cycles. Note: convenience only, I call the end of the current cycle at point 0 or June 2009. I do not believe that the recession is actually over in June.

“Recently, the average saving rate, which is estimated monthly by the Bureau of Economic Analysis, surged since the onset of the longest recession in the post-War era. Consequently, the sharp ascent of the marginal saving rate is wreaking havoc on personal consumption spending, and thus, GDP.

“Interestingly, current saving trends mark opposing behavior relative to the ‘average’ recession occurrence, which is the indexed trajectory of the average saving rate spanning the 7 recessions since 1959. The saving rate drops during the average recession, and stabilizes thereafter. So far, the saving rate has a -50% correlation with the saving trend during ‘average recession’, and is moving against the broader historic trend. If saving continues its ascent, one can discount quite significantly the possibility of an ‘average recovery’ to a recession this deep (i.e. V).”

Source: Rebecca Wilder, News N Economics, August 5, 2009.

Bill King (The King Report): Taxes – statistic that yields the truest economic picture

Source: Bill King, The King Report, August 3, 2009 (hat tip: Matt Trivisonno).

MoneyNews: Stiglitz – Obama will have to raise taxes
“President Barack Obama will have to raise taxes if he wants to push through his healthcare reforms, says Nobel Laureate economist Joseph Stiglitz.

“And that’s not necessarily a bad thing – if tax increases take place down the road when economic recovery is more prevalent, he says.

“‘If we get a more balanced view of our balance sheet, we’ll realize that if we spend our money well then these great extra expenditures are going to actually make our economy more productive in the future,’ Stiglitz told Yahoo! Finance.

“Spending on technology, education and infrastructure ‘will generate revenues that will allow us in the future to pay back any borrowing or lower taxes’.

“President Obama said during his campaign that he would not raise taxes to finance healthcare reform. Yet his leading economists, Treasury Secretary Tim Geithner and National Economic Council Director Larry Summers, recently hinted that tax hikes may be necessary.

“Stiglitz says we’re already paying for not reforming healthcare by helping the uninsured with their medical costs – for instance, when hospitals write-off indigent care but raise prices on paying patients with health coverage.

“‘Right now we’re often paying for it in hidden charges so it’s like a tax but it’s a hidden tax,’ Stiglitz said.”

Source: Forrest Jones, MoneyNews, August 4, 2009.

Asha Bangalore (Northern Trust): July employment report – moderation of jobless is noteworthy
“The civilian unemployment rate edged down to 9.4% from 9.5% in July. The decline in the unemployment rate has to be viewed with caution because the dip in the jobless rate was due to a sharp drop of the labor force in July (-422,000), while employment declined 155,000. The payroll adjusted estimate of employment, a volatile series, rose 70,000 in July. There is a good chance that the August report will show an increase in the labor force after two monthly declines and a higher unemployment rate.

“Nonfarm payrolls fell 247,000 in July after an upwardly revised decline of 443,000 in June. The July drop in employment is the smallest decline since August 2008. The loss of jobs was smaller in most categories compared with the trend seen in recent months. The average loss of jobs in the May-July period is 331,000, nearly half of the pace recorded in the February-April span (-617,000). On a year-to-year basis, seasonally unadjusted payroll employment fell 4.18% during July vs. a 4.19% drop in June, probably the cycle high reading.

“Conclusion – The Fed policy statement of August 12 is most likely to reflect the mildly bullish nature of the July employment report and second quarter GDP report. The Fed is on hold for all of 2009, unless there is a robust turnaround in economic conditions. The small drop in the unemployment rate during July is not the beginning of consecutive monthly declines of the jobless rate, it occurred because a large number left the workforce in July. A significantly higher unemployment rate is nearly certain by the middle of 2010. Having said that, the improvements in the employment numbers are noteworthy as the economy is now recording smaller job losses than in the prior few months.”

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

CNBC: July jobs report analysis
“Employers cut 247,000 jobs in July, far less than expected and the least in any month since last August, providing evidence the economy is turning. Mark Zandi of Moody’s Economy.com, Diane Swonk of Mesirow Financial, Robert Barbera of ITG and the CNBC news team share their analysis.”

Source: CNBC, August 7, 2009.

Asha Bangalore (Northern Trust): ISM non-manufacturing index shows mild decline
“The ISM Non-Manufacturing Survey results of July show a mild decline in the pace of activity. The composite index fell to 48.1 from 48.6 in the prior month. The index tracking new orders declined to 46.4 in July from 47 in the prior month. The responses of survey participants stressed ‘uncertainty’ and ‘caution’ about business conditions.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 5, 2009.

Asha Bangalore (Northern Trust): Factory orders higher
“Factory orders rose 0.4% in June compared with a 1.1% gain in the prior month. The June increase in factory orders reflects a revised 2.2% drop in bookings of durables and a 2.7% jump in orders/shipments of non-durables. The inventories-shipment ratio fell to 1.42 in June from 1.45 in the prior month. The cycle peak for the inventories-shipments ratio appears to have occurred in January 2009 (1.46). Factory inventories have declined for ten consecutive months ended June. Therefore, as the economy gathers steam a large increase in inventories should not be surprising.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 5, 2009.

