Words from the Investment Wise 11.22.09

Words from the (investment) wise for the week that was (November 16 – 22, 2009)

Stock markets succumbed to a bout of profit-taking last week, sparked by concerns that the rally has overshot the pace of economic recovery. Riskier assets were showing signs of fatigue as the US dollar – the catalyst of many recent moves – stabilized and was perceived to be near its trough (if only short-term in the books of ardent dollar bears).

The greenback, usually the remit of the US Treasury, received support from Fed Chairman Ben Bernanke in a speech. He noted that the Fed was “attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability.” These comments spurred some buying interest.

Bill King (The King Report) summarized the situation as follows: “For the past few months, bad economic news was perceived to be good news for stocks on the rationale that it ensured more juice. Dollar down, stocks and gold up has been the routine. Are we at an inflection point, where bad economic news is becoming bad news for stocks?”


Source: Ed Stein, Comics.com, November 20, 2009.

The past week’s performance of the major asset classes is summarized by the chart below. With the exception of equities and investment-grade corporate bonds, most asset classes closed higher on the week despite nervousness creeping in before the weekend. Gold bullion touched a record high of $1,152.74 on Thursday and helped platinum, silver, palladium and copper reach fresh peaks for the year.


Source: StockCharts.com

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

The MSCI World Index (-1.1%) and the MSCI Emerging Markets Index (+0.3%) followed different paths last week, resulting in year-to-date gains of 24.5% and an impressive 70.2% respectively. Notwithstanding solid gains since the March lows, no major index has yet been able to reclaim the 2007 pre-crisis peaks.

As far as the US indices are concerned, the Dow Jones Industrial Index eked out a small gain for the week as investors emphasized high quality, but the other major indices all reversed a two-week up-patch. Six of the ten economic sectors closed lower for the week, with Technology (-1.4%) and Consumer Discretionary (-1.1%) underperforming,

The year-to-date gains in the US remain firmly in positive territory and are as follows: Dow Jones Industrial Index 17.6%, S&P 500 Index 20.8%, Nasdaq Composite Index 36.1% and Russell 2000 Index 17.1%.

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


Top performers among stock markets this week were Bangladesh (+21.3%), Latvia (+4.5%), Kazakhstan (+4.3%), Qatar (+4.1%) and China (+3.8%. At the bottom end of the performance rankings, countries included Ecuador (‑9.3%), Egypt (-7.6%), Greece (-7.1%), Turkey (-7.0%) and Macedonia (‑6.3%).

Of the 98 stock markets I keep on my radar screen, 39% recorded gains (last week 66%), 58% (31%) showed losses and 3% (3%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

While other benchmark indices have been going from strength to strength, the Japanese Nikkei Dow has been in a downtrend since August and last week recorded a fourth consecutive down-week. The weakness in Japanese stocks coincided with a surge in the price of credit default swaps (CDSs) on Japanese government bonds (JGBs) – under stress of sovereign solvency fears. The chart below shows the significant underperformance of the Nikkei (red line) versus the S&P 500 (green line) – in absolute terms in the top section and on a relative basis (blue line) in the bottom part.


Source: StockCharts.com

John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included iShares Silver Trust (SLV) (+6.2%), PowerShares DB Silver (DBS) (+6.2%), PowerShares DB Base Metals (DBB) (+4.6%), SPDR S&P Metals and Mining (XME) (+3.8%) and Market Vectors Agribusiness (MOO) (+3.8%).

At the bottom end of the performance rankings, ETFs included iShares MSCI Turkey Investible Market (TUR) (-8.1%), HOLDRS Merrill Lynch Market Oil Service (OIH) (-4.3%), First Trust ISE-Revere Natural Gas (FCG) (-3.9%), SPDR S&P International Financial Sector (IPF) (-3.9%) and iShares Dow Jones US Home Construction (ITB) (-3.7%).

“Short-term US interest rates turned negative on Thursday as banks frantically stockpiled government securities in order to polish their balance sheets for the end of the year,” reported the Financial Times. Three-month T-Bills traded at a yield of -0.03% and six-month Bills fell to 0.12% – the lowest six-month yield since 1985. “Conventional wisdom says it’s year-end window dressing … But why Bills? If you want to park cash, why not place it in some short-term paper with a positive yield? … those pundits that exclaim there is no problem are not correct. If there were no concerns, the cash would not eagerly run to a negative yield vehicle,” observed Bill King.

Signs of heightened risk aversion also came from a widening of the spread of emerging-market bond yields over Treasuries and an increase in credit default swap spreads on corporate bonds and sovereign debt (notably the US and the UK). Risk aversion also resulted in the selling of some commodity-linked currencies.

In other news, a US congressional panel on Thursday approved the Ron Paul-Alan Grayson initiative to open the Federal Reserve’s monetary policy decisions to government audits. The panel approved the amendment to broader legislation to revamp financial rules, but put off a vote on the broader measure.

