Words from the (investment) wise 10.18.09

Words from the (investment) wise for the week that was (October 12 – 18, 2009)

Risky assets remained in favor during the past week, generally helped along by fairly robust economic data and better-than-expected corporate earnings reports. A number of bourses, crude oil, inflation-linked bonds and high-yielding corporate bonds and currencies recorded fresh highs for the year, whereas gold hit an all-time high of $1,070.20 per ounce.

Assets such as government bonds and the US dollar saw fading demand as safe havens, now that the global economy is on the mend. Similarly, credit default spreads tightened markedly and the CBOE Volatility Index (VIX) declined to its lowest level since early September 2008.

The Dow Jones Industrial Index passed a psychological milestone this week as the Index broke above the 10,000 level for the first time in a year, although it then declined again to fall shy of the roundophobia number by four basis points by the closing bell. The Dow first broke above 10,000 more than ten years ago in 1999 and has since done so on 26 occasions. Yes, a ten-year buy-and-hold index investor has had no capital gain over the period!

Source: The Wall Street Journal, October 16, 2009.

Meanwhile, according to the Financial Times, a survey of 44 leading economists by the National Association of Business Economics (NABE) showed the jobs that were lost during the Great Recession are not expected to return before 2012, while anemic wage growth of only 1% this year and 2.2% next year is forecast – the slowest two-year period on record. “But the way that investors are almost relying on unemployment to stay high [and central banks not to start exiting from the exceptionally low interest rates any time soon] demonstrates that the recovery, in markets and the economy, remains on shaky foundations,” warned FT’s investment editor, John Authers.

Source: Walt Handelsman, October 14, 2009.

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers that indicates an increase in risk appetite.

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 (+1.4%) and MSCI Emerging Markets Index (+2.1%) both made headway last week to take the year-to-date gains to +25.6% and an impressive +70.4% respectively. Interestingly, Chile is now only 1.5% down from its July 2007 highs and could be one of the first markets to wipe out all the financial crisis losses.

Notwithstanding a down-day on Friday, US indices closed higher for the week. The year-to-date gains remain firmly in positive territory and are as follows: Dow Jones Industrial Index +13.9%, S&P 500 Index +20.4%, Nasdaq Composite Index +36.8% and Russell 2000 Index +23.4%.

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

Top performers among stock markets this week were Sudan (+22.6%), Kazakhstan (+8.9%), Cyprus (+7.6%), Egypt (+6.0%) and Hungary (+5.5%). At the bottom end of the performance rankings countries included Nigeria (_4.2%), Thailand (-4.0%), Qatar (-3.2%), Bahrain (-2.8%) and Ireland (_2.4%).

Of the 99 stock markets I keep on my radar screen, 76% recorded gains, 21% showed losses and 2% 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 United States Gasoline (UGA) (+11.1%), United States Oil (USO) (+8.9%), PowerShares DB Energy (DBE) (+8.8%) and iShares S&P GSCI Commodity (GSG) (+7.4%).

On the losing side of the slate, ETFs included iShares MSCI Thailand (THD) (-6.0%), Market Vectors Solar Energy (KWT) (-2.8%), Claymore/MAC Global Solar Energy (TAN) (-2.6%) and ProShares Short MSCI Emerging Markets (EUM) (-2.5%).

Referring to the declining US dollar, the quote du jour this week comes from 85-year-old Richard Russell, author of the Dow Theory Letters. He said: “Now I’ll let you in on an awful secret. The US, despite all its BS talk, really wants a lower dollar. The fact is that the US is doing absolutely nothing to defend the dollar. Of course, if the Fed wanted to defend the dollar they could halt their mass printing of dollars, and they could raise interest rates. And Bernanke could win the 800 meter race at the next Olympics at Rio.

“But let’s be rational – how in God’s name is the US going to pay off trillions in debt? By raising taxes? Impossible. They could renege on the debt like Argentina – unthinkable. But there is a way – they’ll try to minimize the importance of the debt with a cheaper, devalued dollar. That’s the time-honored US way, but loyal Americans don’t believe it. If they did, gold would be selling at $4,000 an ounce.”

Russell added: “It’s all so smarmy, but c’mon, what do you think the Fed has been doing since World War II? It’s been systematically inflating. They can’t fool me, I was around after the War, and I remember prices in 1945. Maybe the chief culprit was Alan Greenspan, but Bernanke is carrying on. There’s a lot of inflating coming up. ‘Strong dollar policy.’ Bite your tongue, and give me a break.”

Other news is that the Federal Deposit Insurance Corporation (FDIC) closed another bank on Friday, bringing the tally of US bank failures in 2009 to 99 (124 since the beginning of the recession). Meanwhile, CreditSights, which tracks the dismal data, predicts (via MarketWatch) that we could be no more than 10% of the way through this cycle of bank collapses, which is sure to be the worst run of closures since the Great Depression.

Next, a quick textual analysis of my week’s reading. Although “bank” still features prominently, the key words have started taking on a more normal pattern compared with the crisis-related words that have dominated the tag cloud for many months. “Recovery” is also gaining in prominence.

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based) are given in the table below. With the exception of the Shanghai Composite Index, which is trading marginally below its 50-day moving average, all the indices are above their respective 50- and 200-day moving averages. The 50-day lines are also above the 200-day lines in all instances.

The US indices are creeping closer to the so-called 50% retracement levels (i.e. regaining half the loss suffered between the October 2007 highs and March 2009 lows). The levels are: 10,346 for the Dow Jones Industrial Index and 1,121 for the S&P 500 Index.

The September highs and October lows are also given in the table as these levels could define a support area for a number of the indices.

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

“We regularly note that the earnings reporting season often marks the end of the market trend into earnings announcements. The reversal tends to occur during the second week [last week] of reporting. Given this is expiration week, which often creates a short-term peak on the usual manipulation, the odds favor a short-term stock market peak late this week or next week. Of course any unexpected ugly news, like negative revenue, earnings or guidance from several key companies could commence a stock downdraft,” said Bill King (The King Report).

Talking of earnings, the third-quarter earnings season has progressed on an upbeat note since Alcoa’s results announcement on October 7 marked the onset of the reporting cycle. It is still early days in this period, but 85% of US companies have so far beaten earnings estimates. According to Bespoke, the current beat rate is well above any other quarter since at least 1998. “Even with analysts raising estimates significantly leading up to the earnings season, companies have still managed to come in better than expected so far,” they said.

Source: Bespoke, October 16, 2009.

Additionally, Bespoke also highlighted that while the earnings per share numbers grab the headlines, it is what companies say about future quarters that impacts equity prices most on their reporting days. As shown in the graph below, 20.3% of US companies have raised guidance so far this earnings season. Bespoke‘s report said: “The highest reading for this number has barely broken 15% in any prior quarter this decade. And if we compare the percentage of companies raising guidance versus the percentage of companies lowering guidance, no other quarters come even close to this one. It will be hard to keep this up as the earnings season progresses, but it’s also shaping up to be a record-breaking quarter on the positive side.”

