Words from the (investment) wise July 27, 2009

Words from the (investment) wise for the week that was (July 27 – August 2, 2009)

For some reason the lyrics of Electric Light Orchestra’s classic, Livin’ Thing, keep resounding in my head: “You took me, ooh, woah, higher and higher, baby. It’s a livin’ thing … ” Followed by: “It’s a terrible thing to lose … ” But let me get on to the review of the financial markets …

Investors (or should I say “Johnny-come-latelies”?) last week again favored the reflation trade on the back of better-than-expected US earnings announcements and economic data, indicating that the trough of the recession might be behind us, or at least be stabilizing at depressed levels.

Newsweek‘s cover declared: “The recession is over”, but a footnote stated “Good luck surviving the recovery”, implying a hard and treacherous slog ahead – note the pin below the “liquidity-inflated” balloon.


Tempering the bullish sentiment, David Rosenberg (Gluskin Sheff & Associates) commented as follows on Friday’s announcement of a 1.0% (quarter on quarter annualized) contraction in Q2’s real GDP: “While we are past the most pronounced part of the downturn, it may still be premature to call for the end of the recession merely because of the prospect of a positive third-quarter GDP result. After all, we saw GDP advance at a 1.5% annual rate in last year’s second quarter, and if memory serves us correctly, the NBER did not subsequently declare the end of the recession. And even if the recession is ending, as we saw in 2002, that does not guarantee a durable rally in risk assets. Sustainability is the key, and it remains the wild card.”


Source: Ed Stein, July 31, 2009.

Many global stock market indices reached new highs for the year during the course of the week, and the S&P 500 Index closed in on the roundophobia 1,000 level. Other beneficiaries of investors’ continued interest in risky assets included commodities, oil, gold (rebounding strongly after a midweek sell-off of $24 an ounce), high-yielding currencies and corporate bonds. On the other hand, the US greenback remained out of favor and the Dollar Index closed the week at its lowest level for the year as investors shunned safe-haven assets.

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers that again indicates investors’ increased risk appetite. In the case of government bonds, a lukewarm response to the US GDP report took the edge off a poor response to the massive issuance of paper by the Treasury.


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. As the second-quarter corporate results in the US came in thick and fast, the American and other markets extended their rallies to three straight weeks in most instances. As a matter of fact, if not for the down week of the Dublin ISEQ Index, the entire table would have been green. But then again, “green shoots” seem to be frowned upon by many pundits.

The MSCI World Index (+1.7%) and MSCI Emerging Markets Index (+2.5%) both made headway last week to take the year-to-date gains to +13.5% and an imposing +48.8% respectively.

As seen from the table, July was a solid month for stock markets with all the major indices recording positive returns. The Dow Jones Industrial Index had its best month since 2002 and the S&P 500 Index, Nasdaq Composite Index and Russell 2000 Index all recorded a fifth successive monthly gain, but were trumped by the Chinese Shanghai Composite Index that notched up seven consecutive positive months.

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


Stock market returns for the week ranged from top performers such as the Czech Republic (+8.7%), Kazakhstan (+8.5%), Turkey (+8.2%), Indonesia (+6.3%) and Kyrgyzstan (+5.8%) to Slovakia (-6.3%), Greece (-3.6%), Nepal (-3.0%), Ecuador (-2.2%) and Macedonia (-1.5%) at the other end of the scale.

The Shanghai Composite Index has surged 87.4% in 2009 as $1.1 trillion of bank loans and government spending stimulated economic recovery. Notwithstanding its gain for the week, the Index plunged by 5.0% on Wednesday – its largest decline in eight months – on speculation that the government might curb inflows into the stock market. “The government is worried that this bubble is becoming too big so they’re going to cut credit growth by probably half in the second half,” remarked former Morgan Stanley chief Asian economist Andy Xie. “I think the property and stock markets will come under pressure around October,” he said in a Bloomberg interview.

Of the 97 stock markets I keep on my radar screen, a majority of 74% (last week: 82%) recorded gains, 22% showed losses and 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 KBW Regional Banking (KRE) (+11.1%), MarketVectors Indonesia (IDX) (+9.2%), PowerShares Global Gold and Precious Metals (PSAU), and United States Gasoline (UGA) (+6.7%).

At the bottom end of the performance ranking, ETFs included “all things short” such as ProShares Short Financial (SEF) (-3.6%), ProShares Short MSCI EAFE (EFZ) (-3.1%) and ProShares Short Russell 2000 (RWM) (-2.3%).

As far as the thawing of the credit crisis is concerned, junk bond yields continued declining, as shown by the Merrill Lynch US High Yield Index (and also by the good performance of the iShares iBoxx $ High Yield Corporate Bond ETF). The Index dropped by 57.8% to 922 from its record high of 2,182 on December 15, meaning the spread between high-yield debt and comparable US Treasuries was 922 basis points on Friday. Considerable progress has been made and high-yield spreads “only” need to fall another 7.4% to reach the “pre-Lehman” level (854 basis points).


Source: Merrill Lynch Global Index System

The quote du jour this week comes from Richard Russell (Dow Theory Letters) who said: “I’m reading and listening to an awful lot of drivel these days. Every analyst has his own scenario, and all seem anxious to broadcast their personal opinions. In this business, there comes a time when the situation is so complex that the most honest thing to do is simply to admit that you don’t know what the hell is going on. The best thing to do is to keep your mouth shut and await developments.” (Also read Barry Ritholtz’s related post on “Analyzing the analyzers“.)

Other news is that Washington hosted a US-China Strategic Dialogue, as the Chinese are increasingly focusing on America’s deficit, the value of the US dollar and the implications for their Treasury holdings. Interestingly, the Federal Reserve’s balance sheet last week contracted for the second consecutive week. “Do you think Ben assured Chinese officials earlier this week that the Fed was reducing its balance sheet?” asked Bill King (The King Report).

Also, the US House of Representatives on Friday approved a $2 billion extension of the government’s car sales incentive program, “Cash for Clunkers”, while the Federal Deposit Insurance Corp (FDIC) closed four more banks on Friday, bringing the tally of US bank failures in 2009 to 68 (93 since the beginning of the recession).

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 “bank”, “economic”, “market”, “prices”, “growth”, “China” and “Fed” featured prominently.


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. All the indices trade 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.

Importantly, the 200-day moving average of the S&P 500 Index last week turned up for the first time since January 2008, after being breached upwards by the Index in early June. The 200-day line – generally seen as a key indicator distinguishing between a primary bull and bear market – is now trending higher for all the indices included in the table, with the exception of the Dow Jones Transportation Index and the Russian Trading System Index.

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.


When considering monthly data, three momentum-type oscillators (RSI, MACD and ROC) are reversing course for the first time since the sell signals of 2007 and now either indicate buy signals (or are getting close to one in the case of MACD).


Source: StockCharts.com

The bulk of the Q2 earnings reports in the US are now in and 71% of the companies have so far reported better-than-expected earnings – one of the highest quarterly readings over the last ten years and by far the highest since the bear market began in late 2007 (albeit largely as a result of cost cutting negating a decline in revenues). “We’ve now had two straight quarters where the ‘beat’ rate has increased quarter over quarter, meaning analysts overestimated earnings to the downside. This is a very positive sign for the market at the moment … ,” said Bespoke.


Source: Bespoke, July 31, 2009.

Expectations for the next earnings season will be high and whether these are met will be determined by the extent of the economic recovery. “… what should matter most for stocks is nominal GDP – price multiplied by volume. Indeed, the chart below illustrates the case – the rate of change in the S&P 500 ultimately tracks the trend-line in nominal GDP growth,” said David Rosenberg.


Source: Gluskin Sheff – Lunch with Dave, July 31, 2009.