Asha Bangalore (Northern Trust): ISM manufacturing report – overall tone is positive
“The ISM manufacturing survey for July shows a distinct improvement, with several of the sub-indexes posting readings exceeding 50. Index levels above 50 indicate growth, while readings below 50 denote a contraction in factory activity. In July, indexes tracking production, new orders, supplier deliveries, inventories, exports, backlogs, prices, and imports posted above 50 readings. The employment (45.6 vs. 40.7 in June) and inventories indexes (33.5 vs. 30.8) also advanced in July but they are holding below 50.0. Historically, the composite index crosses fifty at the end of a recession or several months after a trough is established.

“As the table shows, with the exception of the early part of the post-war period, the ISM composite index and indexes measuring new orders, production, and supplier delivery recorded readings above 50.0 after the trough of a business cycle. If history is a guide, today’s survey results of the factory sector sets up grand expectations for the economy and the factory sector. Additional data will be needed to confirm that the factory sector and economy are both turning around.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, August 3, 2009.

Asha Bangalore (Northern Trust): Jobless claims data are mildly positive
“Initial jobless claims fell 38,000 to 550,000 during the week ended August 1. Continuing claims, which lag initial claims by one week, rose 69,000 to 6.31 million. The insured unemployment rate has held steady at 4.7% for four straight weeks.

“Recipients of the Extended Benefits and Emergency Unemployment Compensation should be added to continuing claims to get the whole picture. Claims under these two programs lag initial jobless claims by two weeks and continuing claims by one week. The sum of seasonally adjusted continuing claims and seasonally unadjusted claims under the two special programs stands at 9.48 million, with the peak at 9.72 million (week ended June 27). Continuing claims have peaked and the year-to-year change of seasonally unadjusted initial claims is showing a decelerating trend.”

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

The New York Times: Prolonged aid to unemployed is running out
“Over the coming months, as many as 1.5 million jobless Americans will exhaust their unemployment insurance benefits, ending what for some has been a last bulwark against foreclosures and destitution.

“Because of emergency extensions already enacted by Congress, laid-off workers in nearly half the states can collect benefits for up to 79 weeks, the longest period since the unemployment insurance program was created in the 1930s. But unemployment in this recession has proved to be especially tenacious, and a wave of job-seekers is using up even this prolonged aid.

“Tens of thousands of workers have already used up their benefits, and the numbers are expected to soar in the months to come, reaching half a million by the end of September and 1.5 million by the end of the year, according to new projections by the National Employment Law Project, a private research group.

“Unemployment insurance is now a lifeline for nine million Americans, with payments averaging just over $300 per week, varying by state and work history. While many recipients find new jobs before exhausting their benefits, large numbers in the current recession have been unable to find work for a year or more.

“Calls are rising for Congress to pass yet another extension this fall, possibly adding 13 more weeks of coverage in states with especially high unemployment. As of June, the national unemployment rate was 9.5%, reaching 15.2% in Michigan. Even if the recession begins to ease, economists say, jobs will remain scarce for some time to come.

“‘If more help is not on the way, by September a huge wave of workers will start running out of their critical extended benefits, and many will have nothing left to get by on even as work keeps getting harder to find,’ said Maurice Emsellem, a policy director of the employment law project.”

Source: Erik Eckholm, The New York Times, August 1, 2009.

Paul Kasriel (Northern Trust): Real consumption expenditures in reverse in June
“Real personal consumption expenditures (PCE) contracted by 0.1% in June after being unchanged in May. But real PCE is set to rev into forward gear in July due, in part, to the Car Allowance Rebate System (CARS), aka, ‘cash for clunkers’. This program was operative for only the last week of July, but it helped light motor vehicle sales accelerate 15.8% in July to an annualized pace of 11.2 million units. With clunkers lined up outside new car dealers’ lots waiting for their turn to be crushed, the Senate is likely to go along with the House and authorize an extra $2 billion to the program. This should help boost or maintain car and truck sales in August.

“Thus, it is likely that real PCE will see some growth in the third quarter. In turn, it is highly likely that real GDP as a whole will see some growth in the third quarter. But some of the expected third-quarter PCE and real GDP growth will have been ‘borrowed’ from the fourth quarter.

“Nominal personal income, which grew 1.3% in May, contracted by 1.3% in June. A lot of seniors got a one-time $250 gift from Uncle Sam in May, which helped boost May’s personal income. June personal income was held back not only because seniors did not get another special gift but also because nominal wage and salary income dipped by 0.4%. With the 0.5% increase in nominal PCE and the 1.3% decline in nominal personal income, the saving rate slipped back to 4.6% in June vs. its 6.2% level in May.

“In fits and starts, the personal saving rate is headed back up toward its more normal level of 8%. As households venture out along the investment risk curve with their past savings and future saving, away from government-guaranteed deposits, personal saving will translate into increased corporate spending.”

Source: Paul Kasriel, Northern Trust – Daily Global Commentary, August 4, 2009.

Paul Kasriel (Northern Trust): June pending home sales – more evidence that trough in sales is behind us
“Signed contracts on sales of existing homes increased 3.6% in June after an upwardly-revised 0.8% increase in May. The June data marks the fifth consecutive monthly increase in pending home sales. The pending-home-sales index is now at a two-year high. Of course, one of the reasons the sales are pending is that the buyers have to qualify for mortgages, a more difficult endeavor today than was the case a few years ago when the only requirement was a pulse – and that was more of a guideline than an absolute rule.

“I remain skeptical that the lows in house prices have been put in. But as for sales, I do believe we have seen the lows for this housing depression. There is a lag between when sales and starts pick up and when the GDP component ‘residential investment expenditures’ respond. But if we can believe Monday’s June nominal construction expenditures data, which showed an increase in residential construction expenditures, we are at or near a low for this GDP component.”