Source: Bespoke, October 16, 2009.

Importantly, one needs to assess what is priced in by the stock market. Useful research comes from David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, who said: “We re-ran our regressions with the latest tightening in spreads and breakout in equity valuation and found that US investment grade credit is now priced for 2.5% GDP growth in the coming year (was 2.0% two months ago) and the S&P 500 is now de facto pricing in 4.8%, which, by the way, is now basis points shy of what it was discounting in the summer/fall of 2007. And, backing out the fair-value P/E from the corporate bond market, and yields have been backing up sizably in recent weeks, we can see that the S&P 500 is now pricing in $85 of operating earnings, which we think will be, at best, a 2013 story. In other words, the rally continues to move further away from the fundamentals.”

However, Rosenberg’s bearish prognostications are not universally accepted. In a rebuttal (via Clusterstock), Eddy Elfenbein created the chart below of profits as a share of GDP. “They’re clearly compressed, and if they revert to a historical standard, it means earnings have some spring in them,” said the report.

Source: Clusterstock – Business Insider, October 9, 2009.

Jeremy Grantham, who has just announced his retirement as chairman of GMO, put matters into perspective in a Kiplinger article, saying: “The recent rally has been very speculative, favoring risky assets over the past few months. I’m sorry if you missed investing at the market’s March lows, but don’t compound the damage to your portfolio by chasing gains in risky assets. We’re at the beginning of a seven-year period of lean returns. You should only be buying the highest-quality blue-chip com_panies, where valuations are most attractive.”

As stated before, share prices have moved too far ahead of economic reality. This calls for a cautious approach in anticipation of the market working off its overbought condition and fundamentals reasserting themselves. I will bide my time while the fundamentals play catch-up.

Economy
“After improving steadily this past summer, global business sentiment has remained largely unchanged so far this fall, consistent with a global economy that is experiencing a tentative economic recovery. The recession is over but the nascent recovery is not quickly gaining traction,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses remain more upbeat about the outlook into next year and broader economic conditions, and dourer when considering the strength of their sales and intentions to hire. South Americans are the most positive and North Americans generally the most negative.”

Source: Moody’s Economy.com

As far as hard data are concerned, China’s economy gained new impetus, according to US Global Investors. “Passenger car sales in September rose 84% year on year to 1.02 million units. Housing starts jumped 56% in September from a year earlier, the fastest pace of growth in at least five years.

“China’s exports declined 15.2% year on year in September, the smallest contraction in nine months, while imports dropped only 3.5% year on year as the domestic economy continued to recover. Exports rose 7.7% on a month-on-month basis, adjusted for seasonality.” The stronger export performance follows a similar trend in South Korea, Taiwan and Vietnam.

“Singapore, which led Asia into recession, on Monday pointed the way to further regional recovery with strong third-quarter economic growth … The Monetary Authority of Singapore (MAS) said GDP expanded 14.9% on a seasonally adjusted quarter-on-quarter annualized basis in the June to September period, after a comparable revised increase of 22% the previous quarter,” reported the Financial Times.

Further good news on the global economic front came from Eurozone industrial production that expanded for the fourth month in a row in August. Output rose by 0.9% from July, when it increased by a revised 0.2%.

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, October 16
• Widespread strength in factory report

Thursday, October 15
• Inflation remains a non-issue, for now
• The quandary between initial claims and total continuing claims

Wednesday, October 14
• Minutes of September 22-23 FOMC meeting – more of the same
• Q3 consumer spending expected jump likely, but muted growth in Q4
• Import prices are turning around
• Restocking – one of the conduits of economic growth in the months ahead

Further evidence that the recession that began in December 2007 has ended, came from the Philly Fed report that was positive for the third straight month. According to Bespoke, “the last time this indicator was positive for three straight months was from September through November 2007, which was the last three months leading up to the start of the recession”.

Source: Bespoke, October 15, 2009.

Dissecting the retail sales data shows that trends improved all over, with the exception of auto-related sales due to “Cash for Clunkers”. The chart below, courtesy of Clusterstock takes September’s year-on-year sales change (Sep 09 versus Sep 08) and subtracts August’s year-on-year sales change (Aug 09 versus Aug 08). It thus shows the change in the retail sales trend. “Yes, this matters: American retail trends have to become less negative before they go positive,” said the report.

Source: Clusterstock – Business Insider, October 14, 2009.

The minutes of the Federal Open Market Committee’s (FOMC) September meeting indicated that most participants thought the recession was over. Although they expected the recovery to be weak initially, most members also upgraded their expectation for near-term growth.

Participants generally expected inflation to remain low in the near term. “The Fed is in the most favorable spot in the near term with regard to inflation because the excess capacity in the economy allows the Fed to maintain a focus on economic growth and leave inflation on the back burner, for now,” said Asha Bangalore (Northern Trust).

Cautioning against bullish expectations, David Rosenberg said (via MoneyNews) that the economy was being held together by very strong tape and glue provided by the Fed, Treasury, and Congress, and that the recovery would be weak.

He predicted the economy would stagnate this quarter and then grow no more than 2% in 2010. The economy won’t take on the “V” shape of previous rebounds, Rosenberg said. “It’s going to look like this whole string of lowercase Ws for the next five years.”

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
Oct 14	8:30 AM	Export Prices ex agriculture	Sep	0.0%	NA	NA	0.7%
Oct 14	8:30 AM	Import Prices ex oil	Sep	0.6%	NA	NA	0.3%
Oct 14	8:30 AM	Retail Sales	Sep	-1.5%	-2.7%	-2.1%	2.2%
Oct 14	8:30 AM	Retail Sales ex auto	Sep	0.5%	-0.3%	0.2%	1.0%
Oct 14	10:00 AM	Business Inventories	Aug	-1.5%	-1.2%	-1.0%	-1.1%
Oct 14	2:00 PM	FOMC Minutes	Sep	–	–	–	–
Oct 15	8:30 AM	Initial Claims	10/10	514K	540K	520K	524K
Oct 15	8:30 AM	Continuing Claims	10/03	5992K	6000K	6000K	6067K
Oct 15	8:30 AM	Core CPI	Sep	0.2%	0.1%	0.1%	0.1%
Oct 15	8:30 AM	CPI	Sep	0.2%	0.2%	0.2%	0.4%
Oct 15	8:30 AM	Empire Manufacturing	Oct	34.57	17.5	17.25	18.88
Oct 15	10:00 AM	Philadelphia Fed	Oct	11.5	13.5	12.0	14.1
Oct 15	11:00 AM	Crude Inventories	10/09	.334M	NA	NA	-0.98M
Oct 16	9:00 AM	Net Long-term TIC Flows	Aug	$28.6B	NA	$30.0B	$15.3B
Oct 16	9:15 AM	Capacity Utilization	Sep	70.5%	70.1%	69.8%	69.9%
Oct 16	9:15 AM	Industrial Production	Sep	0.7%	0.4%	0.2%	1.2%
Oct 16	9:55 AM	Mich Sentiment Preliminary	Oct	69.4	74.0	73.3	73.5

Source: Yahoo Finance, October 16, 2009.