I now know why I keep thinking of those ELO lyrics – it’s the stretched valuations that bother me. Based on operating earnings (i.e. stripping out everything that is bad), the historical price/earnings (PE) multiple of the S&P 500 is 24.6; using reported earnings the figure shoots up to a giddy 777.5! Getting past the loss-making fourth quarter of 2008 and calculating prospective multiples through December 31, 2010, reduces the valuations to 17.8 and 32.9 respectively – still hardly the type of valuations that will inspire one to be a buyer across the board. (The earnings estimates are courtesy of Standard & Poor’s.)

Kevin Lane (Fusion IQ) said: “We have been saying for a while now that the market would likely work higher as sentiment was more doubting than embracing, suggesting that many still had not deployed a lot of capital. That said, we now believe that investors who let the market run away from them or were only partially invested are finally coming into the pool. The new entrants could certainly fuel things (i.e. new buying power) a little bit further before we have another corrective wave. That said, we think in the not too distant future and a bit higher from these levels there will be an opportunity to make sales before a late summer/fall correction.”

Looking at the next few weeks, 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.

For more discussion on the direction of financial markets, see my recent posts “Stock markets – secondary or primary bull?,” “How to interpret the Dow Theory bull signal, according to Richard Russell“, “Picture du Jour: US housing – better days ahead?” and “Video-o-rama: The yin and yang of China/US relations“. (And do make a point of listening to Donald Coxe’s webcast of July 31, which can be accessed from the sidebar of the Investment Postcards site.)

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


Source: Moody’s Economy.com

According to the European Central Bank’s Q2 2009 bank lending survey, the number of banks tightening standards is falling across all loan types. “If you asked me, this constitutes good(ish) news. The credit crisis in Europe has likely passed …,” said Rebecca Wilder (News N Economics).


Source: News N Economics

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, July 31, 2009
• Q2 GDP – the parachute has opened

Thursday,July 30, 2009
• Jobless Claims report makes a case that the labor market is improving

Wednesday, July 29, 2009
• Durable Goods Orders – decline in airline and defense masks improvement

Tuesday, July 28, 2009
• Case-Shiller Home Price Index – home prices are stabilizing
• Consumer Confidence Index slips in July

Monday, July 27, 2009
• Sales of new homes surge in June, inventories of unsold homes are sliding down

Additionally, the Federal Reserve’s latest Beige Book, released on Wednesday, indicated that the US economic recession was becoming less severe. While still weak, some regions reported that the pace of the downturn had moderated.

According to the US Commerce Department’s advance growth estimate, real GDP contracted at an annualized rate of 1% in the second quarter – smaller than the consensus expectation for a 1.5% decline. The rate of contraction slowed from the first quarter’s -6.4% as a result of a much smaller decline in investment, a smaller drop in inventories, less of a decline in exports, and strong government “stimulus” spending (+13.3% on an annualized basis – see chart below). However, consumer spending fell by a disappointing 1.2% in the second quarter.


Source: Northern Trust – Daily Global Commentary, July 31, 2009.

Summarizing the growth data, Paul Kasriel (Northern Trust) said: ” … the worst is over, but the best is not yet at hand. The imminent recovery will take hold not with some sustainable explosion in one sector or another, but because some hitherto really weak sectors will stabilize and/or grow a little.”

“We expect a gradual recovery in the US economy in the months ahead, but the Fed will need to keep the policy setting extremely aggressive to achieve a self-reinforcing upturn in consumer confidence and spending,” added BCA Research.

Warning of a W-shaped recession, Nouriel Roubini (RGE Monitor) said (via Forbes): “The global recession may end toward the end of 2009 – instead of sooner – but the global recovery in 2010 will be anemic and well below trend as households, firms and financial institutions are constrained in their ability to borrow, lend and spend.

“Meanwhile, a perfect storm of the following has inched a little closer on the radar of this cloudy global economic outlook: persistently large fiscal deficits and public debt accumulation; monetization of such deficits that will eventually increase expected inflation; rising government bond yields; soaring oil prices; weak profits; still-falling job figures; and stagnant growth. It’s a storm that could blow the recovering world economy back into a double-dip recession by late 2010 or 2011.”

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


Jul 27

10:00 AM

New Home Sales Jun





Jul 28

9:00 AM

S&P/Case-Shiller Home Price Index May





Jul 28

10:00 AM

Consumer Confidence Jul





Jul 29

8:30 AM

Durable Orders Jun





Jul 29

8:30 AM

Durables, Ex Transportation Jun





Jul 29

10:30 AM

Crude Inventories 07/24





Jul 29

2:00 PM

Fed’s Beige Book

Jul 30

8:30 AM

Initial Claims 07/25





Jul 31

8:30 AM

GDP-Adv. Q2





Jul 31

8:30 AM

Core PCE Q2





Jul 31

8:30 AM

Chain Deflator-Adv. Q2





Jul 31

8:30 AM

Employment Cost Index Q2





Jul 31

9:45 AM

Chicago PMI Jul





Source: Yahoo Finance, July 31, 2009.

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

Across the pond, the Bank of England (BoE) and the European Central Bank (ECB) will make interest rate announcements on Thursday (August 6), while in the US economic highlights for the week include the following:

Monday, August 3
Construction spending, ISM Index and auto sales

Tuesday, August 4
Personal income and spending and pending home sales

Wednesday, August 5
ADP Employment, factory orders, and ISM services

Thursday, August 6
Initial jobless claims

Friday, August 7
Jobs data and consumer credit

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, July 31, 2009.

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right, and how much you lose when you’re wrong,” said George Soros. Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist Investment Postcards readers in adding considerable value to their balance sheets.

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 a winter sun is welcoming the month of August).


Source: Jerry Holbert, July 30, 2009.

Nouriel Roubini (Forbes): The road ahead for the global economy
“The global recession may end toward the end of 2009 – instead of sooner – but the global recovery in 2010 will be anemic and well below trend as households, firms and financial institutions are constrained in their ability to borrow, lend and spend.

“Meanwhile, a perfect storm of the following has inched a little closer on the radar of this cloudy global economic outlook: persistently large fiscal deficits and public debt accumulation; monetization of such deficits that will eventually increase expected inflation; rising government bond yields; soaring oil prices; weak profits; still-falling job figures; and stagnant growth. It’s a storm that could blow the recovering world economy back into a double-dip recession by late 2010 or 2011.

“After rising sharply for three months, asset markets in the mature economies have paused and started a tentative correction in the last few weeks. Risk investors that had driven up prices have partially taken profits, and suddenly they are wary. They are right to be wary.

“Before the recent correction started, there was a very sharp rise in asset prices, beginning around March 9. Equities rose, oil and energy prices rose, commodities rose. Credit spreads sharply contracted, indicating a surge of new confidence in the corporate sector. Long-term government interest rates shot up as ten-year Treasurys rose from 2% to 4% before retracing, suggesting that markets saw growth returning in the near future. The volatility of asset prices also fell, and that is always a sign of increasing confidence and lower risk-aversion.

“Emerging market asset prices – equities, bonds and currencies – have, if anything, been more bullish. The broad indexes of the BRICs showed that, in early 2009, some investors again began to believe that these economies, starting with China, will recover and experience further rises in commodity prices.

“In other words, markets, which only four months ago were pricing-in an L-shaped global near-depression and a near financial meltdown, were three weeks ago pricing-in a rapid V-shaped recovery toward potential growth. And there are some good reasons for part of this rally. At the beginning of the year gross domestic product (GDP) was falling at a rate that suggested that something close to economic depression really was looming, and there was a widespread sense that many of the world’s biggest financial institutions were effectively insolvent.

“Today, both of those fears have been, for now, checked; the tail risk of an L-shaped near-depression is significantly lower. We have seen policy action by the US, Europe, Japan, China and many other economies that has been unprecedented, with interest rates reduced to near zero, with much bad debt ring-fenced (although not written off or worked out), with liquidity created by orthodox and unorthodox means and with final demand in many economies primed by central governments. The rate of output decline has shallowed dramatically, the ‘tail risk’ of a chronic slump has been suppressed, and financial institutions are recording profitable quarters, at least on paper, as forbearance and public subsidies are, for now, hiding their mounting losses.