Source: Paul Kasriel, Northern Trust – Daily Global Commentary, August 4, 2009.

MoneyNews: Buffett – Housing problems over in 18 months
“Warren Buffett thinks most of the country’s housing woes will be over by the end of next year.

“‘We’re not too good at avoiding challenges, but we’re marvelous at surmounting them,’ Buffett told a crowd that had gathered in Des Moines to help a family-founded firm unveil one of the 10 largest furniture showrooms in the country.

“Looking around the store, he added, ‘I don’t see how anyone can be a pessimist about the future of the country.’

“On the mounting federal debt, he observed, ‘It is not dangerous where we are now. It may be dangerous where we are going.’

“And Buffett had this to say about taxes: ‘I would make the tax rates a little more progressive. I would help my cleaning lady and take a little more out of me.'”

Source: Julie Crawshaw, MoneyNews, August 3, 2009.

MoneyNews: Deutsche Bank – half of US mortgages underwater by 2011
“The percentage of US homeowners who owe more than their house is worth will nearly double to 48% in 2011 from 26% at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

“Home price declines will have their biggest impact on prime ‘conforming’ loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

“‘We project the next phase of the housing decline will have a far greater impact on prime borrowers,’ Deutsche analysts Karen Weaver and Ying Shen said in the report.

“Of prime conforming loans, 41% will be ‘underwater’ by the first quarter of 2011, up from 16% at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties’ value, up from 29%, it said.

“‘For many, the home has morphed from piggy bank to albatross,’ the analysts said.”

Source: MoneyNews, August 6, 2009.

The Epoch Times: US food stamp list tops 34 million
“For the first time, more than 34 million Americans received food stamps, which help poor people buy groceries, government figures said on Thursday, a sign of the longest and one of the deepest recessions since the Great Depression.

“Enrollment surged by 2% to reach a record 34.4 million people, or one in nine Americans, in May, the latest month for which figures are available.

“It was the sixth month in a row that enrollment set a record. Every state recorded a gain in participation from April. Florida had the largest increase at 4.2%.

“Food stamp enrollment is highest during times of economic stress. The US unemployment rate of 9.5% is the highest in 26 years.

“Average benefit was $133.65 in May per person. The economic stimulus package enacted earlier this year included a temporary increase in food stamp benefits of $80 a month for a family of four.”

Source: The Epoch Times, August 6, 2009.

The New York Times: Despite bailouts, business as usual at Goldman
“Lloyd Blankfein has a story about the cataclysm that nearly brought down all of Wall Street. It goes something like this: One by one, lesser banks were swept away by the financial storm of 2008. And as the floodwaters rose, no one, not even Goldman Sachs, seemed safe.

“The question, in Mr. Blankfein’s eyes, was how high the water would rise. But Washington stepped in with all those bailouts before the surge reached Goldman.

“The story, which was recounted by several friends and colleagues, represents a sobering private admission from Mr. Blankfein, Goldman’s chief executive.

“Publicly, it is a different story. Now that Goldman is minting money again, the bank insists that it was never in any real danger. Mr. Blankfein, in an e-mail message this week, disputed his private account, saying Goldman’s survival was never in doubt. Other Goldman executives reject the notion that the bank was rescued at all.

“‘We did not have a near-death experience,’ said Gary Cohn, Goldman’s president. The government saved the financial industry as a whole, but it did not save Goldman Sachs, he said.

“Rarely has the view from inside a company been so at odds with the view outside it. Could Goldman Sachs have lived if all those other giant banks had failed? Could it alone survive financial Armageddon?

“Goldman executives are dismissive, even defiant, when critics argue that the bank is playing a heads-we-win, tails-you-lose game with American taxpayers. And yet the questions keep coming. Last month the story of Goldman’s postcrisis success – and conspiracy theories surrounding it – leapt from the business pages to the cover of Rolling Stone.

“The idea that nothing has changed for Goldman Sachs strikes many outsiders as absurd. In this era of mega-bailouts, Goldman is widely perceived, on Wall Street and in Washington, as too big and important to fail. If its bets pay off, Goldman profits and its employees get rich. If its bets go bad, ultimately taxpayers will have to pick up the bill.

“‘Many observers on the market believe that Goldman and others of its size now have a free insurance policy,’ said Elizabeth Warren, the chairwoman of the Congressional oversight panel for the $700 billion bailout fund. ‘Whether they do or not is less important than the fact that many in the market believe they do. That means at some level Goldman is playing with the American taxpayers’ future.’

“Goldman executives dispute suggestions that high-stakes market gambles are behind its big profits – $3.4 billion in the second quarter. And they are dumbfounded when people like Ms. Warren suggest companies like Goldman, which paid back its bailout money last month, now operate with an implicit taxpayer guarantee.

“After so many wrenching changes on Wall Street and in the economy, it might come as a surprise that the post-bailout Goldman is virtually indistinguishable from the pre-bailout one.”

Source: Jenny Anderson, The New York Times, August 5, 2009.

Financial Times: SEC set to target flash trading
“The US Securities and Exchange Commission is preparing to clamp down on lightning-fast ‘flash’ trades made on electronic trading systems amid growing concerns that the practice puts some investors at a disadvantage.

“Mary Schapiro, SEC chairman, said on Tuesday that she had instructed her staff to find ‘an approach that can be quickly implemented to eliminate the inequity that results from flash orders’.