Click the links below for the following economic reports:

• Wells Fargo Securities: Weekly Economic & Financial Commentary
• Wells Fargo Securities: Monthly Outlook (October 2009)

US economic data reports for the week include the following:

Tuesday, October 20
• Building permits
• Housing starts
• PPI

Wednesday, October 21
• Fed’s Beige Book

Thursday, October 22
• Initial jobless claims
• Leading economic indicators
• FHFA Housing Price index

Friday, October 23
• Existing home sales

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, October 16, 2009.

“The emotional brain responds to an event more quickly than the thinking brain,” said Daniel Goleman, author of Emotional Intelligence and Primal Leadership. Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist the thinking brains of readers of Investment Postcards and take the emotion out of their investment decisions.

Click here for more thought-provoking items and quotes.

That’s the way it looks from Cape Town (where we are blessed with balmy spring weather at the moment).

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

Source: Tom Toles, October 16, 2009.

Financial Times: Nobel economics prize for governance duo
“Elinor Ostrom and Oliver Williamson shared the 2009 Nobel Prize for economics of Monday for their work on how economic transactions operate outside markets in common spaces and within companies. Martin Wolf, chief economics commentator, explains the value of the surprise winners’ research.”

Click here for the full article.

Source: Financial Times, October 12, 2009.

Asha Bangalore (Northern Trust): Minutes of September FOMC meeting – more of the same
“The minutes of the September 22-23 FOMC meeting contain the typical pros and cons of Fed policy, with nothing standing out. The willingness of some members to enlarge the size of the mortgage-backed securities purchase plan could be raised to ‘reduce economic slack more quickly than in the baseline outlook’. At the same time, another member held the opinion that improvements underway implied a reduction of these purchases. The importance of ‘flexibility’ to expand purchases of assets in the event of a deterioration of economic conditions was noted.

“The FOMC’s views about inflation are noteworthy. The majority of the FOMC views the inflation outlook during the next few quarters as roughly balanced. There were those belonging to the significant disinflation camp, but they had lowered the probability of this occurrence in the intermeeting period. In the longer term, a few were reported to see ‘risks tilted to the upside’. Inflation expectations have been stable and allow the Fed to watch and wait and focus on economic growth.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, October 14, 2009.

CNN Money: Foreclosures – worst three months of all time
“Despite concerted government-led and lender-supported efforts to prevent foreclosures, the number of filings hit a record high in the third quarter, according to a report issued Thursday.

“‘They were the worst three months of all time,’ said Rick Sharga, spokesman for RealtyTrac, an online marketer of foreclosed homes.

“During that time, 937,840 homes received a foreclosure letter – whether a default notice, auction notice or bank repossession, the RealtyTrac report said. That means one in every 136 US homes were in foreclosure, which is a 5% increase from the second quarter and a 23% jump over the third quarter of 2008.

“Nevada continued to be the worst-hit state with one filing for every 23 households. But even tranquil Vermont, where the foreclosure crisis has barely brushed the housing market, saw foreclosure filings jump nearly 170% compared with the third quarter of 2008. Still, that resulted in just one filing for every 5,023 households in the state – the best record in the country.

“The RealtyTrac report also unveiled the results for September, and it found that there was slight relief from foreclosure filings. Last month, notices totaled 343,638, down 4% compared with August. Unfortunately, that total accounts for 87,821 homes that were repossessed by lenders.

“That deluge contributed significantly to the quarter’s record 237,052 repossessions, a 21% jump from the previous three months. So far this year lenders have taken back 623,852 homes.’

“The foreclosure crisis may not diminish anytime soon. ‘The fastest growing area is in the 180 days late-plus category, the most seriously delinquent borrowers,’ Sharga said. ‘It’s going to be a lingering problem.'”

Source: Les Christie, CNN Money, October 15, 2009.

CNN Money: Foreclosure fix not working
“Elizabeth Warren of the Congressional Oversight Panel says positive news in housing is only part of the story.”

Source: CNN Money, October 12, 2009.

Financial Times: Slow US recovery blamed on low demand “Weak demand from battered consumers will be a ‘major constraint’ on the US economy for the foreseeable future, a key White House adviser said on Monday, as the administration mulls over further ways to spur demand and create jobs. “Lawrence Summers, the director of the National Economic Council, has been banging the drum for the $787 billion stimulus package in the face of Republican criticism that it is not creating the jobs it promised. “With political pressure building as unemployment nears 10%, the administration is looking for additional ways to mitigate the problem, though it insists there will be no ‘second stimulus’. “‘It is not for me_… to preview policies that President Obama will announce in coming weeks,’ said Mr Summers in a speech to an economics conference on Monday. But he said that while the economy had improved substantially, people had to recognise that demand was hobbled and US consumers and exports should be supported. “‘We need to recognise that lack of demand will be a major constraint on output and employment in the American economy for the foreseeable future,’ he said at the National Association for Business Economics conference. ‘Direct public investment has a crucial role at a time like this.’ “His speech was made as a survey of 44 leading economists by the NABE showed many were worried about the effects of unemployment and the budget deficit on the US economy. “Four in every five said that the worst recession since the 1930s was over. But while they expected the stock market and corporate profits to rise next year, they saw unemployment hitting double digits and did not expect all the jobs that have been lost to return until 2012. “Wage growth will be only 1% this year and 2.2% next year: the slowest two-year period on record. That leaves the outlook for consumer spending, which typically accounts for two-thirds of gross domestic product, fairly bleak. Next year it will grow at an anaemic 1.6%, the economists predict, while car sales will not bounce much from this year’s 40-year low. “‘From a technical standpoint [the recession] is probably over, but that doesn’t mean in any way shape or form that it’s over from the point of view of an awful lot of people,’ said Dr Tony Cherin, finance professor at San Diego State University. “But they upgraded their expectations for real gross domestic product growth, forecasting it to rise at a pace of 2.9% in the second half of this year and 3% next year. They think the housing market will recover enough in 2010 to contribute to overall growth for the first time in five years. “Business investment will also pick up next year, they reckon, while corporate profits will rise 11% and the S&P 500 will add 7.5%.” Source: Sarah O’Connor, Financial Times, October 13, 2009.

MoneyNews: Soros – bankrupt banks hamper recovery “Economic recovery in the United States will be sluggish thanks to ‘bankrupt’ financial institutions and debt-laden consumers, says billionaire investor George Soros. “US financial institutions in the Americas have written down or lost $1.1 trillion in the last two years, while savings rates have risen to the highest levels in 24 years as wary consumers tighten their purse strings, according to Bloomberg. “‘The United States has a long way to go,’ Soros said at an International Monetary Fund and World Bank meeting in Istanbul, Turkey. “Soros urged leaders to stick with plans to beef up regulation, which could become difficult once recovery moves ahead. “‘It will be very difficult to accomplish,’ Soros says.” “‘The crash of 2008 now seems like a bad dream and people like to treat it like a bad dream and forget about it and get back to business as usual.’ “Economic indicators suggest recovery is taking place and the recession is thawing or even ending. “‘I see the risk of a stock market correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U-shaped,’ says Nouriel Roubini, a New York University economic professor who is said to have accurately predicted the extent of the current financial crisis. “‘That might be in the fourth quarter or the first quarter of next year,’ says Roubini, according to Marketwatch.” Source: Forrest Jones, MoneyNews, October 12, 2009.