“All this creates a moment when risk to a rally is to be expected. As tail risk is reduced, investors move back into equities, credit and commodities.”

Click Forbes here for the full article.

Source: Nouriel Roubini, Forbes, July 30, 2009.

Barry Norris (Argonaut Capital): Viva la “V”
“Most in the markets believe the global economic recovery will be anything but V-shaped – although such a scenario actually looks increasingly likely, says Barry Norris, partner at Argonaut Capital.

“He says that while the current downturn has been extremely severe, the overlooked story is that compared to previous recessions, real demand for most goods has suffered just a fairly routine fall-off.

“‘This means inventories in many industries have been drawn down to an unprecedented degree. With very low inventory levels, any normalisation in demand, caused by, say, pent-up demand, is likely to be an equally powerful positive stimulus. This is how the recovery could be V-shaped after all.’

“He says purchasing managers’ indices not only give a good idea of future activity, but of why economies tend to recover from slumps. ‘For most managers, conditions won’t get any worse than December 2008 and it will not be long before the majority are experiencing better conditions.

“‘Global PMIs are moving back towards equilibrium. This means economic expansion and the end of recession – and most major economies will return to growth in the second half of 2009. This recession is ending in a recovery that is suspiciously V-shaped.

“‘This bottoming out should mark the low point in corporate profits. When we buy equities now it is increasingly likely we are buying trough earnings.'”

Source: Barry Norris, Argonaut Capital (via Financial Times), July 27,2009.

Bloomberg: US assures “concerned” China it will shrink deficit
“Treasury Secretary Timothy Geithner pledged to rein in the US deficit as China underscored concern about preserving the value of its $801.5 billion of Treasury holdings.

“The US will ensure a ‘sustainable’ deficit by 2013, Geithner said at the beginning of the first round of Strategic and Economic Dialogue talks under President Barack Obama in Washington. China is ‘concerned about the security of our financial assets’, Assistant Finance Minister Zhu Guangyao said.

“In a shift from meetings under the Bush administration, officials indicated there were few signs of tension over the value of China’s yuan, which US lawmakers have labeled as artificially cheap and an aid to Chinese exports. That may be because the ‘best idea is just to keep the yuan-dollar rate stable’ given US need for Chinese demand for Treasuries, said Ronald McKinnon, a professor of economics at Stanford University.

“‘The Chinese are trapped with supporting the value of the dollar,’ McKinnon said in a telephone interview from Stanford, California. ‘If they withdrew from the market, there’s a big appreciation’ of the yuan as a result that would send China’s exports down, he said.

“The new focus on the deficit and Treasuries reflects the legacy of China’s record trade surpluses and its accumulation of dollars as a result of holding down the yuan. Chinese foreign exchange reserves surpassed $2 trillion for the first time in the second quarter, and its holdings of Treasuries reached $801.5 billion in May, about 100% more than at the start of 2007.

“Obama said in a speech opening the meetings he wants to engage China in cooperation on a range of issues, beyond acting together to stimulate a global economic recovery.

“‘We must also be united in preventing Iran from acquiring a nuclear weapon,’ Obama said. He cited nuclear proliferation, terrorism, piracy, global pandemics, climate change and civil war as other common threats facing the two countries. In her sessions, Clinton addressed both the Iranian and North Korean nuclear programs.”

Source: Rob Delaney and Rebecca Christie, Bloomberg, July 28, 2009.

Laurence Mutkin (Morgan Stanley): The borrowers return
“Recent official lending surveys in the UK and eurozone offer grounds for optimism, says Laurence Mutkin, head of European rates strategy at Morgan Stanley.

“He says it is vital to identify whether the collapse in broad money growth since the onset of the credit crunch – and particularly in lending to the non-financial sector – is cyclical or secular.

“‘If it is the former, then a cyclical economic upswing should revive credit markets. Central banks and governments have taken extraordinary measures to achieve this.

“‘But if we are seeing the start of a secular deleveraging, with fiscal and monetary authorities unable to trigger a revival in credit growth, the monetary transmission mechanism will remain impaired – making a period of Japan-style stagnation more likely in the West.’

“The latest survey from the ECB provides some reassurance, Mr Mutkin says. ‘It shows that appetite for lending and borrowing became less negative during the second quarter. Consumers have moved more quickly than corporations towards being willing to borrow again.’

“This trend was also reflected in the Bank of England’s latest credit conditions survey, he says.

“‘All in all, while credit growth looks set to remain soft, the restored willingness of consumers and businesses to borrow implies a lessening risk of secular deleveraging – although the next half year will prove crucial.'”

Source: Laurence Mutkin, Morgan Stanley (via Financial Times), July 30, 2009.

Radoslaw Bodys (Bank of America-Merrill Lynch): CCE borrowing fears overblown
“Fears about central and eastern Europe’s foreign exchange borrowing problem now look to have been overdone, says Radoslaw Bodys, emerging EMEA economist at Bank of America-Merrill Lynch.

“He points to two major concerns: that borrowing had become a threat to the region’s external financial stability, and the negative impact on the real economy of the private sector’s impaired balance sheet.

“But Mr Bodys says: ‘We believe the former problem has been largely sorted out given the recent massive balance of payments adjustment, while the latter issue has been blown out of proportion from the very beginning.’

“First, he says, the CEE’s non-financial private sector FX credit exposure is relatively large, but considerably smaller than commonly believed.

“Second, he argues that the belief that exchange rate depreciation severely hit central Europe’s non-financial private sector balance sheet is a complete misunderstanding.

“‘The fact is that falling interest rates have more than offset FX depreciation over the past year. Not only did the service cost of FX loans not increase, but actually fell by between 5.5% and 7.5% from the previous year.’

“And Mr Bodys believes that calls for, and actions by, regulators to ‘kill’ FX lending are pointless. ‘Banks have already tightened their credit policies so severely that FX lending is already virtually dead.'”

Source: Radoslaw Bodys, Bank of America-Merrill Lynch (via Financial Times), July 28, 2009.

Financial Times: Europe braced for rising credit card defaults
“Lenders in Europe bracing themselves for a rising wave of consumer debt defaults as the credit card crisis that has caused billions of dollars in losses among US banks spreads across the Atlantic.

“The International Monetary Fund estimates that of US consumer debt totalling $1,914 billion, about 14% will turn sour.

“It expects that 7% of the $2,467 billion of consumer debt in Europe will be lost, with much of that falling in the UK, the continent’s biggest nation of credit card borrowers.

“National Debtline of the UK said that the number of calls it had received from UK consumers worried about loans, credit cards and mortgage arrears had reached 41,000 in May – double the 20,000 calls it had received in May 2008. It added that the number of calls showed no sign of abating.

“In the US, credit card defaults have been rising for months as a spike in unemployment and the most severe economic downturn since the Great Depression took their toll on overstretched consumers.

“The rate of US credit card losses has overtaken the rate of unemployment in recent months – a highly unusual occurrence that makes it more difficult for card issuers to forecast future losses.

“The severity of the financial crisis coupled with rising unemployment on both sides of the Atlantic have stoked fears of a substantially higher default rate in the coming months.”

Source: Jane Croft, Megan Murphy and Francesco Guerrera, Financial Times, July 26, 2009.

The New York Times: House votes for $2 billion fund to extend “Clunker” plan
“As problems go in the nation’s capital these days, the White House could live with this one.

“Officials at the Transportation Department figured Thursday morning that they had applications in hand for about a tenth of the $1 billion that Congress set aside for the “cash for clunkers” program, meant to give rebates to people who turn in old vehicles for new, more fuel-efficient ones.

“By late Thursday afternoon, they ran to the White House with news that they might have committed the whole $1 billion, or even more. This stimulus program had, in fact, stimulated very heavy demand, which required a quick decision about what to do next.