Also, the Fed announced a reduction in the term of discount window loans from 90 to 28 days, effective January 14, 2010. Asha Bangalore (Northern Trust) argued that the need for discount window loans had decreased significantly from the period following the collapse of Lehman Brothers. “This [Fed’s announcement] marks the beginning of a gradual withdrawal of the extraordinary support the Fed has extended to the global financial system as signs of stability have emerged,” she said.

Next, a tag cloud of all the articles I read during the week. This is a way of visualizing word frequencies at a glance. “Gold” has been rising in prominence for a while, and now occupies the top slot in the media. Words such as “rates”, “dollar”, “prices” and “China” are not far behind.


Back to the stock markets: The S&P 500 Index broke above 1,100 on Monday, but reversed course later in the week and again closed below what was seen as an important resistance level.

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town) are given in the table below. With the exception of the Russell 2000 Index, the indices in the table are all trading above their 50-day moving averages, with all the indices also above their respective 200-day moving averages. However, many European markets have already fallen to below their 50-day lines (not shown on this table, but indicated on the performance table higher up), pointing to possible further weakness.

The October lows are also given in the table. A break below these levels would indicate a reversal of the uptrend since March, i.e. reversing the progression of higher-reaction lows.

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


In addition to having retraced 50% of their bear market declines and up-volume recently having been mediocre, the Dow Industrial and S&P 500 are up against significant medium-term downward trendlines. Also, negative divergences are showing up in a number of breadth indicators, often good leading indicators at tops, as discussed below.

The number of S&P 500 stocks trading above their respective 50-day moving averages has declined from 92.6% in September to 56.8%, having made a series of declining tops while the underlying index was making new highs for the move. “This means that less and less stocks have been helping the index move higher, and it’s definitely something that favors the bearish argument,” said Bespoke.


Source: StockCharts.com

The Bullish Percent Index shows the percentage of stocks that are currently in bullish mode as a result of point-and-figure buy signals. The figure is still relatively high at 77.0%, but the indicator appears to be topping out.


Source: StockCharts.com

Richard Russell, 85-year-old writer of the Dow Theory Letters newsletter, said: “I keep thinking that the stock market is on thin ice … I’m still bothered by the fact that this ‘bull market’ never started from an area where stocks were selling below ‘known values’. Every bear market I’ve ever seen has ended with stocks selling below ‘known values’. We never saw anything like that at the October 2008 lows or at the March 2009 lows. For this reason, I continue to think that maybe the final bear market bottom lies ahead. Suspicion, thy name is Russell.”

In case you have missed Adam Hewison’s (INO.com) short technical analysis videos during the past week, click on the following links to access these excellent presentations: S&P 500, Dow and Nasdaq, the US dollar, gold and crude oil.

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.

For more discussion on the economy and financial markets, see my recent posts “Velocity of US money supply at long last edging up“, “2009 Rally vs. 1982 Bull Market“, “Picture du Jour: Plunging dollar erodes non-US investors’ returns“, “WealthTrack: Bruce Berkowitz – golden rules of investing“, and “Donald Coxe – Investment Recommendations (November 2009)“. (And do make a point of listening to Donald Coxe’s webcast of November 20, which can be accessed from the sidebar of the Investment Postcards site.)

Twitter and Facebook
I regularly post short comments (maximum 140 characters) on topical economic and market issues, web links and graphs on Twitter. For those not doing so already, you can follow my “tweets” by clicking here. You may also consider joining me as a friend on Facebook.

“Global business confidence is slowly improving. Businesses remain cautious, but sentiment is much better than at the beginning of the year and is consistent with a tentative global economic recovery,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses were much more upbeat … notably optimistic about the economy’s prospects next spring. South American businesses are the most positive, and North Americans generally the most negative.”


Source: Moody’s Economy.com

The Ifo World Economic Climate Indicator rose in the fourth quarter of 2009 for the third time in succession, with the economic climate improving in all major economic regions. The improvement was particularly marked in Asia, where the indicator even surpassed its long-term average, but the climate indicator also rose clearly in Western Europe and North America in the fourth quarter. While the recovery of the world economy is driven especially by Brazil as well as India, China and other Asian countries, the economic expectations are now optimistic almost everywhere, with the exception of several countries in Central and Eastern Europe.


Source: Ifo, November 19, 2009.

As far as hard data are concerned, the Japanese gross domestic product grew by 1.2% quarter on quarter between July and September – the biggest quarterly expansion since the first quarter of 2007. A growing trade surplus and stimulus-fuelled private consumption combined to help the world’s second-largest economy recover from its worst postwar recession.

The latest acronym used in the context of economic recovery is “LUV”, indicating an L-shaped economic recovery in Western Europe, a U-shaped improvement in the US and a V-shaped reversal in the BRIC and other emerging countries.

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.)

Thursday, November 19
• Index of Leading Economic Indicators underscores US economy will continue to grow
• Labor market data point to stabilizing conditions

Wednesday, November 18
• Higher prices for cars and energy lifted CPI in October
• Housing starts – permits show a more stable trend

Tuesday, November 17
• Fed reduces term of discount window loans
• Factory production slips in October
• Higher prices for food and energy lift wholesale prices, core price index declines

Monday, November 16
• Chairman Bernanke stresses job market and credit conditions; the dollar receives special mention
• October retail sales – noteworthy gains of several components

Bespoke‘s “Economic Indicator Diffusion Index” measures the pace at which US indicators are coming in ahead of (or below) expectations over a 50-day period. Interestingly, the Index last week fell into negative territory as data reports failed to live up to (higher) expectations.