Bespoke: Long-term downtrend in confidence continues “It’s increasingly becoming a glass half empty mood in the US. This month’s index of Consumer Confidence by IBD/TIPP showed that sentiment declined 7.2% from 52.5 to 48.7. For this index, readings above 50 indicate net optimism and readings below indicate pessimism. While the index is still near its recent highs, from a longer-term perspective, the five-year downtrend is somewhat concerning. As shown in the chart below, the index peaked above 60 in 2004, then made a lower high back in late 2006, and now is showing signs of another lower high in 2009. Is it a faulty index, or to borrow a line from former President Carter, are American consumers stuck in a crisis of confidence?”

Source: Bespoke, October 13, 2009.

Clusterstock: The government debt explosion “The growth of government debt has ‘decoupled’ from the rest of the economy. “While households, businesses and the financial sector reduce leverage, public sector debt growth has simply exploded. As you can see from the chart, every non-governmental sector of the economy is now in debt reduction mode while governmental debt is growing a breakneck speeds.”

Source: John Carney and Kamelia Angelova, Clusterstock – Business Insider, October 13, 2009.

Asha Bangalore (Northern Trust): Q3 consumer spending expected jump likely, but muted growth in Q4 “Retail sales in September fell 1.5% after a 2.2% gain in August. These headline numbers reflect the swings in auto sales brought about by the lift from the temporary ‘Cash for Clunkers’ program. Excluding autos, retail sales increased 0.5% in September following a 1.0% increase in August. “Furthermore, the sharp increase in gasoline prices in August translated into corresponding gains of gasoline purchases in the retail sales report. Excluding autos and gasoline, retail sales increased 0.4% in September after a 0.6% advance in August. “The main message is that retail sales in September have been impressive with purchases of furniture (+0.9%), apparel (+0.5%) and general merchandise (+0.5%) posting significant increases which will add up to a strong increase in consumer spending in the third quarter (+3.0%) compared with a 0.9% drop in the second quarter. The absence of the ‘Cash for Clunkers’ program implies that consumer spending will be positive but show only muted growth in the fourth quarter.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, October 14, 2009.

Clusterstock: The retail sales second derivative is on fire “Dissecting today’s [Wednesday] advance retail sales data shows that trends improved for everything, except auto-related sales due to cash for clunkers. This is strong. “The data beat expectations, with overall retail sales down 1.5% vs. an expected negative 2.1%. While 1.5% is the largest drop since December of last year, it was due to the end of cash for clunkers. “The chart below takes September’s year over year (YoY) sales change (Sep 09 vs. Sep 08) and subtracts August’s year over year sales change (Aug 09 vs. Aug 08). It thus shows the change in change. Yes, this matters: American retail trends have to become less negative before they go positive. “And that’s exactly what is happening. While sales continued to fall for many categories, the rate of decline slowed down substantially, improving by the amount in green shown below for each.”

Source: Vincent Fernando, Clusterstock – Business Insider, October 14, 2009.

Asha Bangalore (Northern Trust): The quandary between initial claims and total continuing claims “Initial jobless claims fell 10,000 to 514,000 during the week ended October 10. This reading is the lowest since March 2009 when initial jobless claims peaked at 674,000. This is good news, firms are not hiring but the pace of firing has slowed. Continuing claims, which lag initial claims by one week, declined 75,000 to 5.992 million and the insured unemployment rate moved down one notch to 4.5%. Continuing claims have held above the 6-million mark for six straight months.

“However, total claims including continuing claims and claims under the Extended Benefits Program and Emergency Unemployment Compensation Program have advanced to nearly 10 million. The good news here is that total continuing claims appear to have peaked; they have held between 9.86 million and 9.89 million for the four weeks ended September 26, with the latest weekly reading at the lower end of this range. We will be tracking these numbers closely for signs of improvement in the labor market.” Source: Asha Bangalore, Northern Trust – Daily Global Commentary, October 15, 2009.

Asha Bangalore (Northern Trust): Widespread strength in factory report “Industrial production increased 0.7% in September, following an upwardly revised 1.2% gain in the prior month. The industrial production index hit the cycle low in June and has since risen every month.

“In the third quarter, industrial production rose at an annual rate of 5.2%, the first increase since the first quarter of 2008. Production at the nation’s mines (0.7%) advanced while that of utilities (-0.7%) fell in September. “Factory activity, which excludes mining and utilities and makes up roughly 85% of industrial production, moved up 0.9% after revised gains of 1.2% in each of the prior two months. In the third quarter, factory production advanced at an annual rate of 8.9%, the largest gain since the fourth quarter of 1987! “The operating rate of the factory sector has increased to 67.5% in September from a record low of 65.1% in June 2009. The overall tone of the industrial production report is positive and confirms that an economic recovery is underway.” Source: Asha Bangalore, Northern Trust – Daily Global Commentary, October 16, 2009.

Bespoke: Philly Fed positive three months in a row “If you needed more evidence that the recession that began in December 2007 has ended, this morning’s [Thursday] Philly Fed report should provide it. While the actual number came in below forecasts (11.5 vs 12.0), it was still positive for the third straight month. The last time this indicator was positive for three straight months was from September through November 2007, which was the last three months leading up to the start of the recession.”

Source: Bespoke, October 15, 2009.

Asha Bangalore (Northern Trust): Restocking – one of the conduits of economic growth in the months ahead “Business inventories dropped 1.5% in August, marking the twelfth consecutive monthly drop. In the meanwhile, business sales have risen for three straight months, inclusive of a 1.0% increase in August. “As a result of the drop in inventories and gain in sales, the inventories-sales ratio plummeted to 1.33 in August from 1.36 in July and it is a sharp reduction from the cycle high of 1.46 in January 2009. Starting from the end of the third quarter of 2008 businesses have been liquidating stocks in response to the weakness in demand conditions. As the economy recovers, inventories will add to real GDP growth, some of which is already apparent, particularly in the auto sector.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, October 14, 2009.

Asha Bangalore (Northern Trust): Inflation expectations non-threatening “The Fed is in the most favorable spot in the near term with regard to inflation because the excess capacity in the economy allows the Fed to maintain a focus on economic growth and leave inflation on the back burner, for now. Moreover, inflation expectations are also non-threatening at the present time. Inflation will emerge as a major concern after there is self-sustaining economic growth.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, October 15, 2009. Asha Bangalore (Northern Trust): Inflation remains a non-issue, for now “The Consumer Price Index (CPI) increased 0.2% in September after a 0.4% increase in the prior month. In the third quarter, the CPI has increased 3.6% after a 1.3% gain in the second quarter. On a year-to-year basis, the CPI fell 1.3% in September. The food price index dropped 0.1% during September vs. a 0.1% increase in August. The energy price index moved up 0.6% in September compared with a 4.6% jump in the previous month.