“Over the course of 24 hours, the White House changed its mind three times. At first, it said it would shut off the incentives by day’s end. Then it let them continue through Friday, and then through Sunday.

“On Friday, the House voted to add $2 billion, soothing the fears of car dealers, who would have been responsible for paying any money they promised to customers as a rebate. But the Senate might not follow suit. Some senators said Friday that the speed at which the money flew out the door was a sign that the government’s deal was too good, and perhaps should be modified.”

Source: Matthew Wald, The New York Times, August 1, 2009.

MoneyNews: Doug Casey – America has died
“As the Obama administration has taken over the car industry, the banking industry, and the insurance industry, some experts now believe that American style capitalism is dead. Doug Casey, a free market capitalist and founder and chairman of Casey Research, is one of them.

“‘Unfortunately, the idea of America has died and it’s been replaced by another political entity called the United States, which in essence is no different from the 200 other countries spread across the globe,’ he says.

“In an exclusive interview with Dan Mangru of Newsmax TV and Moneynews.com, Casey tells why he sees American capitalism on the decline and why other countries such as China will eclipse the United States.

“‘The average entrepreneur in China has a lot more freedom than the average entrepreneur does in the United States. He pays a lot less taxes … he’s got a lot less regulation,’ says Casey.

“Casey goes on to tell Mangru that Communism is a ‘scam’ and is designed to cheat workers.

“Casey also believes that the United States has not seen the worst of the economic crisis. ‘We’re just starting to see the beginning of what’s going to happen,’ Casey says.

“The United States has already entered what Casey calls the Greater Depression, one that will be much more serious than the 1930s. ‘This depression can be as long and as deep as you can possibly imagine,’ he says.

“The reason most people don’t realize this is that the majority of those giving economic opinions aren’t economists describing how the world actually works but political apologists describing how they think it ought to work, Casey notes.

“‘Everyone’s looking to the government for a solution, but all the government does is tax and regulate and inflate the currency,’ Casey says.

“Trillions of dollars of phony inflationary capital people believed were real assets have disappeared, says Casey. That’s going to continue to deplete the value of the dollar and guarantee catastrophic inflation in the future.

“‘If you’re relying on the US dollar, you’re relying on a figment of the US government’s imagination,’ says Casey. ‘To me, holding US dollars for the long term is about the most stupid thing you can do. Gold is the only financial asset that isn’t someone else’s liability.'”

Source: MoneyNews, July 29, 2009.

Wells Fargo Securities: Recession probability drops again
“Our monthly recession probability model turned in April, and the sharp drop is now confirmed by our quarterly model. Recent improvement of the LEI and ISM manufacturing series confirms economic recovery.

“Economic recovery prospects have improved. The probability of recession two quarters from now has downshifted sharply over the previous quarter. As evidenced in the top graph, the latest probability calculation from our model is consistent with prior economic recoveries. Our model takes a look at a very broad set of variables, and the results suggest economic recovery is likely within the next six months. The original model estimates were published in “Forecasting US Recessions with Probit Stepwise Regression Models,” Business Economics, January 2008. Economic improvement began to show up in our model in recent months in the regional Chicago manufacturing survey. While the official recovery call will come from the National Bureau of Economic Research, our outlook is that the recovery will begin in the third quarter of this year.

“As evidenced by the graph, the recession probabilities move quickly and thereby emphasize how rapidly the economic cycle can change. Moreover, the data suggest that while it may be fashionable for some so-called pundits to be always bearish or bullish the reality is that the economy is characterized by cycles and business leaders are best served by economic advice that recognizes that cycle.

“While we expect consumer spending to improve in the period ahead, we expect such growth to be disappointing to policymakers who anticipate a return to a normal pace of growth. Moreover, we expect the recovery will not be strong enough to produce jobs as in prior recoveries or to fuel the pace of housing/discretionary spending that we have come to expect. Slower-than-usual growth produces greater-than-expected pressures on public budgets.”


Source: Wells Fargo Securities, July 29, 2009.

Financial Times: Fed sees signs of economic improvement
“The pace of economic decline has moderated or stabilised in most parts of the US, the Federal Reserve said on Wednesday, with manufacturing, residential property and even employment showing some signs of improvement.

“According to the Beige Book, which offers a picture of the economy based on anecdotal evidence provided to the US central bank, overall economic activity has stabilised at a low level since its last report in early June when most regions reported that conditions were weak or worsening. The report adds to mounting evidence that the worst recession in the past 50 years is easing.

“The more optimistic tone was a welcome shift from reports earlier in the year signalling that the economy was in freefall. Many obstacles remain, however, and the Beige Book warned that commercial property, consumer spending and the labour market were still severely weakened.

“Retail sales remained sluggish in most of the Fed’s 12 districts, with consumers focused on cheaper necessities while luxury goods ‘languish’. Car sales were mixed early this summer, with purchases of new cars stalling while five regions reported growing strength in sales of less expensive used cars.

“Manufacturing activity remained ‘subdued’ but improved from earlier in the year, as some districts reported that companies were replenishing inventories after months of clearing stocks to cope with the collapse of consumer demand.”

“Unemployment, which has reached a 26-year high of 9.5 per cent, is an ongoing worry, but there were some glimmers of hope in the Fed’s report. Seven districts said that businesses had begun to take advantage of the job cuts by partaking in “selective hiring” of top talent that other companies have shed. But the labour market is still “slack” and many businesses continue to cut workers, freeze pay or institute furloughs.”

Source: Alan Rappeport, Financial Times, July 29, 2009.

MoneyNews: Plosser – Obama risks damaging Fed
“Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said he was concerned about the Obama administration’s plans to rewrite the nation’s financial regulations, saying it could leave the US Central Bank with an ill-defined role as bank regulator and make it less effective at its main job of fighting inflation.

“Plosser is one of 12 Federal Reserve regional bank presidents who have a voice in Fed decisions about interest rates and bank supervision.

“‘You don’t want an institution that is so heavy into other things that it fails to do its appropriate role on the monetary policy piece,’ Plosser told The Wall Street Journal.

“‘I would feel more comfortable with this if I had a clearer statement of what it is we’re expected to accomplish,’ he said.

“President Barack Obama has proposed giving the Fed additional power to oversee large financial institutions as part of a regulatory overhaul.

“Nevertheless, public opinion of the Fed is falling.

“A Gallup poll, conducted in mid-July, found that only 30% rated the Fed as doing an ‘excellent/good” job, down sharply from the 53% who thought the Fed was doing an excellent-to-good job in a survey in 2003, the Associated Press reported.”

Source: Forrest Jones, MoneyNews, July 28, 2009.

Financial Times: Bernanke explains Fed’s new openness
“Ben Bernanke has explained his decision to turn the normally secretive US Federal Reserve into something of an open house, saying his unusually large number of recent public appearances are the result of the ‘extraordinary’ times the country faces.

“The Fed chairman has turned up at everything from a 60 Minutes television interview to a Kansas City town hall session over the past few weeks, prompting some to wonder if he is trying to ensure he is re¬appointed when his four-year term ends in January.

“However, Mr Bernanke said he was answering a clear public need. ‘Normally Fed chairmen don’t do this kind of thing because we want to avoid causing near-term market volatility as people try to anticipate our next FOMC (Federal Open Markets Committee) meeting,” he told the Financial Times this week.

“‘But this is an extraordinary period. We want to answer the questions we know people have about what hit them in this economic crisis, what the Fed is doing about it and how we expect economic developments to play out.’

“The Fed’s new openness is well timed. This week, as the debate continues over the bank’s role in the financial crisis and proposed prudential powers, Gallup showed it is held in lower esteem than the Internal Revenue Service.

“More seriously, there is a populist headwind in Congress among some lawmakers who want to remove the Fed’s monetary independence.