“The SEC has been looking into flash orders – in which some exchanges allow traders a look at share order flows a fraction of a second before the broader market – as part of a review of so-called ‘dark pools’, anonymous electronic trading venues that do not display public quotes for stocks. Ms Schapiro’s statement underscores the agency’s intention to respond quickly to market concerns.

“Flash orders have stoked the ire of some lawmakers, including New York Senator Charles Schumer, who last month started urging the SEC to ban the practice altogether. Mr Schumer said on Tuesday that Ms Schapiro had personally assured him that the agency plans to put a ban in place.

“‘It is also important to make sure flash orders aren’t just the tip of an iceberg lurking in the dark reaches of the market,’ he said. ‘There is a lot of mystery about what goes on in dark pools and in the realm of high-frequency trading generally.’

“Any proposals involving flash orders would have to approved by the full commission and be open to public comment.”

Source: Joanna Chung and Michael Mackenzie, Financial Times, August 4, 2009.

Financial Times: Market for leveraged loans hits 12-month high
“The prices of the most traded risky European and US loans have reached their highest levels for more than a year, in a further sign of improving conditions in credit markets.

“Over the past week, European leveraged loan prices reached 89.11% of face value, a high not seen since July 10, 2008, according to Standard & Poor’s LCD and Markit.

“The same is true for riskier US loans, for which the average price bid rose above 90% of face value for the first time since June 24, 2008.

“Growing confidence in an economic recovery was further highlighted by a fall in a key barometer of financial stress, the spread between three-month dollar Libor – the rate banks charge each other to borrow – and three-month US Treasury bills. This so-called TED spread fell to its lowest level for two years on Monday – 29.3 basis points – having reached a high of 464 basis points last October.

“The loans rally has been fuelled by growing demand for credit this year. David Shaw, co-head of European leveraged finance at Barclays Capital, said the rise in secondary leveraged loan pricing would support the issue of new leveraged loans.

“The rally in loan prices above a key threshold of 80-85% of face value will also reduce pressure on collateralised loan obligations, complex funds that pool loans, which at the height of the credit boom accounted for 60% of the demand for leveraged loans.”

Source: Anousha Sakoui, Financial Times, August 3, 2009.

Mark Schofield (Citi): Bond yield curve is flattening
“Last week’s US Treasury auction results point to the start of a new trend for the yield curve – a sustainable and structural flattening, says Mark Schofield, head of interest rate strategy at Citi.

“He notes that two dismal auctions of short-dated bonds, which some took as a sign that demand for US debt was drying up, were followed by a blow-out sale of seven-year notes, which were swept up at well below the prevailing yield.

“‘We have seen similar behaviour at the bottom of virtually every rate cycle over the past 20 years,’ Mr Schofield says. ‘But this time, the size of the demand shift was probably exaggerated by very low yields at the short end.’

“He says the move further out along the curve by yield-oriented investors has effectively left them taking on duration risk for the wrong reasons at the wrong point in the cycle.

“‘Once the cycle turns, yields will rise sharply, although longer maturities should hold up until shorter paper offers something closer to normal long-term average returns.

“‘Investors who think the Fed staying on hold will keep the curve steep and who expect to have time to reposition once the Fed’s intentions become clearer would do well to remember that in the 2003-5 cycle, the curve completed 30% of its eventual flattening before the first rate hike and 65% within six months of the first move.

“‘This flattening could ultimately rival the moves of 1992-4 and 2003-5.”

Source: Mark Schofield, Citi (via Financial Times), August 4, 2009.

Barnaby Martin (Bank of America-Merrill Lynch): A good year for corporate bonds
“The rally in the corporate bond market might have reached its fourth month but sufficient catalysts remain for another half-year of strong returns, says Barnaby Martin, credit strategist at Bank of America-Merrill Lynch.

“‘Bond spreads have yet to retrace back to pre-Lehman levels, leaving a strong valuation proposition still on the table,’ he says. ‘Credit fund inflows have jumped to very high levels and new cash is likely to push secondary market spreads tighter over the summer as supply tails off.’

“Mr Martin also points to a more favourable macro outlook as upgrades to earnings and economic growth filter through. While acknowledging that there are risks from growth being either too weak or too strong, he says a moderate recovery scenario should be good for credit.

“‘For bullish investors, one decision to make is whether to buy lower-rated bonds or to extend in maturity. While lower-rated credit still offers value, investors should not overlook duration.

“‘Bond curves are currently very dislocated due to poor secondary market liquidity and new issue focus. As liquidity improves in the secondary market, we expect curves to normalise, just as credit default swap curves have.’

“‘In the 2002-2004 recovery, long-dated bonds handsomely outperformed lower-rated bonds. We believe increasing duration makes sense in many issuers.'”

Source: Barnaby Martin, Bank of America-Merrill Lynch (Financial Times), August 6, 2009.

Bespoke: Credit default swap prices down but still elevated
“The credit default swap (CDS) became a buzzword during the financial crisis as their prices soared and some firms that wrote them had to be bailed out in part because they would never be able to actually pay them out if default actually occurred (think AIG). Below we provide a chart of an index that measures CDS prices for 125 North American investment grade credit vehicles. As shown, the index rose from 50 to more than 250 from September 2007 to early 2009. Since then, however, the index has declined 38.86% as the S&P 500 has risen 48%. While the drop has been significant, it’s still above pre-Lehman bankruptcy levels. While many investors are looking beyond the problems that occurred last fall and winter, credit market traders have not yet priced in a full recovery on Wall Street.”