“The core CPI, which excludes food and energy, increased 0.2% in September after two consecutive monthly gains of 0.1%. The core CPI has risen 1.5% from a year ago in September, following a cycle low gain of 1.44% in August.” Source: Asha Bangalore, Northern Trust – Daily Global Commentary, October 15, 2009.

The Wall Street Journal: Investors hedging inflation risks “Economists continue to debate the path of inflation but investors are looking to hedge the risks of rising prices by buying inflation linked bonds.”

Source: The Wall Street Journal, October 14, 2009.

MarketWatch: Banks cutting back on loans to businesses “US banks are reducing their lending at the fastest rate on record, tightening the credit squeeze and threatening to leave many otherwise viable businesses unable to borrow money to expand their businesses, meet their payroll or refinance their maturing debts. “According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace. “Last autumn, bank lending temporarily expanded when other sources of funding from the shadow banking system dried up after the collapse of Lehman Bros. Since then, however, total outstanding bank loans have dropped at an accelerating pace. “The decline in bank lending mostly affects smaller businesses. Larger corporations have alternative sources of funding, including retained earnings, corporate bonds, securitized loans and new equity. Those other sources of capital have increased in recent months, but not enough to offset the decline in bank lending. “In the first and second quarters, the US private sector consumed more capital than it raised for the first time in more than 60 years. Negative net investment is ‘the hallmark of depression and difficult to reverse’, said economist Leigh Skene of Lombard Street Research. “The big drop in credit also shows up as slower money growth. In the past 13 weeks, the money supply has fallen 0.3%. Most new money is created by borrowing, as banks credit the borrower’s account with the proceeds of a loan. Conversely, the money supply is reduced when debts are paid off or written off. Deflation is not a threat – it’s already here. “The question is whether the decline in lending will be reversed soon. “If the drop-off in lending is mainly due to weak demand by businesses, then there’s some hope that the recent upward momentum in industrial output and sales could lead to more optimistic business sentiment, greater demand for capital, and more lending by banks. “But if the decline is mainly due to weak banks unable or unwilling to lend, then a turnaround in credit creation may have to wait until banks’ balance sheets are repaired, a process that could be delayed by further expected defaults in consumer loans, mortgages and commercial real-estate loans.” Source: Rex Nutting, MarketWatch, October 9, 2009.

CNBC: Bair on state of banking industry “FDIC Chair Sheila Bair discusses the state of the US banking industry with CNBC.”

Source: CNBC, October 13, 2009.

Financial Times: US bank results highlight recovery gap “Bumper third quarter profits at Goldman Sachs and another loss for Citigroup on Thursday highlighted the gap between the financial resilience of Wall Street and the woes of Main Street, fresh evidence that two Americas are emerging from the crisis. “The diverging performance of investment banks such as Goldman and the retail banking operations of the banks such as Citi is problematic for an Obama administration that wants a strong Wall Street but is also under pressure to tackle the plight of ordinary people. “‘When you have unemployment creeping towards 10% and a sluggish economy, stories of huge profits and huge bonuses … could create difficulties if [the president] needs any more stimulus,’ said Norman Ornstein, a political analyst at the American Enterprise Institute. “Goldman announced near-record earnings of $3.2 billion, boosted by surging profits in bond and currency trading – two activities that have become more profitable after the crisis reduced competition in financial markets and governments injected emergency funds into the banking system. “Goldman’s profit, which was nearly four times higher than in the third quarter of 2008, underscores its status as one of the winners from a crisis that eliminated two rivals – Lehman Brothers and Bear Stearns – and hobbled others such as Citi, Merrill Lynch and UBS. “Citi, by contrast, suffered its seventh loss in eight quarters as US consumers continued to fall behind on credit card bills and mortgage payments. “‘US consumer credit remains the number one issue affecting our near-term results,’ said Vikram Pandit, Citi’s chief executive, after announcing the bank had suffered credit losses of $8 billion in the three months to September, largely in its consumer business. “Citi, which has been bailed out with $45 billion of US taxpayers’ money, has suffered a total of more than $42 billion in credit losses since the beginning of 2008. “The contrasting fortunes of Goldman and Citi suggest that Wall Street, which played a major part in the crisis and was one of its first victims, is recovering much faster than the rest of the US economy.” Source: Francesco Guerrera, Greg Farrell and Anna Fifield, Financial Times, October 15, 2009. The Wall Street Journal: Wall Street on track to award record pay “Major US banks and securities firms are on pace to pay their employees about $140 billion this year – a record high that shows compensation is rebounding despite regulatory scrutiny of Wall Street’s pay culture. “Workers at 23 top investment banks, hedge funds, asset managers and stock and commodities exchanges can expect to earn even more than they did the peak year of 2007, according to an analysis of securities filings for the first half of 2009 and revenue estimates through year-end by The Wall Street Journal. “Total compensation and benefits at the publicly traded firms analyzed by the Journal are on track to increase 20% from last year’s $117 billion – and to top 2007’s $130 billion payout. This year, employees at the companies will earn an estimated $143,400 on average, up almost $2,000 from 2007 levels. “The growth in compensation reflects Wall Street firms’ rapid return to precrisis revenue levels. Even as the economy is sluggish and unemployment approaches 10%, these firms have been boosted by a stronger stock market, thawing credit market, a resurgence in deal making and the continuing effects of various government aid programs.”

Source: Aaron Lucchetti and Stephen Grocer, The Wall Street Journal, October 14, 2009.

Bespoke: 30-year fixed mortgage rate back below 5% “For those worried that they missed the bottom in mortgage rates a few months ago, you’ve now got a second chance to refinance or lock in that home loan at less than 5%. As shown below, after spiking nearly 100 basis points off its low in late April, Bankrate.com’s national average for 30-year fixed mortgage rates hit 4.97% on Friday.”

Source: Bespoke, October 13, 2009.

Clusterstock: Besides the Fed, nobody is buying agency debt “Where would we be without the Fed and its printing press? There’s been a lot of debate about the appetite of foreign investors of our debt – Treasury auctions continue to be strong, even as noises emanate from overseas about wanting to dump the dollar. “But here’s a stark fact, via the Council on Foreign Relations: Only the Fed is buying agency debt. Foreign buyers, who once consumed it voraciously, have been net sellers so far this year.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock – Business Insider, October 8, 2009.