Still bearish, Nouriel Roubini (RGE), according to The Money Game – The Business Insider, predicts a slow recovery, quoting the following ten reasons why we will see a U-shaped US recovery:

1. A U-shaped US consumer. Roubini argues against a “V-shaped” recovery, which he says puts too much confidence in this year’s strong equity rally. Eighty percent of the population reacts to home prices, not equity prices, and he forecasts that home prices will fall further.

2. Difficult labor market conditions. Expect a strong second half of 2009 and a sluggish 2010, with growth below potential and continued job losses.

3. Balance sheet recession caused by over-leverage and debt accumulation. There are signs of a massive re-leveraging in the public sector. The cost of maintaining this level of debt will be very high and a drag on the economy.

4. Investment usually is a strong recovery component. But investment will not recover while one third of current capacity is not utilized.

5. A damaged financial system and the related credit crunch. Only half of the estimated $3 trillion global credit losses (IMF recently lowered their estimates) have been recognized so far. Expect more to come, especially in Europe.

6. Home prices said to fall further and commercial real estate bust continuing.

7. Exit strategy: Damned if you do and damned if you don’t. Removing fiscal accommodation will constrain a recovery that still appears weak. It has already been determined that it is too early to remove fiscal accommodation, but if it continues it will fuel persistent large budget deficits and lead to inflation.

8. Fall in potential GDP levels and possibly in potential growth.

9. Global imbalances: Over-spenders retrench while over-savers don’t compensate. Fall in demand from countries that tend to be over-spenders (US, UK) has not been neutralized by countries that tend to be over-savers (Japan, Germany).

10. Emerging markets (EMs) fared better, but can’t close the consumption gap. Can China/India be the engine of global growth? No. Can EMs decouple from anemic growth in G3? No. Is the policy response of China/Asia appropriate and sustainable? No. There are not the necessary social safety nets in EM countries, so the motive to save is high. Private demand has to take over and drive growth.

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


Nov 16

08:30 AM

Retail Sales Oct





Nov 16

08:30 AM

Retail Sales

ex auto






Nov 16

08:30 AM

Empire Manufacturing Nov





Nov 16

10:00 AM

Business Inventories Sep





Nov 17

08:30 AM

Core PPI Oct





Nov 17

08:30 AM






Nov 17

09:00 AM

Net Long-term TIC Flows Sep





Nov 17

09:15 AM

Capacity Utilization Oct





Nov 17

09:15 AM

Industrial Production Oct





Nov 18

08:30 AM

Housing Starts Oct





Nov 18

08:30 AM

Building Permits Oct





Nov 18

08:30 AM






Nov 18

08:30 AM

Core CPI Oct





Nov 18

10:30 AM

Crude Inventories 11/13





Nov 19

08:30 AM

Initial Claims 11/14





Nov 19

08:30 AM

Continuing Claims 11/13





Nov 19

10:00 AM

Leading Indicators Oct





Nov 19

10:00 AM

Philadelphia Fed Nov





Source: Yahoo Finance, November 20, 2009.

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

US economic data reports for the week include the following:

Monday, November 23
• Existing home sales

Tuesday, November 24
• Case Shiller 20 City Index
• Consumer confidence
• FHFA Home Price Index

Wednesday, November 25
• Personal income and spending
• PCE prices
• Initial jobless claims
• Durable goods orders
• Michigan Sentiment Index
• New home sales

Thursday, November 19
• Thanksgiving Day

The performance chart for various financial markets usually obtained from the Wall Street Journal Online is unfortunately not available this week.

“The recipe for perpetual ignorance is to be satisfied with your opinions and
content with your knowledge,” said Elbert Hubbard, American writer (hat tip: The Kirk Report). Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will make a contribution towards continuously shaping new opinions and increasing the knowledge of the readers of Investment Postcards to enable them to make the appropriate investment decisions.

This week, the markets will be closed on Thursday, Thanksgiving Day, and on Friday from 13:00 EST.

That’s the way it looks from Cape Town (where I am enjoying beautiful summer days before making my annual early-December trip to New York City).


Source: Tom Toles, The Washington Post, November 17, 2009.

Clusterstock: The Journal has the richest readership among print publications
“The Wall Street Journal has the wealthiest readership among print readers according to a new survey from Mediamark Research & Intelligence, by way of BtoB Online.

“This is why Rupert Murdoch is trying to build stronger pay walls around his sites. He wants to protect his premium readership so he can keep charging high ad rates.”


Source: Jay Yarow and Kamelia Angelova, Clusterstock – The Business Insider, November 19, 2009.

Financial Times: Goldman’s PR problem
“Although the $500 million Goldman Sachs has pledged to help small businesses is the largest donation the company has ever made, the firm remains the whipping boy for Wall Street excess, says Francesco Guerrera.”