Source: Bespoke, August 5, 2009.

Financial Standard: Faber – danger signs ahead but bargain stocks a-plenty
“Leading contrarian investor Dr. Marc Faber wears his ‘ultra bearish’ cap in his Australian visit, predicting another financial crisis could happen in the next five to 10 years – but even that doesn’t mean there aren’t any investment opportunities, particularly in Asia.

“Visiting Australia as a guest presenter for Treasury Asia Asset Management (TAAM), Dr. Faber said that the Federal Reserve’s policy in the past decade only added to the market volatility. By keeping rates artificially low and pumping money into the system, equities, markets and economies will face ‘unintended consequences’, including another financial crisis in the next five to 10 years.

“This crisis has not been fully cleansed out of the system, he said.

“He repeated his bearish views of the US dollar, which he believes will approach zero (not overnight, but it will happen) while many Asian currencies will rise on the back of a continually improving Chinese currency.

“Against that environment, he highlights various investment themes including going long on gold and silver (sovereign funds will likely buy gold when interest rates are around zero), corporate bonds and Asian equities (many markets in Asia are near 20-year lows).

“Tapping on socio-demographic trends, Faber is bullish on healthcare stocks in Asia, infrastructure stocks, commodities, REITs in emerging economies and tourism stocks (‘every hotel will soon have a Chinese restaurant in it,” he said).

“As uncorrelated investments to more established equity markets, Faber also sees opportunities in plantations and farmland (in Latin America and Ukraine), Japanese banks and new regions including Cambodia and Mongolia.

“In short, Faber believes that based on how economies and markets fared over the last few years, a new world has emerged where it is now the poor countries driving global consumption and global markets.

“But for many fund managers who believe they can take a breather now that the GFC has passed, Faber believes US and European stock markets are still overvalued relative to the lows reached in previous recessions.

“‘The ultimate crisis is still ahead of us,’ he said.”

Source: Michelle Baltazar, Financial Standard, August 6, 2009.

Bespoke: Key ETF performance
“Over the last month, all asset classes except for the dollar and fixed income have been on a tear. There are lots of green arrows in the table below that show the recent performance of key ETFs.

“The S&P 500 tracking SPY ETF is up 14.24% over the last month, and most foreign ETFs are up even more. Australia (EWA), Brazil (EWZ), Canada (EWC), Germany (EWG), Mexico (EWW) and Russia (RSX) are all up more than 20%.

“Materials (XLB) and Financials (XLF) have been the two best performing sectors over the last month with gains of about 25%. Telecom (IYZ), Health Care (XLV) and Utilities (XLU) have gone up the least. And most commodities ETFs are up more than 10% as well.

“If you’ve been long and strong, you’ve got to have a smile on your face after a run like this.”

Source: Bespoke, August 5, 2009.

Bespoke: Year to date sector performance
“With the S&P 500 now up 10.77% year to date, there are still two sectors that are down for the year – Utilities and Telecom. These are defensive sectors so the fact that they’re underperforming in an up market isn’t surprising. Only three sectors are outperforming the S&P 500 so far this year – Technology (+37.13%), Materials (+31.37%), and Consumer Discretionary (19.32%). While the Financial sector has gained the most since the March 9 bottom, it is only up 5.88% year to date since it was down so much in the first two months of the year. If the rally continues, look for the outperformers to continue to do well and the defensive sectors to underperform.”

Source: Bespoke, August 3, 2009.

Eoin Treacy (Fullermoney): Impact of low interest rates on stock markets
“The global stock market universe can be broken up into two distinct groups; those that bottomed in October and November and those that hit important lows in March 2009. Subscribers will be familiar with this separation which we have highlighted repeatedly. Interest rates have fallen to record low levels across the OECD and have pulled back significantly in a number of other economies.

“In a bull market, rising interest rates serve to eventually choke off speculative demand and are often one of the prime reasons behind an index or sector topping out. Counter wise, following a bear market, when interest rates have arguably bottomed conditions are ripe for asset prices to appreciate. This spread of the US 10yr – US 2yr is currently testing its 20yr highs and is indicative of the condition of the US yield curve where banks can earn 250 basis points by borrowing at the short end and lending at the long end. At some point in the future, this spread will become inverted once more but that is likely to be a number of years from now.

“Interest rates remain a tailwind for stock markets at current levels … and currently offer no impediment to stock markets. This will not always be the case and as they advance over time, they will offer an increasingly powerful headwind.”

Source: Eoin Treacy, Fullermoney, August 6, 2009.

Bespoke: Q2 sector earnings growth
“While stocks have reported much better than expected numbers this earnings season, the year over year change in earnings has still been pretty bad. Overall, S&P 500 earnings are down 31.7% versus Q2 ’07. Energy has seen the biggest decline in earnings at -67.9% (finally Financials don’t top the list), followed by Materials (-65.1%), Financials (-45.9%), and Industrials (-34.1%). These four are all underperforming the S&P 500 in terms of earnings. Six sectors are doing better than the index as a whole, and only two have seen year over year earnings growth – Health Care and Utilities.”

Source: Bespoke, August 3, 2009.

Bespoke: Guidance turns positive
“Probably the most bullish aspect of this earnings season has been guidance. After three quarters where companies guiding lower far outnumbered companies guiding higher, the trend has reversed to the positive side. As shown, 8.4% of companies reporting earnings have raised guidance in Q2, while 6.1% of companies have lowered guidance. Just two quarters ago, 15.7% of companies lowered guidance, while just 2.66% raised guidance.”