Bloomberg: Pimco’s Gross boosts government debt, cuts mortgages “Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. (Pimco), bought government debt last month and cut mortgage bond holdings to the lowest level since 2005 after he said this year that the US recession will lead to a period of less-than-average growth. “Gross boosted the $185.7 billion Total Return Fund’s investment in Treasuries, so-called agency debt and other government-linked bonds to 48% of assets in September from 44% in August, according to Pimco’s website. The holdings are the most since August 2004. “‘We’ve exchanged our mortgages for the government’s check,’ Gross, who is based in Newport Beach, California, said in an interview last month. He said he was buying longer-maturity Treasuries because of deflation concern. “Treasuries rose in July, August and September, offering their first three-month gain in a year, Merrill Lynch & Co. indexes show, as optimism waned about the pace of economic recovery. Federal Reserve Vice Chairman Donald Kohn said this week inflation and growth will probably stay below the central bank’s objectives for some time, warranting very low interest rates for an ‘extended period’. “The Total Return fund cut mortgage debt to 22%, the lowest level since February 2005, from 38%, according to the website.” Source: Wes Goodman and Susanne Walker, Bloomberg, October 15, 2009. Bespoke: Investment-grade corporate bond ETF breaks down “Investment-grade corporate bonds have generally moved alongside the stock market throughout the bull market. In recent days, however, investment grade corporates have moved lower even as stocks have risen. Below is a chart of the iShares iBoxx Investment Grade Corporate Bond Fund ETF (LQD) since the March lows. As shown, the ETF had been in a tight uptrend for months until just last week when it broke below its 50-day moving average. With the uptrend now broken, it will be interesting to see what, if any, impact this has on equity markets.” Source: Bespoke, October 12, 2009. Clusterstock: Investors are only interested in high-yield junk “Today’s chart shows not only that high-yield junk debt (HYG) has decimated safe debt (LQD) since the market lows, but that in recent days the situation has gotten really extreme. “Investment-grade debt has started to break down over the past couple of weeks, clearly breaking an uptrend, while the risky stuff keeps on powering higher.” Source: Joe Weisenthal and Kamelia Angelova, Clusterstock – Business Insider, October 12, 2009. Bespoke: Bull market check-up “Below we have updated our table of historical S&P 500 bull markets (at least a 20% gain that was preceded by at least a 20% decline) since index data begins in 1927. The table is sorted by bull market length. The current bull market that started on March 9 is now 219 calendar days with a gain of 61.41%. As shown, the median gain for all bull markets has been 68%, and the median length has been 308 days. The current bull is still below the median in terms of both gains and days. However, there aren’t a lot of bulls bunched up around the median, and there is a pretty big deviation between all of them. Bottom line though is that this is definitely a bull market.” Source: Bespoke, October 15, 2009. Bespoke: Break out the Dow 10,000 “For the fourth time in the index’s history, the Dow has broken above 10,000 after trading below that level for at least a month. While the media would have you believe otherwise, the more this occurs the less exciting it becomes. Call us at Dow 100K.” Source: Bespoke, October 14, 2009. MoneyNews: Rosenberg – Buy bonds, dividend stocks “Economist David Rosenberg says the recovery will be weak and thus recommends that investors buy bonds and dividend-paying stocks. “‘Right now the economy is being held together by very strong tape and glue provided by the Fed, Treasury, and Congress,’ the chief economist for Gluskin Sheff and Associates, tells Bloomberg. “Without the government’s massive fiscal and monetary stimulus, there’s little to pull the economy out of the recession that began in December 2007, he says. “Rosenberg, who saw the recession coming early, predicts the economy will stagnate this quarter and then grow no more than 2% next year. The economy shrank 0.7 percent in the second quarter. “The recovery will resemble the ‘jobless’ recovery of 2002, when the economy grew just 1.8%. “The economy won’t take on the ‘V’ shape of previous rebounds, Rosenberg says. ‘It’s going to look like this whole string of lowercase Ws for the next five years.’ That means there will be periods of growth followed by periods of contraction. “As a result, ‘you want to maintain strategies aimed at income generation,’ Rosenberg says. ‘There’s a shortage of income on the household balance sheet.’ That means bonds and dividend stocks.” Source: Dan Weil, MoneyNews, October 15, 2009. MoneyNews: Stiglitz – irrational exuberance is back “Former Federal Reserve Chairman Alan Greenspan warned of ‘irrational exuberance’ in the stock market 13 years ago. Nobel laureate economist Joseph Stiglitz warns of it today. “Weak economic recovery, particularly in the jobs sector, will weigh on stocks, he told Bloomberg. The unemployment rate hit a 26-year high of 9.8% in September. “‘It’s pretty clear that the situation will continue to get worse,’ Stiglitz said. “In a vicious circle, the slumping economy prevents companies from hiring, and employment losses keep the economy weak. So look for unemployment to keep rising as the economy sags, Stiglitz said. “The job woes have made it more difficult for consumers to pay their debts, especially for credit cards, he points out. “The Columbia University professor also cited the difficulties for residential and commercial real estate. “‘There’s a lot of risk going ahead of some big bumps. There’s a very big risk that markets have been irrationally exuberant,’ he said. “As for this year’s fiscal stimulus package, the chances of the US economy rebounding meaningfully before 2011, when most of the spending measures expire, are very slim, Stiglitz argues.” Source: Dan Weil, MoneyNews, October 9, 2009. Bespoke: Strategists’ year-end price targets right where they started “Below we highlight the year-end S&P 500 price targets of major Wall Street strategists polled each week by Bloomberg. Since we last updated our table, Credit Suisse, HSBC, and Morgan Stanley have increased their year-end targets. The average price target for all strategists currently sits at 1,050 for the S&P 500. This is 3.77% below the actual level of the index, so strategists as a whole aren’t bullish for the remainder of the year. “What’s ironic about the current average price target is that it is right at the level it was at to start the year! As shown below, at the start of 2009, strategists had a target of 1,049.9 for the S&P 500, which would have been a gain of 16.2%. Throughout the first two quarters of the year, however, strategists lowered their estimates as the market headed lower, and now they’ve had to raise their estimates as the market has rallied. Their low year-end price target was 944 on June 1, so they continued to lower estimates well after the market had bottomed in March. Had they all just held tight, they would have been more spot on and not made themselves look bad in the process.” Source: Bespoke, October 15, 2009. Bespoke: S&P 500 sector trading ranges “The chart below summarizes the current levels of the S&P 500 and its ten sectors compared to their normal trading ranges. The circles represent where the sectors and index currently stand, while the end of the tail represents where it was one week ago. When the circle is in the red zone, the sector or index is overbought (light red=overbought, dark red-extreme overbought). Readings in the green zone indicate that the index or sector is oversold (light green=oversold, dark green = extreme oversold). “As shown below, currently the S&P 500 and nine out of ten sectors are overbought. Additionally, the index and seven of its sectors are at or above levels that would be considered extremely overbought. While these types of readings often lead to corrections, we would note that corrections can occur in either price or time. As has been the case with prior overbought readings during this bull market, sometimes all it takes is some sideways action in order for the overbought readings to work themselves off.” Source: Bespoke, October 15, 2009. Bespoke: Short interest declines again “Last Friday, short interest figures for the end of September were released, and once again they showed declines. The average short interest as a percentage of float for companies in the S&P 1500 was 6.4%. This is now lower than any other point since at least the start of 2007. As shown in the chart, bets against the market have declined considerably since their peaks in 2008.” Source: Bespoke, October 14, 2009. Bespoke: New highs expand again “This is a bull market that’s lifting all boats. With today’s [Wednesday] run above 10,000 in the DJIA, and another new high in the S&P 500, the number of stocks in the S&P 500 hitting 52-week highs rose to 22% (110 stocks). As long as this figure can expand as the market rises, the ball is in the bulls’ court.” Source: Bespoke, October 14, 2009. Bespoke: Bullish sentiment high but still below 50% “With the Dow up more than 50% since its lows in March, it is no surprise that sentiment among newsletter writers has improved dramatically. As shown below, the percentage of bullish newsletter writers has increased from a low of 22.4% in October 2008 to 47.2% today. While sentiment has improved, we would note that some investors are still uneasy. With bullish sentiment below 50%, this implies that over half of newsletter writers are anticipating a bear market or at least a 10% correction. Additionally, even as the major indices have all hit new highs off the lows, bullish sentiment is down from its peak of 51.6% in late August and at its lowest levels since the first week of August.” Source: Bespoke, October 14, 2009. John Authers (Financial Times): Jobless recovery aiding stock rally “What would send markets for a loop? Disconcertingly, it is possibly the event which the world’s populations, and its politicians, have been awaiting – a strong and early recovery in employment. “This joyous event would be a problem because it is currently deemed so unlikely. There is a deep split between ‘bears’ who believe the weight of bad debts and the ‘deleveraging’ – paying down debts – that it causes will drag the economy into another dip, and ‘bulls’ who believe that government stimuli are jolting the corporate sector back to life. “But both tend to agree that unemployment will stay uncomfortably high for a long time. The bulls’ case is for a ‘jobless recovery’. If companies start serious re-hiring, then the pressure would become extreme on central banks to exit from the current exceptionally low rates. Such a rise in employment would suggest that there really are inflationary pressures in the economy. Without a long drawn-out period of cheap money from the government, the bulls’ case begins to fall apart. “Any situation in which wrong-footed central banks need to scramble to change policy brings with it risks of mistakes, both by bankers themselves, and by the investors attempting to interpret their actions. Then there is foreign exchange. Persistent joblessness is one of