“Cynics believe Mr Bernanke is using this public relations outreach to ensure he is reappointed next January. But Mr Bernanke says the goal is to educate the public about what the Fed does at a time when it keeps getting caught in the crossfire over its role in the crisis and its future prudential powers.”

“The chairman’s personal standing remains high. ‘I would be astonished if Ben isn’t re¬appointed,’ says Alice Rivlin, a former vice-chairman of the Fed. ‘He has become very good at interacting with people beyond the usual circles and he is good at avoiding traditional Fed-speak.'”

Source: Edward Luce, Financial Times, July 30, 2009.

Nouriel Roubini (The New York Times): The Great Preventer
“Last week Ben Bernanke appeared before Congress, setting off a discussion over whether the president should reappoint him as chairman of the Federal Reserve when his term ends next January. Mr. Bernanke deserves to be reappointed. Both the conventional and unconventional decisions made by this scholar of the Great Depression prevented the Great Recession of 2008-2009 from turning into the Great Depression 2.0.

“Mr. Bernanke understands that in the Great Depression, the collapse of the money supply and the lack of monetary stimulus during contractions worsened the country’s economic free fall. This lesson has paid off. Mr. Bernanke’s decision to keep interest rates low and encourage lending has, for now, averted the L-shaped near depression that seemed highly likely after the financial collapse last fall.

“To be sure, an endorsement of Mr. Bernanke’s reappointment comes with many caveats. Mr. Bernanke, a Fed governor in the early part of this decade, supported flawed policies when Alan Greenspan pushed the federal funds rate (the policy rate set by the Fed as its main tool of monetary policy) too low for too long and failed to monitor mortgage lending properly, thus creating the housing and credit and mortgage bubbles.

“He and the Fed made three major mistakes when the subprime mortgage crisis began. First, he kept arguing that the housing recession would bottom out soon (it has not bottomed out even three years later). Second, he argued that the subprime problem was a contained problem when in reality it was a symptom of the biggest leverage and credit bubble in American history. Third, he argued that the collapse in the housing market would not lead to a recession, even though about one-third of jobs created in the latest economic recovery were directly or indirectly related to housing.

“Mr. Bernanke’s analysis was mistaken in several other important ways. He argued that monetary policy should not be used to control asset bubbles. He attributed the large United States current account deficits to a savings glut in China and emerging markets, understating the role that excessive fiscal deficits and debt accumulation by American households and the financial system played.

“Still, when a liquidity and credit crunch emerged in the summer of 2007, Mr. Bernanke engineered a U-turn in Fed policy that prevented the crisis from turning into a near depression. He did this largely with actions and programs that were not in the traditional toolbox of monetary policy.”

Click here for the full article.

Source: Nouriel Roubini, The New York Times, July 25, 2009.

Clusterstock: Thank goodness for government spending
“Today’s better-than-expected -1% GDP was tempered, somewhat, by the staggering 11% spike in Federal Government spending (hello stimulus!). Today’s chart looks back at the Y/Y GDP change with the same number sans government spending. As you can see from the divergence, the government boost provides a big help.”


Source: Joe Weisenthal and Kamelia Angelova, Clusterstock – The Business Insider, July 31, 2009.

BCA Research: US GDP – major benchmark revision to growth
“US output net of inventories stabilized in the second quarter, which could foreshadow positive growth in the second half as inventory levels are rebuilt.
“Although the advanced GDP report for the second quarter beat expectations, it also indicated that the 2008 downturn in growth and consumer spending was considerably weaker than previously thought. Gross domestic product contracted by 6.4% (at annual rates) in the first quarter, a much weaker result than the previous estimate of 5.5%. Consumer spending was also revised markedly lower. Interestingly however, real final sales of domestic product – i.e. GDP net of the change in inventory – has stabilized, a fairly positive sign that growth can turn positive in the second half of the year as inventories are rebuilt.

“Bottom line: We expect a gradual recovery in the US economy in the months ahead, but the Fed will need to keep the policy setting extremely aggressive to achieve a self-reinforcing upturn in consumer confidence and spending.”


Source: BCA Research, July 31, 2009.

Asha Bangalore (Northern Trust): Jobless claims report makes a case that the labor market is improving
“Initial jobless claims rose 25,000 to 584,000 during the week ended July 25. There were seasonal distortions in the early part of July which have been more or less corrected now. Typically, layoffs at auto companies increase in July for retooling. This year the layoffs occurred in May and June and were related to the GM and Chrysler bankruptcy issues. This shift in layoffs led to lower seasonally adjusted jobless claims in July and the readings we see now are gains after the artificial decline. Despite the increase in initial jobless claims in the past two weeks, the peak in initial jobless claims has occurred in March 2009 (674,000).”


“Continuing claims, which lag initial jobless by one week, fell 54,000 to 6.197 million. Continuing claims have declined in four out of the last five weeks.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, July 30, 2009.

The Wall Street Journal: Consumer-debt picture shows one sign of improvement
“Fewer American households appear to be falling behind on their debt payments, according to a new study, but some economists question whether the data reflect a meaningful easing of consumer-credit problems.

“‘I feel very confident we are at a turning point,’ said Mark Zandi, chief economist of Moody’s Economy.com. ‘Household credit conditions are set to improve significantly by this time next year,’ he said. Mr. Zandi attributed the turn to tightening lending standards.

“Mr. Zandi’s outlook is based largely on his analysis of 7.5 million credit files supplied by Equifax Inc., the credit-reporting titan based in Atlanta. The files analyzed represent 5% of US consumers. The analysis showed that the number of mortgage, credit-card and other consumer loan payments that were 30 and 60 days past due fell by nearly 1.1 million to 13.9 million at the end of June, on a seasonally adjusted basis, from three months earlier. Nearly two-thirds of the decline came from falling credit-card delinquencies.

“The analysis of ‘early-stage’ delinquencies can be key to spotting changing trends. When such data show a slowing, it could indicate that total delinquencies will come down in the next six to 12 months. But the data don’t mean the broader credit problems plaguing banks and other lenders will be eliminated anytime soon.

“In fact, the total number of seriously delinquent borrowers and those in default will keep rising for some time, as borrowers who are 30, 60 and 90 days delinquent move to the next phase of delinquency. Overall, household liabilities in delinquency and default rose to $1.15 trillion in June, 10% of total liabilities, according to Mr. Zandi’s analysis of the Equifax data. The delinquency and default rate in June was up from 8.96% in March and 8.01% in December.

“Still, Mr. Zandi said the reduction in newly delinquent borrowers is a positive sign for the economy, especially coming at a time when ‘the job market and housing market are still bad and getting worse. Once those markets stabilize, when combined with the tighter underwriting, we will see a dramatic improvement in credit quality.’

“But not all analysts are convinced. Some believe that improvements in the data represent little more than temporary blips that will reverse as a new wave of credit problems emerge.”

Source: Ruthe Simon and Constance Mitchell Ford, The Wall Street Journal, July 25, 2009.

Asha Bangalore (Northern Trust): Durable goods orders – decline in airline and defense masks improvement
“Orders of durable goods fell 2.5% in June after a 1.3% increase in May. The 38.5% drop in orders of aircraft and a 28.3% decline in bookings of defense equipment resulted in the overall plunge in orders of durable goods. Orders of non-defense capital goods excluding aircraft increased 1.4% following a 4.3% gain in the prior month.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, July 29, 2009.

Asha Bangalore (Northern Trust): Sales of new homes surge in June, inventories of unsold homes are sliding down
“Sales of new single-family homes rose 11.0% to an annual rate of 384,000 in June, after gains in both April and May. The bottom of the housing market appears to have occurred in January 2009 (329,000). Sales of new single-family homes have dropped 72% from the peak registered four years ago in July 2005. On a year-to-year basis, sales of new single-family homes fell 20% in June, a noteworthy deceleration following the largest cyclical drop in January 2009 (45.5%).”