Click here for the full article.

Source: Financial Times, November 18, 2009.

Ifo: Clear improvement in the Ifo World Economic Climate Indicator
“The Ifo World Economic Climate Indicator rose in the fourth quarter of 2009 for the third time in succession. The rise in the indicator is the result of both more favourable expectations for the coming six months as well as less negative assessments of the current economic situation. The recovery of the world economy is driven especially by the dynamic development in Brazil as well as in India, China and other Asian countries.

“The economic climate improved in all major economic regions. The improvement was particularly marked in Asia, where the indicator even surpassed its long-term average. Also in Western Europe and North America the climate indicator rose clearly in the fourth quarter of 2009. The economic expectations are now very optimistic almost everywhere, with the exception of several countries of Central and Eastern Europe.

“In contrast, the current economic situation is still assessed as decidedly unfavourable in all major regions, although these assessments clearly improved over the previous quarter. The appraisals of the current economic situation are particularly negative in the euro area, North America, Central and Eastern Europe and Russia.

“The inflation expectations for 2009, on a worldwide average, are clearly lower than the inflation estimate for the previous year (2.5% compared to 5.4%). According to the expectations of the World Economic Survey (WES) participants, prices will increase only slightly in the course of the coming six months.

“The short-term interest rates will increase again in the coming six months for the first time in more than a year, in the opinion of the WES experts. In accord with the more favourable economic outlook, the WES experts anticipate that the long-term interest rates are also likely to increase in the coming six months in most countries.

“An increasing number of WES experts regard the euro as overvalued. The other major world currencies, the US dollar, the Japanese yen and the British pound, are now seen as properly valued, on average.”


Source: Ifo, November 19, 2009.

Bill King (The King Report): Sovereign solvency fears
“Over the past several weeks, credit default swaps (CDS) on sovereign debt have rallied sharply. Investors increasingly fear that the massive amounts of sovereign debt will not be repaid. The following CDS chart on JGBs is alarming.


“While the surge in CDS on Japanese debt has retrenched over the past week, the CDS on US and UK debt have rallied … Our guess is the market fears another downturn will lead to more stimulus and more governments absorbing crappy paper and risk from the private sector … The last crisis flamed on fears of bank and major corporate solvency. The next crisis could be characterized by sovereign solvency fears.”


Source: Bill King, The King Report, November 18, 2009.

The Wall Street Journal: China’s blunt talk for Obama
“China’s top banking regulator issued a sharp critique of US financial management only hours before President Barack Obama commenced his first visit to the Asian giant, highlighting economic and trade tensions that threaten to overshadow the trip.

“Liu Mingkang, chairman of the China Banking Regulatory Commission, said that a weak US dollar and low US interest rates had led to ‘massive speculation’ that was inflating asset bubbles around the world. It has created ‘unavoidable risks for the recovery of the global economy, especially emerging economies’, Mr. Liu said. The situation is ‘seriously impacting global asset prices and encouraging speculation in stock and property markets’.

“Early Monday, a spokesman for China’s Ministry of Commerce added further criticism of the Obama administration, targeting recent measures by Washington against Chinese exports. ‘We’ve always known the US and the West as free market economies. But now we’re seeing a protectionist side,’ the spokesman, Yao Jian, told a monthly press briefing. Mr. Yao also rejected criticism of China’s currency policy, saying the yuan’s exchange rate has little to do with trade imbalances with the US and that China should keep the exchange rate stable.

“The Chinese comments signaled that Mr. Obama – on the third leg of a four-country Asian tour – can expect blunt talk from Chinese leaders on the economy. The issue could complicate his broad agenda in China that also includes efforts to extract new commitments on climate change and to encourage them to take a more active role to defuse nuclear threats in Iran and North Korea.”

Click here for the full article.

Source: Jonathan Weisman, Aaron Back and Andrew Browne, The Wall Street Journal, November 16, 2009.

Financial Times: Obama in China
“Barack Obama and Hu Jintao pledge to work together on a long list of pressing international issues during talks in the Chinese capital Beijing.”


Click here for the full article.

Source: Financial Times, November 17, 2009.

Reuters: China, US eye pact to help troubled banks
“Chinese and US regulators are negotiating a pact aimed at encouraging Chinese financial institutions to buy into small and medium-sized banks in the United States, bankers briefed on the plan said on Tuesday.

“Chinese bankers have complained that it’s been difficult for them to set up branches or invest in banks in the world’s leading economy, due partly to US regulators’ tough supervision and strict approval process for financial deals.

“But the global financial landscape has been revamped by the credit crisis, and cash-rich Chinese banks are now bigger players on the world scene and are scouting around for investment targets.

“To illustrate the global shake-down, Industrial and Commercial Bank of China is now the world’s biggest bank by market value, while Citigroup, once the world’s No.1 bank, is worth the same as a second-tier commercial bank in China.

“Two senior Chinese bankers said they had been invited this year by US officials, investment bankers and financial advisers to look at several potential investments in US banks, mostly in financial trouble.