Source: Bespoke, August 7, 2009.

MoneyNews: Biggs – S&P will climb another 22%
“The Standard & Poor’s 500 Stock Index will climb by 22% as the global economy emerges from its recession buoyed by improving consumer spending and housing markets, according to investor Barton Biggs.

“Japanese stocks will also be attractive buys, also on expected improved consumer spending there as well as increased exports to China.

“‘I’m still bullish,’ Biggs, who runs New York-based hedge fund Traxis Partners, told Bloomberg radio.

“‘We’re going to have a pretty strong recovery in earnings both this year and next year.’

“In the United States, cost cuts at companies will eventually lead to better earnings. In Japan, elections are scheduled to take place next month and the new government will inherit an economy that is ripe for recovery.

“‘They’re going to really try to stimulate consumer spending,’ Biggs said of the new Japanese government.”

Source: Forrest Jones, MoneyNews, August 5, 2009.

Richard Russell (Dow Theory Letters): What I really think is going on
“We tend to forget that every move, large or small, in the stock market is entitled to a correction. I believe that the rise from the March lows is simply a correction of the huge bear market decline which preceded it.

“Normally, a secondary correction will recoup one-third to two-thirds of the ground lost during the preceding bear leg. To refresh your memory, the preceding bear leg carried from 14 164.58 on October 9, 2007 to 6 547.05 on March 9, 2009 – a total loss of 7,617 points. A one-third correction would carry the Dow to 9,083. A two-thirds recoup of the bear market losses could take the Dow back to 11,619.

“Subscribers should know that following the famous 1929 crash which took the Dow from 381 to 198, a correction took the Dow back to 294 in early 1930. That correction turned the entire investment community bullish. The public piled back into the market. However, the correction had nothing to do with an improving economy. In fact, the great 1929-1930 correction was followed by the greatest market wipe-out and economic depression in history.

“I don’t think the current rally is part of a new bull market for the following reasons:

(1) At the March lows there were none of the typical indications of a bear market bottom.

(2) At the March lows, valuations were far too high, and totally atypical of a bear market bottom.

(3) At the March lows sentiment was far too optimistic.

(4) Lowry’s Buying Power Index was too high compared with other bear market bottoms.

(5) Weeks after the supposed March ‘bear market bottom’, Lowry’s Buying Power Index dropped to a new low – below its low at the March ‘bottom’. In the 76-year history of Lowry’s, this has never happened following any true bear market bottom.

“To sum up, I don’t think the March low was the beginning of a new bull market, rather I believe it was the start of a correction of the preceding huge bear market decline. Then why is the bull in the box? Answer: Because the secondary trend has clearly turned up.

“Because of the strange background, I’m now being very cautious, this despite the Dow Theory bull signal. My suggestion is that my subscribers do the same. The market will always be there, and there will be more attractive times to load up on stocks. Remember, at this time we have a background of a weak dollar and weak bonds (meaning rising interest rates).

“Could the current upward correction be a sister to the 1929-1930 correction that followed the great crash? Is it a prediction of better times or is it just a normal correction following a huge bear market decline? I believe it is part of a normal correction of the 7,617 Dow points lost during the bear market decline of 2007 to 2009. There’s something spooky about the action – I don’t care for it.”

Source: Richard Russell, Dow Theory Letters, August 4, 2009.

Bespoke: Percentage of stocks above 50-day moving averages
“There are currently 435 stocks in the S&P 500 trading above their 50-day moving averages (87%). While this is a high number indicating broad market breadth, it still hasn’t reached the high seen during the spring rally when it got all the way up to 92%. During that rally, the percentage of stocks above their 50-days remained around 85% to 90% for a couple of months. We’ve just gotten back up to 87% in the last few days, so the bulls are hoping for another round of internal strength.

“The Financials have roared all the way back into first place based on this breadth indicator with a reading of 96%. Many investors had given up on the sector after it jumped out of the gate so fast and then stalled. Over the last couple of weeks, the Financials have definitely caught a second wind. Consumer Discretionary has also come back quite a bit, and it ranks second with a reading of 93%. The rest of the sectors are in the 80s except for Telecom, which is at 56%.”

Source: Bespoke, August 6, 2009.

Reuters: Lingering fear likely to hold up a wall of cash
“The sustainability of 2009’s financial market recovery will hinge to a large degree on investors continuing to switch out of their cash holdings, a move that is by no means certain.

“Fund trackers EPFR Global note that in the first six months of this year there were net outflows from money market funds amounting to $193 billion, some $107 billion alone in June.

“This is what has been behind much of the rally that has seen global equities gain more than 50% since early March and other riskier assets such as corporate and emerging market debt soar.

“The question is whether it will continue at the same pace.

“There is certainly the potential for it to do so. The cash redemptions seen this year compare with a massive net inflow into money markets of nearly $461 billion in 2008.

“So although survey sampling makes direct comparisons difficult, it is a reasonable assumption to make that around 60% of last year’s flight-to-quality inflows are still in place.

“If that low-yielding but relatively safe money were to tip into equity markets or other risk assets, a new global bull market would no longer be a question but a fact.

“Ranged against this, though, is a combination of factors – from the type of investor in cash to just plain fear of losses – that is likely to mitigate against a sudden flood of new investment.

“Indeed, there is some evidence – from both EPFR and Merrill Lynch’s latest fund manager survey that the pace of cash redemption has slowed or even reversed very slightly.”