“The inventory-sales (I-S) ratio of new single-family homes has dropped significantly. This ratio has dropped in four of the five months ended June. The median I-S ratio is roughly a 6-month supply. The I-S ratio of all new homes was an 8.8-month supply in June, down from a 12.4-month supply in January. Unsold and sold homes are reported as three sub-categories – not started, under construction, and completed homes. Within the sub-category of unsold/sold completed homes, the I-S ratio was an 8.0-month supply in June vs. a peak of a 12.8-month supply in January.

“The median number of months to sell a new single-family home continues to advance, and in June it reached a new record high of an 11.8-month supply.

“The median price of a new single-family home was $206,200 in June, down 11.9% from a year ago. The elevated level of inventories continues to influence prices of new single-family homes.

“In sum, the housing market is stabilizing with sales of both new and existing single-family homes having advanced in each of the three months ended June and the I-S ratios of new and existing unsold homes have peaked.”

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

Standard & Poor’s: Case-Shiller – home price declines continue to abate
“Data through May 2009, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, show that, although still negative, the annual rate of decline of the 10-City and 20-City Composites improved for the fourth consecutive month in 2009.


“The chart above depicts the annual returns of the 10-City and 20-City Composite Home Price Indices. The 10-City and 20-City Composites declined 16.8% and 17.1%, respectively, in May compared to the same month last year. These values are improvements over April’s data, which show annual declines of 18.0% and 18.1%, respectively. After 16 consecutive months of record annual declines, beginning in October 2007 and ending in January 2009, the indices have now shown four consecutive months of improvement in annual returns.

“‘The pace of descent in home price values appears to be slowing,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s. ‘There is a clear inflection point in the year-over-year data, due to four consecutive months of improved rates of return, after the steep decline that began in the fall of 2005. In addition to the 10-City and 20-City Composites, 17 of the 20 metro areas also saw improvement in their annual returns compared to those of April. Looking at the monthly data, 13 of the 20 metro areas reported positive returns; and the 10-City and 20-City Composites reported positive returns for the first time since the summer of 2006. To put it in perspective, these are the first time we have seen broad increases in home prices in 34 months. This could be an indication that home price declines are finally stabilizing.'”

Source: Standard & Poor’s, July 28, 2009.

Floyd Norris (The New York Times): Politicians accused of meddling in bank rules
“Accounting rules did not cause the financial crisis, and they still allow banks to overstate the value of their assets, an international group composed of current and former regulators and corporate officials said in a report to be released Tuesday.

“The report, from the Financial Crisis Advisory Group, also deplored successful efforts by politicians to force changes in accounting rules and said that accounting standards should be kept separate from regulatory standards, contrary to the desire of large banks.

“‘The message to political bodies of ‘Don’t threaten, Don’t coerce’ flies in the face of some of what has been coming from the European Commission and from members of Congress,’ said Harvey Goldschmid, a co-chairman of the group and a former member of the Securities and Exchange Commission.

“‘We have become increasingly concerned about the excessive pressure placed on the two boards to make rapid, piecemeal, uncoordinated and prescribed changes to standards, outside of their normal due process procedures,’ the group wrote in its report, which was commissioned by the Financial Accounting Standards Board of the United States and the International Accounting Standards Board.

“‘While it is appropriate for public authorities to voice their concerns and give input to standard setters, in doing so they should not seek to prescribe specific standard-setting outcomes,’ the report added.”

Source: Floyd Norris, The New York Times, July 28, 2009.

CFO: Five firms hold 80% of derivatives risk, Fitch report finds
“Members of Congress probing threats to the global financial system – especially the threat of concentration of risk – will have a lot to ponder in newly mandated disclosures highlighted by a Fitch Ratings report issued last week. While derivatives use among US companies is widespread, an ‘overwhelming majority of the exposure is concentrated among financial institutions,’ according to the rating agency’s review of first-quarter financials.

“Concentrated, in fact, among a mere handful of financial-services giants. About 80% of the derivative assets and liabilities carried on the balance sheets of 100 companies reviewed by Fitch were held by five banks: JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup and Morgan Stanley. Those five banks also account for more than 96% of the companies’ exposure to credit derivatives.

“About 52% of the companies reviewed disclosed there were credit-risk-related contingent features in their derivative positions. Such features require a company to post collateral or settle outstanding derivative liabilities if there’s a downgrade of the company’s credit rating.

“The Fitch analysts also found that just 22 companies disclosed the use of equity derivatives. Just six nonfinancial firms – IBM, General Motors, Verizon, Comcast, Textron and PG&E – reported exposure to share-based derivatives.”

Source: David Katz, CFO, July 24, 2009.

Bloomberg: Schumer presses SEC for ban on “unfair” high-frequency trades
“Charles Schumer, the third-ranking Democrat in the US Senate, asked the Securities and Exchange Commission to ban so-called flash orders for stocks, saying they give high-speed traders an unfair advantage.

“Schumer’s letter to SEC Chairman Mary Schapiro yesterday raised the stakes in a debate over the practice offered by Nasdaq OMX Group, Bats Global Markets and Direct Edge Holdings LLC, which handle more than two-thirds of the shares traded in the US. With flash orders, exchanges wait up to half a second before they publish bids and offers on competing platforms, giving their own customers an opportunity to gauge demand before other traders.

“‘This kind of unfair access seriously compromises the integrity of our markets and creates a two-tiered system, where a privileged group of insiders receives preferential treatment,’ Schumer wrote in the letter.

“Flash orders make up less than 4% of US stock trading, according to Direct Edge and Bats. They have drawn criticism from the Securities Industry and Financial Markets Association, which is Wall Street’s main lobbying group, and Getco LLC, one of the biggest firms that uses high-frequency trading strategies to make markets in stocks and options. NYSE Euronext, owner of the world’s largest exchange by the value of companies it lists, told the SEC in May that the technique results in investors getting worse prices.

“Schumer, a member of the Senate Banking Committee, said he will introduce legislation to ban flash orders if the SEC doesn’t act on his request.”

Source: Edgar Ortega and Eric Martin, Bloomberg, July 25, 2009.

Financial Times: Emerging markets rush to issue debt
“Emerging market bond issuance has risen to record levels as investors hungry for greater risk switch to the securities because of attractive yields.

“The surge in issuance this year, to its highest since records began in 1962, is an encouraging sign for the world economy as activity in emerging market bonds had seized up until a few months ago.

“The bond market freeze had made it difficult for governments and companies, especially those in eastern Europe hit by the credit crunch and needing to refinance debt.

“Bond volumes in emerging markets have risen to $352 billion so far this year, according to Thomson Reuters, up 45% on the same period in 2007 before the financial crisis.

“July, typically a slower month as investors wind down for the summer holidays, has been the second highest for new volumes, with issuance rising to $60 billion.

“China has been the biggest issuer this month, but countries such as Poland and Hungary have been able to tap markets.

“Hungary, which was forced to turn to the International Monetary Fund for financial support, this month launched its first international bond since June 2008.

“Bankers said the pick-up in bond yields had been a big factor in attracting investors.

“Yields on emerging market sovereign bonds, measured by JPMorgan’s Embi Index, are nearly 2 percentage points higher than those on single A rated US corporate bonds.

“Bryan Pascoe, global head of debt syndicate at HSBC, said: ‘Although emerging market bond spreads have narrowed, they still offer a lot of value compared with developed market corporate spreads, with better credit fundamentals in many cases.'”

Source: David Oakley, Financial Times, July 26, 2009.

Bespoke: Financial default risk at lowest level since June 2008
“Our Bank and Broker CDS Index measures credit default swap (CDS) prices for global financial firms on a cap weighted basis. Below is a chart of our index that shows the huge spike in default risk that occurred during the peak of the financial crisis in late 2008 and early 2009. As things have settled down, default risk has now moved well below the levels it was at just before the Lehman bankruptcy. Our CDS index is currently at its lowest level since June 23, 2008, and it’s down a whopping 67% from its all-time high.”


Source: Bespoke, July 29, 2009.