“‘The trend is already there,’ said one Chinese banker. ‘Now they’re going to make this into an agreement to show there’s a change in official attitude toward Chinese investments in the US banking system,’ said the banker, who declined to be identified due to the sensitive nature of the matter.”

Source: George Chen, Reuters, November 17, 2009.

Financial Times: Geithner defends record to Congress
“Tim Geithner launched a fierce defence of his record as US Treasury secretary on Thursday as Republicans said his policies had failed and he should resign.

“In an unusually testy Congressional hearing, Mr Geithner told his Republican critics that he refused to take responsibility for ‘the legacy of crises you’ve bequeathed this country’.

“Kevin Brady, senior House Republican on the joint economic committee, told Mr Geithner he was a failure. ‘Unemployment skyrocketed … The deficit is becoming frightening … We are reduced to begging China to buy our debt and getting lectures from other nations on our financial disarray,’ he said. ‘The public has lost all confidence in your ability to do the job.’

“Mr Geithner shot back: ‘I agree with almost nothing in what you’ve said.’

“Although the US economy has started growing again, last month the unemployment rate breached 10% and is expected to stay high. With investment banks returning to profit but ordinary people still suffering, Republicans are increasing their attacks on the Obama administration over the economy.

“The Treasury secretary faced an array of questions and criticism during the hearing, which was ostensibly about plans to reform financial regulation. On that topic, Mr Geithner urged Congress to press ahead with legislation to reform the US regulatory system.

“He said reform would help to avoid a situation such as the government bail-out of insurance behemoth AIG in the future. He was criticised for his role in that rescue as then-president of the New York Federal Reserve.

“‘The United States of America … came into this crisis without anything like the basic tools countries need to contain financial panics,’ he said. ‘Coming into AIG, we had basically duct tape and string.’

“Mr Geithner also faced complaints that China was unfairly undervaluing its currency, the renminbi.

“He replied that he was confident Beijing would soon move to flexible rates. ‘They understand they need to do it, I think they want to do it, and I’m quite confident they will do it,’ he said.

“He also defended the ‘extraordinary’ actions taken to stabilise the economy and said the troubled asset relief programme was bringing good returns to US taxpayers.”

Source: Sarah O’Connor and Alan Rappeport, Financial Times, November 19, 2009.

Mark Felsenthal (Reuters): House panel OKs plan to open Fed policy to audits
“A US congressional panel on Thursday approved a measure to open the Federal Reserve’s monetary policy decisions to government audits, a surprise blow to the central bank’s efforts to shield its independence and a signal of frustration with the central bank.

“The provision, co-sponsored by Republican Representative Ron Paul and Democrat Alan Grayson, would allow a congressional watchdog agency to conduct a broad review of the US central bank’s policy and lending. Fed officials have strongly opposed it, saying it would cast doubt on the central bank’s independence from political pressure.

“The House of Representatives Financial Services Committee approved the amendment to broader legislation to revamp financial rules. The panel put off a vote on the broader measure.

“House Financial Services Committee Chairman Barney Frank, who opposed the Paul-Grayson measure, predicted it would be revisited when financial reform legislation is debated by the House.

“‘I think it’s going to be seen as weakening the independence of monetary policy with consequent negative implications,’ he told reporters after the vote. ‘I think people will be worried about the impact on the dollar and on interest rates, and I think that one may be revisited when we get to the floor.’

“However, Paul’s measure has earned support from more than half of the members of the House.

“The amendment is a further congressional slap at the US central bank after a Senate regulatory overhaul proposed stripping the Fed of its regulatory authority. Some lawmakers fault the Fed for failing to anticipate or prevent the financial crisis that pitched the economy into deep recession, while others are angry at its extensive emergency support for financial institutions.

“The Fed objected to the provision, saying it could raise financial market questions about its independence and could result in higher long-term interest rates as investors worry about inflation risks.”

Source: Mark Felsenthal, Reuters, November 20, 2009.

Bespoke: Government spending – where does it end?
“On Thursday, the Treasury Department released its monthly budget statement which summarizes revenues and spending for the month of October. After one looks at these figures, it’s hard to believe that they are accurate, but unfortunately they are. Unless you have been living under a rock for the last several years, you know that our Federal Government has been spending money at rates that would make even a sub-prime borrower blush. But even taking this into account, these numbers are still startling, if not scary.

“During the month of October, the Federal Government spent $2.30 for every dollar of revenue it took in. Given the fact that this is the fifth time this year that the ratio has exceeded two, one might think that this type of deficit spending is commonplace. However, going back to 1970, October was only the 13th month that the ratio ever exceeded two. Prior to 2008, the ratio exceeded two on average once every 6.5 years. In the last two years, the ratio has exceeded two on average once every three months!

“The charts below highlight the twelve-month rolling totals of government revenues and outlays. It doesn’t take an accountant to see that these two lines are moving in the wrong direction. Given the fact that nobody thinks Washington is going to reign in spending, the only way to solve the gap is through higher revenues (raising taxes) or increasing the money supply. Is it any surprise that barely a day goes by where the dollar doesn’t trade down in value?”


Source: Bespoke, November 16, 2009.