the assumptions behind the attack on the dollar. This boosts the earnings of US companies, as most of S&P 500 companies’ sales are made outside the US. A recovery in employment would mess up that scenario and create the risk of accidents as investors re-position in a hurry. “There are good reasons why most expect unemployment to stay high. Stock markets, nudging their highs for the year, show investors can deal with this. But the way that investors are almost relying on unemployment to stay high demonstrates that the recovery, in markets and the economy, remains on shaky foundations.” Source: John Authers, Financial Times, October 12, 2009. Barry Ritholtz (The Big Picture): How do you sell at the top? “According to Raymond James Strategist Jeff Saut, who channels Ed Genstein, you don’t: “‘The absolute price of a stock is unimportant. It is the direction of price movement which counts. “‘During major sustained advances in stock prices, which usually occupy from five to seven years of each decade, the investor can complacently hold a list of stocks which are currently unpredictable. He doesn’t worry about the top because he knows he is never going to sell at the top. He knows that the chances are overwhelming in favor of the assumption that he will get far better prices by waiting until after the top is passed and a probable reversal in trend can be identified than he will ever get by attempting to anticipate the top, and get out on the nose. “‘In my own experience the largest profits we have ever taken have come from stocks purchased while they were making a new high in a market which was also momentarily expecting the top. As I have already pointed out the absolute price of a stock is unimportant. It is the direction of the price movement that counts. It is always probable, but never certain, that the direction of the price movement will continue. Soon after it reverses is time enough to sell. You should sell when you wish you had sold sooner, never when you think the top has arrived. That way you will never get the very best price – by hindsight your individual transactions will never look daring. But some of your profits will be large; and your losses should be quite small. That is all that is necessary for a satisfactory, enriching investment performance.'” Source: Barry Rithotlz, The Big Picture, October 13, 2009. CNBC: Mishkin on US dollar doldrums “Frederic Mishkin, former Federal Reserve Board governor and an economics professor at Columbia University, discusses monetary policy with CNBC.” Source: CNBC, October 14, 2009. The New York Post: Dollar loses reserve status to yen and euro “Ben Bernanke’s dollar crisis went into a wider mode yesterday [Tuesday] as the greenback was shockingly upstaged by the euro and yen, both of which can lay claim to the world title as the currency favored by central banks as their reserve currency. “Over the last three months, banks put 63% of their new cash into euros and yen – not the greenbacks – a nearly complete reversal of the dollar’s onetime dominance for reserves, according to Barclays Capital. The dollar’s share of new cash in the central banks was down to 37% – compared with two-thirds a decade ago. “Currently, dollars account for about 62% of the currency reserve at central banks – the lowest on record, said the International Monetary Fund. “Bernanke could go down in economic history as the man who killed the greenback on the operating table. “After printing up trillions of new dollars and new bonds to stimulate the US economy, the Federal Reserve chief is now boxed into a corner battling two separate monsters that could devour the economy – ravenous inflation on one hand, and a perilous recession on the other. “Investors and central banks are snubbing dollars because the greenback is kept too weak by zero interest rates and a flood of greenbacks in the global economy. “They grumble that they’ve loaned the US record amounts to cover its mounting debt, but are getting paid back by a currency that’s worth 10% less in the past three months alone. In a decade, it’s down nearly one-third. “Economists believe the market rebellion against the dollar will spread until Bernanke starts raising interest rates from around zero to the high single digits, and pulls back the flood of currency spewed from US printing presses.” Source: Paul Tharp, The New York Post, October 13, 2009. CNBC: The US dollar debate “Discussing strategies for saving the dollar, with Brian Wesbury, First Trust Advisors, and Niall Ferguson, Harvard University.” Source: CNBC, October 14, 2009. The Wall Street Journal: Commodities guru Rogers likes silver, palladium, agriculture “Certain metals and agricultural products as well as natural gas are among the commodities ripe for longer-term gains, well-known commodities-investing expert Jim Rogers said Thursday. “In an afternoon speech at an ETF Securities event where he reiterated his bearish stance on the US dollar and bullish views on commodities and Asian demand, Rogers said silver and palladium are better investments for the rest of 2009 than gold or platinum. “Although he said he wouldn’t buy sugar at the moment because it is near 28-year-highs, he noted that sugar – as well as silver and cotton – remain well below their all-time peaks, even as gold extends its own record. “‘Most agricultural products are hugely depressed on a historical basis,’ Rogers said. ‘Sugar is going to be much, much higher in the next decade.’ “He also noted that natural gas is down sharply and encouraged a long-gas-short-oil investment play. “Although Rogers said he is ‘terribly pessimistic’ on the US dollar, he isn’t selling the greenback at the moment because he sees too many sellers leaving the currency open for a rally. If that comes, he plans to unload some of his dollar holdings. “‘I don’t think it’s going to be a sustainable rally,’ Rogers said, adding that he believes the greenback will be replaced as the world’s reserve currency. ‘The US dollar is in trouble these days.’ “Rogers said the bull market in US bonds is coming to an end and equities are entering into a sideways phase that could continue for the next decade. “‘Stocks are still very expensive,’ he said. “But raw materials remain in a secular bull market that started 11 years ago, he said, adding that historically, such bull markets for commodities last 18 years. Rogers noted that there has been little production capacity expansion for commodities, while demand from Asia will continue increasing. “‘The world is running out of natural resources,’ Rogers said. ‘If you diversify your portfolio, commodities are the best anchor.'” Source: Matt Whittaker, The Wall Street Journal, October 8, 2009. TheStreet.com: Jim Rogers talks gold “Jim Rogers, global investor and author, reveals how high he thinks gold will go and what he is buying.” Source: TheStreet.com, October 12, 2009. Richard Russell (Dow Theory Letters): Gold’s magic patterns “I always find it remarkable when technical patterns work out just as they are supposed to. Below we see weekly gold having formed a perfect symmetrical triangle which has served as a ‘right shoulder’ to a huge ‘head-and-shoulders’ bottoming pattern. Sure enough, gold broke upside out of the triangle and has since surged above 1,000. Who would have believed it? Your editor, of course. “Below we see a weekly chart of GDX, the gold miners ETF. Here we see a perfect rising channel. If GDX hits the top of the channel it will have advanced to 53. Nice work if you can get it – particularly if you happen to own GDX. On the P&F chart, the upside ‘count’ for GDX is 62.0.” Source: Richard Russell, Dow Theory Letters, October 14, 2009. Craig Farley (Ashburton): China – a Goldilocks liquidity result “We vehemently disagree with the view that China is in ‘bubble’ territory but there is no doubt that the market is hot as far as current investor interest is concerned, reflecting the crucial role the economy is playing in the global recovery. September’s macro data has just been released, generating plenty of debate amongst commentators regarding potential policy ramifications and we felt it appropriate to briefly summarise our thinking. “All eyes were on the new bank lending figure which came in at RMB 517 billion (versus RMB 410 billion in August), above analyst expectations and clear evidence that Beijing is not engaging in any sort of policy ‘tightening’. We hate to sound like a broken record, but this is an outlook we have reiterated several times this year, one clearly signalled in both private and public statements from Chinese officials. “The People’s Bank of China (PBOC) is concerned about the sustainability of the economic recovery now underway, not asset price bubbles or overheating, supporting our view that Beijing will continue to gradually reduce the level of economic stimulus that has worked (via lower growth and infrastructure spending) and is no longer needed as both private investment and private consumption recover. Expect a degree of ‘fine-tuning’ as the government ensures a ‘Goldilocks liquidity result’ – not too much, not too little, but just the right amount. “From our perspective, the risk that the government will prematurely tighten and send the economy into a ‘W’-shaped recovery is minimal, given that there are no bubbles in residential property or the A-share market, inflation is well contained and real urban unemployment is c.7%. Instead, Beijing will be focusing on steering the economy towards the all-important 8% GDP growth figure whilst maintaining a healthy balance between government and private spending. “We do not expect to see any genuine tightening measures until the second half of 2010, but the caveat would be a very strong export rebound, rampant wage inflation or soft commodity prices spiralling out of control. The government has managed expectations extremely well in 2009 but will be swift to respond if necessary. Stay tuned.” Source: Craig Farley, Ashburton, October 15, 2009. Financial Times: Sharp improvement in Chinese trade “The recovery in China’s economy gained new impetus on Wednesday with figures showing a sharp improvement in the country’s exports and imports in September. “The trade surplus also fell last month, providing evidence of some rebalancing of the economy at a time of persistent trade tensions over cheap goods from China, which is likely to become the world’s biggest exporter this year. “Chinese customs said exports had fallen by 15.2% in September against the same month last year, compared with a 23.4% decline in August. The stronger export performance follows a similar trend in South Korea, Taiwan and Vietnam. “The improvement was even more pronounced in imports, which dropped by 3.5% in September after falling 17% the month before, an indication that domestic demand in China is recovering. “Sun Mingchun, an economist at Nomura Securities, said: ‘The sharp improvement in imports likely reflected strong domestic demand both for capital goods, as a result of stimulus investment, and for consumer goods, as a result of an unexpected consumption boom lately.’ “Boosted by an aggressive government stimulus plan including a massive increase in bank loans, China has rebounded more sharply than most other economies and analysts forecast that third-quarter GDP growth, which is to be announced next week, will exceed 9 per cent.” Source: Geoff Dyer, Financial Times, October 14, 2009.