Bespoke: Country returns
“The S&P 500 is up 11.24% since July 10, which is a significant move in such a short period of time. The recent gains also put the index up nicely at 8.28% year to date. As shown below, the US has performed well relative to the rest of the world. Since July 10, it ranks 22nd out of 82 countries. Russia is up the most with a gain of 24.23%, followed by Hungary, Poland, Norway, Romania, and Germany. Middle and Eastern European countries have seen some of the biggest gains in recent weeks.

“While China has been the second best performing country (behind Peru) year to date, it is only up 10.32% since July 10. This is better than most countries, but it hasn’t been the worldwide leader that it was earlier in the year. Five of the G-7 countries have outperformed China, and all seven G-7 countries are in the top 50% in terms of performance. This is a sign that developed markets have been holding their own against emerging markets in recent weeks. Only ten out of 82 countries are down since July 10, with Slovakia leading the way at -5.67%.”


Source: Bespoke, July 27, 2009.

Bespoke: Newsletter writers turning a little more bullish
“This week’s release of the Investors Intelligence survey of newsletter writers showed a moderate increase in bullish sentiment. As shown, the bulls rose back above 40%, although they’re still below levels from early July. Bearish sentiment also declined, but it too is still above 30% and higher than it was a few weeks ago. The market’s rally over the last two weeks has certainly improved spirits, but given the gains, one would expect a larger increase in positive sentiment.”


Source: Bespoke, July 29, 2009.

Bespoke: Are institutions participating in the rally?
“We recently broke the S&P 500 into 10 deciles (10 groups of 50 stocks) based on the amount of a stock’s shares that are held by institutions. We then calculated the average performance of the stocks in each decile since the rally ramped up again on July 10. As shown below, the two deciles of stocks with the most institutional ownership are up the most, while the decile of stocks with the lowest institutional ownership is up the least. Based on this analysis, institutional investors do believe in the rally, and maybe even more than individuals.”


Source: Bespoke, July 27, 2009.

Clusterstock: Shades of 1929
“We’ve put together an amazing, fool-making rally since the market hit its lows in early March. Of course, before you break out the champagne, remember that a strong bull run can happen during a long-term decline.

“We have eclipsed most such precedents. But we did have one big bull run of nearly the exact same length and magnitude between November 1929 and April 1930. And you know what happened after that.”


Source: Joe Weisenthal and Kamelia Angelova, Clusterstock – The Business Insider, July 30, 2009.

Bespoke: Dividend stocks outperform during the rally
“Prior to the 2008 financial crisis, investors typically flocked to stocks with high dividends as safety plays when the overall market was in correction mode. However, since so many financial stocks had nice yields, dividend stock indices and ETFs actually underperformed the S&P 500 throughout the last bear market. The ability for companies to actually pay their dividends eventually came into question, and that added even more fear to owning high yield stocks.

“Below we highlight the performance of the Dow Jones Dividend Select Index versus the S&P 500 during the bear market that ran from 10/9/07 to 3/9/08. As shown, the dividend index was down 60.3% versus the S&P 500’s decline of 56.7%. Since the March 9 bottom, however, dividend indices have outperformed. As shown in the bottom chart, the same dividend index is up 51.16% while the S&P 500 is up 45.18%.”



Source: Bespoke, July 28, 2009.

Bespoke: Q2 earnings growth versus estimates
“At the start of the second quarter, the consensus estimate was that S&P 500 earnings versus Q2 ’07 would be down 31.3%. As shown below, this estimate trended downward to a low of -35.1% on May 15, picked back up again through the end of May, and then dropped to -35.2% on July 10 just when earnings season was beginning.

“One of the reasons the market has done so well this earnings season is because actual earnings growth has come in better than expected. Fifty percent of the S&P 500 has reported second quarter numbers, and the collective change in earnings from Q2 ’07 to Q2 ’08 has been -24.8%. This is a negative number, but compared to the estimates, it’s a positive.”


Source: Bespoke, July 29, 2009.

Clusterstock: China’s incredible run
“Chinese shares crashed 5% on Wednesday, setting off a mild panic about Asian stocks and currencies. Chinese stocks have had a massive rally this year, by far outpacing the S&P’s meteoric rise since March. So perhaps a pull back shouldn’t be that much of a surprise.”


Source: Joe Weisenthal and Kamelia Angelova, Clusterstock – The Business Insider, July 29, 2009.

Bloomberg: China stocks plunge on tightening concern
“China’s stocks plunged, driving the Shanghai Composite Index down the most in eight months, on speculation the government will curb inflows into a market that had doubled from last year’s low.

“The benchmark gauge lost 5%, snapping a five-day, 7% advance that pushed valuations to their highest since January 2008. The gauge has gained 79% this year as government stimulus spending, record bank lending and an economic rebound spurred demand for equities.

“‘Speculation the central bank may take steps to rein in liquidity worried the market,’ said Gabriel Gondard, deputy chief investment officer at Fortune SGAM Fund Management Co., which oversees about $7.2 billion in assets. ‘A lot of people were looking to take profit’ after the market gains.

“‘Expensive valuations and jitters among investors about fast share-price gains are enough to trigger panic selling like today,’ said Larry Wan, Shanghai-based deputy chief investment officer at KBC-Goldstate Fund Management Co., which oversees about $583 million in assets.

“Stocks plunged amid speculation the central bank is poised to order lenders to set aside larger reserves, Beijing-based Caijing magazine reported today on its website. Market News International said Chinese equities fell on speculation regulators will increase a tax on stock trading.”

Source: Bloomberg, July 29, 2009.

MoneyNews: China says loose monetary policy to stay
“China’s central bank pledged to maintain loose monetary policy to support the economy and said it would ensure sustainable credit growth without resorting to heavy-handed quotas to rein in a lending spree.

“In a statement that analysts said was intended to calm skittish markets, the People’s Bank of China Vice Governor Su Ning said the central bank ‘will unswervingly continue to apply appropriately loose monetary policy and consolidate the economic recovery momentum.’

“The statement was posted on the bank’s website after Wednesday’s 5% fall in the Chinese stock market, its biggest daily drop in eight months, which had been sparked in part by worries that Beijing would restrict bank lending.

“But there was also a hint of a gradual shift in policy footing when an unnamed official was quoted by state-run Xinhua news agency as saying that the central bank would ‘fine tune’ its loose monetary stance and keep prices ‘within a reasonable and controllable range’.

“Officials have expressed concern about the risk of stock and property bubbles inflating because of an unprecedented surge in bank lending, and the central bank said this week that consumer prices, now in mild deflationary territory, could start rebounding after the third quarter.

“China has in the past used a quota system to control lending, telling banks not to exceed specific ceilings. This credit management was a key prong of China’s monetary tightening in 2008 and it was subsequently blamed for contributing to the economy’s sharp slowdown in the fourth quarter.

“Su’s comments appeared to rule out an imminent return to a strict, central bank-directed quota system.

“‘They are responding to an incorrect interpretation by the market,’ said Ting Lu, economist with Merrill Lynch in Hong Kong.

“Beijing has tamped down a little on the tide of money washing through the economy, but it is seen as unwilling to shift to more substantial tightening until a full-fledged recovery is assured.”

Source: MoneyNews, July 30, 2009.

Bespoke: IBD 100 China edition?
“Investors Business Daily has its IBD-100 list that highlights the most attractive stocks from an earnings, growth, and relative strength perspective. When the market is rallying, the IBD-100 has historically outperformed, and when it corrects, these stocks usually underperform.

“This weekend, however, we wondered whether we were reading an alternate edition of the newspaper. When looking through the top stocks in the IBD-100, seven of the top eight and ten of the top twenty were Chinese stocks listed in the US. We’re all well aware of how China has recently been the leading force of economic growth, but given the strength in these names, one has to at least wonder how much of this growth has already been priced in.”

Source: Bespoke, July 28, 2009.