Source: Jeremy Gaunt, Reuters, July 29, 2009.

BCA Research: US dollar – no long-term bottom
“The sharp rally at the end of 2008 pushed the trade-weighted US dollar to overvalued levels. As a result, the dollar still has more cyclical downside that should eventually see it weaken to deep undervalued levels.

“Since the breakdown of Bretton Woods in the early 1970s and the move to floating exchange rates, there have been only two major bottoms in the dollar: The late 1970s and the early 1990s. These bottoms shared two common features. First, the dollar had fallen to deep undervalued levels. Second, the US current account balance had improved markedly, moving to a small surplus position.

“These two conditions are not currently in place. While the US current account deficit has narrowed, it remains much wider than the levels seen at the dollar lows of the late 1970s and early 1990s. Moreover, the recent improvement in the US current account is entirely cyclical and the structural outlook has actually worsened with the plunging national savings rate. Specifically, the falling national savings rate means that US trend growth will be lower and it will come with a wider current account deficit.

“Bottom line: We do not believe the conditions for a major low in the dollar are in place yet. The dollar is not undervalued and due to the weak cyclical state of the economy, continued US policy reflation should see the trade-weighted dollar index overshoot to new lows in the months ahead. Stay strategically short dollars.”

Source: BCA Research, August 4, 2009.

Daragh Maher (Calyon): Sterling the recovery currency
“Sterling is the most undervalued of major currencies against the dollar argues Daragh Maher, FX strategist at Calyon.

“Mr Maher says sterling is undervalued using both a fundamental economic equilibrium approach and purchasing power parity analysis.

“Furthermore, speculators still remain positioned for further sterling weakness against the dollar. This means there is greater scope for the pound to appreciate if sentiment turns positive towards the currency as investors scramble to cover those positions.

“Mr Maher says the combination of a sharp contraction in global demand, a collapsing UK housing market and a UK banking crisis all took their toll on activity in the UK economy, and the pound was punished accordingly.

“But conditions have changed, he argues.

“‘Policy stimulus is helping drive a recovery in the UK,’ says Mr Maher. ‘The catalyst for a re-think on sterling is already evident with early signs of improvement in the economic cycle and the financial sector.’

“Low interest rates have eased pressure on many indebted households, while house prices have begun to stabilise. The credit crunch may also be easing, with UK banks indicating an intent to increase credit availability to households.

“‘We continue to target $1.75 in sterling against the dollar by the year-end, and $1.90 by the end of 2010.'”

Source: Daragh Maher, Calyon (via Financial Times), August 3, 2009 .

TheStreet.com: Gold bulls rev up
“Natalie Dempster, Head of Investment for the World Gold Council, expects a strong gold market for the rest of 2009 driven by investor demand and dollar weakness.”

Source: TheStreet.com, August 6, 2009.

Bloomberg: Roubini says commodity prices may rise in 2010
“Commodity prices may extend their rally in 2010 as the global recession abates, said Nouriel Roubini, the New York University economist who predicted the financial crisis.

“‘As the global economy goes toward growth as opposed to a recession, you are going to see further increases in commodity prices especially next year,’ Roubini said today at the Diggers and Dealers mining conference in Kalgoorlie, Western Australia. ‘There is now potentially light at the end of the tunnel.’

“Roubini, chairman of Roubini Global Economics and a professor at NYU’s Stern School of Business, joins former Federal Reserve Chairman Alan Greenspan in seeing signs of recovery. Commodity prices gained the most in more than four months on July 30 as investors speculated that the worst of the global recession has passed and consumption of crops, metals and fuel will rebound.

“‘The things he was saying provide good indicators for our business,’ Martin McDermott, a manager for metals project development at SNC-Lavalin Group Inc., Canada’s biggest engineering and construction company, said at the conference. ‘The commodities that we’re involved with, being copper, nickel, gold, iron ore, all seem to have positive signs and we hope to take advantage of that.’

“Roubini predicted on July 23 that the global economy will begin recovering near the end of 2009, before possibly dropping back into a recession by late 2010 or 2011 because of rising government debt, higher oil prices and a lack of job growth.

“China will meet its target of 8% growth in gross domestic product this year, Roubini said.

“A rise in commodity prices may help the Australian dollar, Roubini said today, adding he is ‘bullish’ on the currency. Countries including Australia, New Zealand and Canada have so-called commodity currencies because raw materials generate more than 50% of their export revenues.

“‘The recovery will continue slowly, slowly over time,’ Roubini said today. The global economy may contract 2% this year and swing to growth of 2.3% next year, he said.”

Source: Rebecca Keenan and Jason Scott, Bloomberg, August 3, 2009.

Financial Times: Raw material price rises “just the beginning”
“‘The financial crisis has been addressed, the commodity crisis has not,’ warned Goldman Sachs on Thursday, predicting that this year’s rise in prices was ‘just the beginning’ of another rally which was ‘ultimately likely to be even more extreme’ than those seen in the past.

“‘The reality is that the commodity problem is one of supply shortage due to years of under-investment,’ said Goldman. ‘This chronic problem has been exacerbated during the financial crisis by tight credit conditions and large price declines, which impacted producers.’

“Goldman predicted that, as the global economy recovered, commodity markets would return to the same conditions as mid-2008 when severe supply constraints drove prices sharply higher.

“Goldman said a co-ordinated policy response, similar to that which followed the financial crisis, would be_required to resolve commodity shortages.”