MoneyNews: Obama admits spending binge risks plunge into second recession
“President Barack Obama gave his sternest warning yet about the need to contain rising US deficits, saying on Wednesday that if government debt were to pile up too much, it could lead to a double-dip recession.

“With the US unemployment rate at 10.2%, Obama told Fox News his administration faces a delicate balance of trying to boost the economy and spur job creation while putting the economy on a path toward long-term deficit reduction.

“His administration was considering ways to accelerate economic growth, with tax measures among the options to give companies incentives to hire, Obama said in the interview with Fox conducted in Beijing during his nine-day trip to Asia.

“‘It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a way that could actually lead to a double-dip recession,’ he said.”

Source: MoneyNews, November 18, 2009.

The Washington Post: Bailout program could be extended
“The Obama administration is poised to extend the life of the highly unpopular $700 billion financial bailout and, to display a commitment to fiscal responsibility, is planning to use much of the leftover funds to reduce the national debt, government sources said.

“Administration officials are grappling with how best to announce the extension of the Troubled Assets Relief Program at a time when the economy is struggling and the unemployment rate is at its highest point in 26 years. The officials are hoping that by putting roughly $200 billion toward paying down the $12 trillion national debt, they could mitigate the political fallout, the sources said.

“No final decision about the fate of the bailout has been made, and officials are keenly aware that their preferred course contains risks. Officials worry that lawmakers, seeking to fund their own projects, may try to tap any large sum of unused money set aside for debt reduction, the sources said, speaking on condition of anonymity because the internal deliberations were private.

“Congressional Democrats are already eyeing the unexpended bailout cash as a source of funding for new efforts to combat soaring unemployment. Rep. John B. Larson (D-Conn.), chairman of the House Democratic Caucus, said lawmakers could send an important message about their priorities by taking money from the financial bailout program and redirecting it to pay for road and bridge projects and other measures meant to create jobs.”

Source: David Cho, Michael Shear and Lori Montgomery, The Washington Post, November 19, 2009.

Asha Bangalore (Northern Trust): Chairman Bernanke stresses job market, credit conditions and dollar
“The Chairman spoke at length about credit conditions and the labor market. In his opinion, impaired financial market conditions have led to banks holding larger buffers compared to the situation prior to the onset of the current crisis. In addition, a shaky economic environment marked with high loan losses and uncertainty about regulatory capital standards are factors restraining the growth of credit. The impaired market for securitization is another aspect that is contributing to the reduction of credit availability.

“The main message is that the credit machine needs to function for self-sustained economic activity. There is a minor improvement to note on this front. Loan extensions remain noticeably weak but for the week ended November 4, the decline was smaller (6.5%) compared with recent weeks. It appears that a trough has been established. Additional improvements with positive readings will be necessary to declare the coast is clear.


“Bernanke also spoke extensively about the labor market and more or less reiterated the well known aspects of the current labor market conditions. He raised the issue of a ‘jobless recovery’ and highlighted the reasons for the likelihood of this situation.

“The explicit mention of the dollar was the most important departure from earlier speeches. He noted that the Fed is ‘attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability.’ Historically, the dollar is the domain of the Treasury Department.

“The inflationary implications of the weak dollar are restrained partly by the enormous slack in the economy. However, prices of imported goods excluding fuel have risen for three straight months and commodity prices have also risen. Although inflation expectations have risen in recent days, the overall picture is that of a contained situation. Inflation expectations will be watched closely in the months ahead.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 16, 2009.

Asha Bangalore (Northern Trust): Fed reduces term of discount window loans
“The Fed announced a reduction in the term of discount window loans to 28 days from 90 days as of January 14, 2010. The Fed lengthened the maturity of discount window loans on August 17, 2007 to 30 days from a maximum term of overnight and extended it further to 90 days on March 16, 2008.

“As seen in the chart below, the need for discount window loans has reduced significantly from the period following the collapse of Lehman Brothers. This marks the beginning of a gradual withdrawal of the extraordinary support the Fed has extended to the global financial system as signs of stability have emerged.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 17, 2009.

Financial Times: Short-term US interest rates turn negative
“Short-term US interest rates turned negative on Thursday as banks frantically stockpiled government securities in order to polish their balance sheets for the end of the year.

“The development highlighted the continuing distortions in the financial system more than a year after Lehman Brothers’ failure triggered a global crisis.

“The growing appetite for short-term government debt reflects an effort by banks to present pristine year-end balance sheets to regulators and investors – an effort known as ‘window dressing’ on Wall Street, analysts said.

“With the Federal Reserve maintaining an overnight target rate of zero to 0.25 per cent, investors are demonstrating a willingness to completely forgo interest income – or even to take a small loss – to own securities that are seen as safe.

“Ted Wieseman, economist at Morgan Stanley, said there was a ‘squeeze in the [Treasury] bill sector’ that was ‘intensifying as investors stash money over year-end’.

“The scramble has been exacerbated by the fact that all leading US banks, many sitting on big trading profits, will this year close their books at the same time – at the end of December. In past years, investment banks such as Goldman Sachs and Morgan Stanley reported annual results in November.