MoneyNews: Gross: Wall Street to blame for high fees
“Bill Gross, the influential manager who runs top bond fund PIMCO, on Wednesday lambasted his industry for charging investors hefty fees for subpar performance amidst the worst economic crisis since the Great Depression.

“In his latest investment letter to clients, Gross, co-chief investment offer of Pacific Investment Management Co., said roughly 90% of the $1.5 trillion in 401K and other defined contribution assets in mutual funds are ‘actively managed’. And yet many of those portfolio managers posted unspectacular performance for exorbitant fees, close to 1%, he asserted.

“He likened the situation to the infamous Madame Rue selling Potion #9.

“‘I’ve never known any gold-capped tooth money managers, but without squinting very hard there is undoubtedly a strong resemblance between all of us ‘managers’ and the infamous Madame Rue selling Potion #9,’ Gross said. ‘Instead of love, though, we sell ‘hope’, but very few are able to seal the deal with performance anywhere close to compensating for the generous fees we command.’

“Gross said investors paying for those potions during an era of asset appreciation with double-digit returns may have been ‘tolerable’, but if investment returns gravitate close to 6% as his firm envisions, ‘then 15% of your income will be extracted based on the beguiling promise of Madame Rue’.

“He highlighted a recent Barron’s article that pointed out that stock funds extract an average 99 basis points or virtually 1% a year in fees from an investor’s portfolio, while bond managers at 75 basis points. Many money market funds manage to charge 38 basis points.

“‘Since money market funds barely earn 38 basis points these days, much of the return winds up in the hands of investment managers,’ Gross said. ‘A mighty expensive potion indeed.’

“For his part, Gross’ PIMCO Total Return Fund, whose assets under management of $164 billion makes it the world’s largest mutual fund, ranks as a strong performer. The Fund charges 46 basis points to investors.

“Gross reiterated that economic growth for the United States will fall short of recent years, expanding around 3% a year once it emerges from recession. The US economy was growing at 5-7% a year for 15 years before it plunged into the worst recession in decades.

“Slower growth means lower profit growth, permanently higher joblessness, constrained consumer spending and increased government involvement, Gross added.

“‘The ‘new normal’ nominal GDP, the future return on our stock of labor and capital investment, will likely be centered closer to 3%, for at least a few years once a recovery is in place beginning in this year’s second half,’ Gross said. ‘Diminished capitalistic risk taking and constrained policymaker releveraging will lead to that likely conclusion.'”

Source: MoneyNews, July 29, 2009.

Steve Barrow (Standard Bank): SNB battles stubborn franc
“Signs are finally emerging that the Swiss National Bank (SNB) may succeed in its aim of driving down the franc, believes Steve Barrow, currency strategist at Standard Bank.

“He notes that it is highly unusual for a central bank to promise to keep a currency from rising. ‘It is more common for them to aim to avoid currency weakness. This is a very important difference.’

“Usually, he says, central banks looking to defend their currency face the problem that they could run out of reserves. Any hint of this happening can lead to intense pressure on the currency. But for the SNB, no such constraint exists – it can intervene with a potentially limitless supply of newly-printed francs, which should leave the market running scared.

“So why has the franc stubbornly refused to fall?

“‘All theories concerning the effectiveness of intervention stress the importance of falling interest rates,’ Mr Barrow says. ‘The problem for the SNB has been that rates are about as low as they can go with a three-month Libor target of 0.25%. But there are signs of a bit more rate divergence now, especially further down the curve. For instance, quite a gap has opened up in 10-year bond spreads between Germany and Switzerland.

“‘With similar, if smaller, divergences creeping in at the front end, the euro could be on its way back to the SFr1.5450 level seen in the wake of the original decision to target franc weakness in March.'”

Source: Steve Barrow, Standard Bank (via Financial Times), July 29, 2009.

TheStreet.com: Frank Holmes – gold will hit $1,300
“Frank Holmes, CEO and Chief Investment Officer of US Global Investors, argues that deflation and the dollar are the main factors moving gold futures and he outlines his number one trading strategy for the rest of the summer.”

Source: TheStreet.com via (via YouTube), July 30, 2009.

Bloomberg: Goldman – crude oil to rise to $85 by year-end
“Goldman Sachs Group Inc. said it is maintaining its forecast that West Texas Intermediate crude oil will reach $85 a barrel by year end as the recent weakness in market fundamentals will be temporary.

“Oil demand will be supported by stabilization in US industrial activity and a positive outlook for China’s economic growth, the bank said in a report today.

“‘Concerns over economic growth and weak oil statistics led a commodity sell-off yesterday,’ said Goldman analysts, led by London-based Jeffrey Currie. ‘However, we believe most of these drivers are less negative than they first appear.’

“‘We maintain that demand stabilization will be critical to a sustainable rise in oil prices that we expect later this year,’ the analysts said. ‘Stabilization in industrial activity and a nascent slowing in industrial destocking give us confidence in this view.’

“Goldman closed its recommendation to buy crude futures for December 2011 delivery in a July 27 report after long-dated oil prices approached the bank’s target of $85 a barrel.”

Source: Bloomberg, July 30, 2009.

CNBC: Speculators hiked oil prices – Chilton
“New data shows speculators played an important role in last year’s hike in oil prices, Bart Chilton, one of four CFTC commissioners, told CNBC Tuesday.”

Source: CNBC, July 28, 2009.

Nationwide: UK house prices up for third month in a row
“The price of a typical house rose for the third consecutive month in July, increasing by 1.3% 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 1.0% in June to 2.6% in July, the highest level since February 2007. House prices are still 6.2% lower than 12 months ago, but this represents another sharp improvement from the 9.3% year-on-year decline in June.

“Even if prices were to remain unchanged for the rest of 2009, the year-on-year rate would continue to improve since prices were falling very sharply in the second half of last year. For the first seven months of 2009 as a whole, prices have risen by a cumulative 1.3%, suggesting there is now a reasonable chance that prices could end the year slightly higher than where they started. Only a few months ago, such an outcome would have appeared unthinkable.”


Source: Nationwide, July 30, 2009.

The Wall Street Journal: UBS, Swiss reach pact on US tax probe
“UBS AG and the Swiss government, rocked by months of embarrassing details about bank secrecy and guilty pleas for UBS clients, agreed to settle a tax-evasion probe with US authorities.

“The agreement appears to signal that thousands of US client accounts, hidden in offshore shadows, will be turned over to US revenue agents.

“The settlement, announced during a teleconference with a federal court judge Friday ahead of a scheduled hearing in Miami on Monday, closes one chapter in the long-running case that centered on the Internal Revenue Service’s demand that UBS turn over the identities of 52,000 UBS accounts that belong to UScitizens.

“Details of the settlement weren’t provided during the call, with the Justice Department simply reporting that the parties had reached an agreement in principle and would work to resolve remaining issues in the coming week. Another conference that could shed more light on the deal is set for Friday.

“But lawyers involved in the case said one likely scenario is that UBS will turn over the identities of some, but not all, of the 52,000 accounts.

“‘I think it’s possibly going to push north of 10,000,’ said William Sharp, a Tampa, Fla., lawyer who is representing UBS clients and was working on the case in Zurich in the past week.

“‘We have never before seen so many US citizens and residents potentially subject to criminal tax prosecution on the same basic issue,’ said Bryan Skarlatos, a partner at New York law firm Kostelanetz & Fink LLP who is representing UBS clients.

“UBS and the Swiss government argued in the tax-evasion case that Swiss bank-privacy law meant the bank couldn’t hand over the account identities. It now appears that UBS and the Swiss government have combed through the files and identified enough potential fraud to make them willing to hand over information about certain accounts.

“Swiss laws don’t provide confidentiality if people engage in fraudulent activities such as setting up accounts with shell companies that lack any real business substance.”

Source: Carrick Mollenkamp, Stephen Fidler and Laura Saunders, The Wall Street Journal, August 1, 2009.

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