Source: Chris Flood, Financial Times, August 6, 2009.

The Motley Fool: A conversation with T. Boone Pickens
“It’s no secret that America is at an energy crossroads. Energy prices are only expected to increase, and relying on foreign oil could pose a national security threat. Renewable energy seems like a possible alternative, especially with government incentives – yet capital markets aren’t permitting it right now.

“To gain some perspective on the multitude of issues that plague the energy space, I spoke with T. Boone Pickens, oil tycoon, champion of the Pickens Plan, and chairman of hedge fund BP Capital.

“Pickens says he’s moving forward with the Pickens Plan, despite having to postpone his wind farm project because of clamped capital markets and difficulties surrounding transmission of energy generation. Aside from the plan, the billionaire says the Commodities Futures Trading Commission’s (CFTC) potential regulation to limit trading in the oil futures markets doesn’t faze him. Pickens says he thinks oil is going to $75 a barrel by year-end – and higher in the longer term.

“We also discussed Pickens’ favorite energy companies to invest in. After crashing in 2008, Pickens – who has a 20% stake in his hedge fund – has seen his fund’s energy futures fund rise 79% this year, while his energy equity fund is up 14%.”

Click here for an edited transcript of the interview.

Source: Jennifer Schonberger, The Motley Fool, August 4, 2009.

Financial Times: BoE boosts quantitative easing programme to £175 billion
“Fresh doubts about the strength of the UK economic recovery emerged on Thursday after the Bank of England’s rate-setting committee surprised markets by voting to pump an extra £50 billion into the economy.

“The bank’s monetary policy committee voted to extend its so-called quantitative easing programme of buying government and corporate bonds from £125 billion to an unexpectedly large £175 billion, while holding interest rates at 0.5%.

“After the meeting, Mervyn King, governor of the Bank and Alistair Darling, chancellor of the exchequer exchanged letters about the expansion of the asset purchase facility – the government programme of gilt and corporate bond acquisitions.

“The decision came despite an array of brighter economic data this week, with upbeat survey results suggesting that the economy was emerging from recession. But the central bank said the ‘recession appears to have been deeper than previously thought’ in the UK, although it noted that the pace of contraction had moderated.

“Stocks rose as investors bet that the extra support would help the banks while gilt yields fell in the belief that the extra funds signalled any interest rate rise was even further away than had been thought.

“The European Central Bank also kept rates on hold as it made clear it had no intention of stepping up action to combat continental Europe’s recession.

“Jean-Claude Trichet, president, hinted strongly that the ECB forecast would be revised next month to show quarterly positive growth returning earlier than mid-2010, as envisaged. ‘A flat level of growth’ was possible this year, he said in a Reuters interview on Thursday night.”

Source: Vanessa Houlder and Jennifer Hughes, Financial Times, August 6, 2009.

MoneyNews: China will not tighten money until west does
“China will not tighten monetary policy before developed nations do so, because it first needs a recovery in exports to support the economy, a government researcher said in remarks published on Friday.

“Zhao Zhongwei, an economist at the Chinese Academy of Social Sciences, a government think-tank in Beijing, also said that easy credit was vital to stimulating private sector investment to drive the economy after a boost from public spending wears off.

“The timing of China’s exit strategy from its loose monetary policy would largely depend on the pace of its export recovery, he said.

“‘China’s external demand is still facing uncertainty, despite recent signs of a pick-up in developed economies,’ he said in an article published in the official China Securities Journal.

“China has begun to mop up liquidity at the margins after a record surge in bank lending fueled concern about bubbles forming in the country’s stock and property markets.

“Separately, another senior government researcher was cited by Xinhua news agency as saying that China is considering new ways to promote private sector investment in tandem with Beijing’s massive stimulus program.”

Source: Reuters (via MoneyNews), August 7, 2009.

Financial Times: China’s growth figures fail to add up
“China’s gross domestic product figures are among the world’s most closely watched since they can move markets or boost hopes of an imminent recovery.

“But the latest set of first-half numbers provided by provincial-level authorities are far higher than the central government’s national figure, raising fresh questions about the accuracy of statistics in the world’s most populous nation.

“GDP totalled Rmb15,376 billion ($2,251 billion) in the first half, according to data released individually by China’s 31 provinces and municipalities, 10% higher than the official first-half GDP figure of Rmb13,986 billion published by the National Bureau of Statistics.

“All but seven of the regions reported GDP growth rates above the bureau’s first-half figure of 7.1%. At the start of the year, Beijing set 8% as China’s growth target for the year.

“With the rest of the world looking to China as a beacon of expansion, the discrepancy is a reminder that statistics there are often unreliable and manipulated regularly by officials for personal and political purposes.

“In recent years, provincial figures have suggested consistently the world’s third-largest economy is bigger than Beijing’s published estimate, but the discrepancy appears to have widened this year.

“Even state-controlled media reports and editorials have in recent days raised questions over their accuracy.

“The Global Times, controlled by the People’s Daily, the Communist party mouthpiece, reported that the public reacted with ‘banter and sarcasm’ to NBS figures showing average urban wages in China rose 13% in the first half to $2,142.

“It quoted an online poll showing 88 per cent of respondents doubted the official numbers.

“An editorial on Tuesday in the China Daily, the government’s English-language mouthpiece, quoted another survey that found 91% of respondents sceptical of official data, up from 79% in 2007.”

Source: Jamil Anderlini, Financial Times, August 4, 2009.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.