“‘People are setting up for year-end early, and once you see bill rates going down quickly, it pulls in more buying,’ said Gerald Lucas, senior investment adviser at Deutsche Bank.

“On Thursday, Treasury bills maturing in January traded below zero per cent, traders said. Three-month bills traded at 1 basis point and six-month bills fell to a record low of 13 basis points – compared with 14 basis points at the height of the crisis last year.”

Source: Michael Mackenzie, Financial Times, November 20, 2009.

MoneyNews: Bullard – shrinking reserves key to exit plan
“A senior Federal Reserve official said on Wednesday the US central bank may start tightening financial conditions by adjusting its extensive asset purchase programs rather than raising interest rates.

“‘The market’s focus on interest rates is disappointing, given quantitative easing,’ St. Louis Federal Reserve Bank President James Bullard said in a presentation to a group of bankers. “Markets should be focusing on quantitative monetary policy rather than interest rate policy,” he said.

“‘The main challenge for monetary policy going forward will be how to adjust the asset purchase program without generating inflation while interest rates are near zero,’ Bullard said.

“Medium-term inflation hinges on what the Fed will do with this program, he said.

“Bullard said financial market focus on interest rates may in part be misplaced because the Fed has in the past waited two and a half to three years after the end of a recession before raising rates.

“‘Assuming that the (Fed) would behave the same way that it’s behaved in the past, this could mean that the (Fed) would not start increasing rates until early 2012,’ he said.

“However, the Fed will take into account the criticism that it fueled a housing bubble that contributed to the crisis by holding interest rates too low for too long in the early part of the decade, he said.”

Source: MoneyNews, November 18, 2009.

Bill King (The King Report): Getting more bearish on US economy
“Goldie’s Jan Hatzius is getting more bearish on the economy by the day.

“‘Despite the sharp pickup in real GDP growth since the dark days of early 2009, we estimate that real final demand – net of the boost from fiscal policy – is still contracting at an annual rate of around 1% in the second half of 2009. Although we expect a moderate recovery of around 2% by the second half of 2010, such a 3-percentage-point improvement would be insufficient to offset the loss of 4-5 percentage points of stimulus from fiscal policy and the inventory cycle. Hence, real GDP growth is likely to slow anew to a below-trend pace.

“‘The significantly stronger recovery that is now anticipated by a number of forecasters would require a much sharper acceleration in underlying final demand, along the lines of prior recoveries from deep recessions. But this ignores some key differences between the current situation and the aftermath of prior slumps. In particular, bank credit is tighter, the personal saving rate is much lower, the labor market is less cyclical, there is much more excess housing supply, and state and local budget gaps are deeper.'”

Source: Bill King, The King Report, November 17, 2009.

Asha Bangalore (Northern Trust): Leading Economic Index underscores US economy will continue to grow
“The Conference Board’s Index of Leading Economic Indicators rose 0.3% in October, after a 1.0% increase in the prior month. On a year-to-year basis, the leading index moved up 4.7% in the fourth quarter of 2009 (based on October data). The year-to-year change in the leading index has held in the positive territory for two consecutive quarters. The historical record of the leading index supports expectations of continued growth of real GDP in the near term.


“In October, six of the ten components of the leading index advanced – average manufacturing workweek, stock prices, interest rate spread, jobless claims, real money supply and orders of durable consumer goods. The remaining four components – orders on non-defense capital goods, vendor deliveries, building permits and consumer expectations – fell in October.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 19, 2009.

Asha Bangalore (Northern Trust): Factory production slips in October
“Industrial production inched up 0.1% in October mainly due to a 1.6% increase in production at the nation’s utilities. Utilities and mining (-0.2%) components make up a small part of the total industrial production. Excluding these components, factory production slipped 0.1% in October after posting strong gains for three consecutive months.


“The weakness was in the durable goods component (-0.4%), while production of non-durable posted a small increase. Within durables, the gain in primary metals (+3.6%) was more than offset by declines in autos (-1.6%), furniture (-1.9%), electrical equipment (-0.9%) and computer and electronic products (-0.3%). Stepping back from these details, the small decline in factory production is not a severe setback. The process of recovery will be marked with some monthly readings showing declines. More importantly, the projected trajectory of factory activity in the coming months is positive.

“The operating rate of the nation’s industries moved up to 70.7% in October from 70.5% in the prior month. The capacity utilization rate of the factory sector held steady at 67.6% in October, which is noticeably higher than the 65.1% record low mark of June 2009.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 17, 2009.

Asha Bangalore (Northern Trust): Labor market data point to stabilizing conditions
“Initial jobless claims held steady at 505,000 during the week ended November 14. Continuing claims, which lag initial claims by one week, declined 39,000 to 5.611 million. The insured unemployment rate held steady at 4.3%.

“Total claims which include recipients under the special programs, Extended Benefits Program and Emergency Unemployment Compensation Program, were 9.81 million during the week ended October 31, down from 10 million during the week ended October 3. Total continuing claims have held below 10 million for four straight weeks implying that although hiring is not advancing, job losses have stabilized.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 19, 2009.