Financial Times: Singapore GDP growth points to Asia revival “Singapore, which led Asia into recession, on Monday pointed the way to further regional recovery with strong third-quarter economic growth and a substantial upward revision to its forecast for the year. “The island state’s gross domestic product estimates coincided with positive official comment from Australia, China and other countries, underlining growing optimism that Asia is undergoing a rapid and sustainable recovery. “The Monetary Authority of Singapore (MAS) said GDP expanded 14.9% on a seasonally adjusted quarter-on-quarter annualised basis in the June to September period, after a comparable revised increase of 22% the previous quarter. Output rose 0.8% year-on-year, the first such gain in four quarters. “The MAS said the outcome was ‘better than expected’ and trimmed its expected annual GDP contraction to between 2 and 2.5% from 4-6%. The central bank said the pace of growth was likely to moderate next year, noting that demand in key export markets remained depressed. It warned of ‘significant challenges’ as governments prepared to wind down extraordinary fiscal and monetary measures. “Private sector economists were much more bullish. Robert Prior-Wandesford of HSBC said the past two quarters had provided the biggest GDP half-year rise since the quarterly series began in 1975. “‘While GDP will obviously not retain its current momentum, the economy is likely to expand by a healthy 6.5% next year. It’s not impossible that year-on-year growth could hit double digits in the first quarter of 2010,’ he said.” Source: Kevin Brown, Financial Times, October 12, 2009.

BCA Research: Canada – recovery well underway “The Canadian employment report showed that 30,600 jobs were created in September, following a similar gain of 27,100 in August. Unlike in August, gains were driven by additions to full time positions, although they were concentrated in the public sector. The private sector actually shed jobs. Thus, while the report is encouraging, the BoC still has flexibility in timing its exit strategy. Moreover, policymakers are also likely to take a monetary conditions approach to tightening and will be slower to withdraw stimulus if the CAD continues to appreciate. “In a speech given to a trade group yesterday, Senior Deputy Governor Paul Jenkins noted that ‘growth has resumed … however, some of this stronger growth reflects the effects of temporary factors, such as the impact of the US ‘cash-for-clunkers’ program on Canadian automotive production.’ “Policymakers will need further confirmation that a durable recovery is indeed taking hold. Bottom line: The BoC will not be swayed in action by today’s jobs report, although it is a sign that a recovery is well underway. We expect the central bank to tighten during the first half of 2010.” Source: BCA Research, October 13, 2009. Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.