Clusterstock: The hires-and-fires gap brings good news for job seekers
“The unemployment rate is still miserable, but it’s not entirely bad news – at least if you find clever ways of slicing and dicing the data.

“Today’s chart measures the percentage difference between new hires and separations (people leaving a job). As you can see, the gap yawned late last year, as way more people left the workforce than were hired. But it’s coming back, getting closer to the 0% mark (even). And then of course, we just need to create a lot of jobs.”


Source: Vince Veneziani and Kamelia Angelova, Clusterstock – The Business Insider, November 16, 2009.

Asha Bangalore (Northern Trust): Housing starts – permits show a more stable trend
“Total housing starts fell 10.6% to an annual rate of 529,000, the lowest since April. The 35% plunge in construction of apartment building to a new record low of 53,000 units brought down the overall reading. The 6.9% drop in single-family starts to 476,000 is the lowest since May. Uncertainty about the extension of the $8,000 tax credit for first-time home buyers is seen as one of the reasons for the weakness in home construction. If this is accurate, a rebound is likely in November because the tax credit program has been extended to April 2010.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 19, 2009

Asha Bangalore (Northern Trust): October retail sales – noteworthy gains of several components
“Retail sales rose 1.4% in October, after downward revisions of retail sales in September (-2.3% vs. earlier estimate of -1.5%). The downward revision of retail sales in September combined with the widening of the trade deficit in September implies a lower estimate of third quarter real GDP (+3.5%).


“In October, retail sales excluding building materials (part of residential investment expenditure in GDP), autos (unit sales are consistent with auto spending component of consumer spending in GDP) and gasoline (excluded due to volatility of prices) advanced 0.5% after strong readings in August and September. In addition, retail sales excluding, building materials, autos, and gasoline rose 1.4% in October, the first year-to-year gain since October 2008. The main point is that consumer spending is recovering gradually.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 16, 2009.

Bill King (The King Report): Sharp contraction in consumer credit
“John Williams: ‘As shown in the following graph, consumer credit outstanding fell at a 4.8% annualized rate, the deepest annual decline of the post-World War II era:


“‘The year-to-year contraction in September commercial and industrial (C&I) loans also set a post-World War II record decline, and October’s drop will be even worse. Based on 28 days of reporting, October C&I loans fell by about 16.2% year-to-year, following annual contractions of 10.6% in September and 7.1% in August.'”

Source: Bill King, The King Report, November 16, 2009.

Asha Bangalore (Northern Trust): Higher prices for cars and energy lifted CPI in October
“The Consumer Price Index (CPI) rose 0.3% in October after a 0.2% increase in the prior month. The details of the October CPI report indicate that higher prices for cars and energy were the predominant gains. The energy price index moved up 1.5% in October, with higher gasoline prices accounting for a large part of the increase. Food prices inched up only 0.1% following a 0.1% decline in the prior month. Year-to-date the CPI has risen at annual rate of 2.7% and from a year ago it fell 0.2%.


“The core CPI, which excludes food and energy, increased 0.2% in October. According to the BLS, higher prices for used and new cars and light trucks were responsible for 90% of the increase in the core CPI. Given the soft demand for cars and shaky balance sheets of households, it is unlikely that higher prices will stick in the months ahead.

“From a year ago, the core CPI increased 1.7% and is inching closer to the Fed’s threshold of tolerance (2.0%). However, the concentration of the gains in prices among two components – energy and autos – suggests that we need to wait for more evidence before we can confirm that inflation is problematic. Inflation will continue to rank low among the Fed’s priorities compared with economic growth and financial stability in the near term.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 19, 2009.

MoneyNews: Sprott – hyperinflation on the way
“Eric Sprott, CEO of Sprott Asset Management, says quantitative easing is ‘just debasing the currency, which will eventually lead to hyperinflation’.

“The recent extension of the homeowner credit and giving corporations loss carry-backs while paying unemployment benefits for an additional 20 weeks, augur an inflationary if not a hyperinflationary scenario, Sprott notes.

“‘I really think that once the Fed has spent the $1.25 trillion buying the GSE paper that we might yet see another level of quantitative easing in the States,’ he says.

“Sprott does see one upside for investors, though: ‘You can just feel the momentum in gold – it’s picking up dramatically’ and so too are prospects for a plethora of little-known small and mid-cap gold stocks.

“‘There aren’t too many choices when you’re in debt to the level that the US government is,’ Sprott told The Gold Report.

“‘One way of calculating it says there’s $72 trillion of debt and another way suggests it is $100 trillion. It’s almost academic which calculation you use; it’s just an overwhelmingly serious problem … it certainly seems that (the Obama administration) is going to try to spend their way out of it,’ Sprott says.”

Source: Julie Crawshaw, MoneyNews, November 19, 2009.

Clusterstock: An inflation warning sign
“In a speech on Monday, Federal Reserve chairman Ben Bernanke said he did not see inflationary threats on the horizon.

“Perhaps that is because he’s looking in the wrong place. The prices of crude goods, those in the earliest stages of production, have been inflating for most of the year. The willingness to pay more for crude goods probably indicates that businesses are predicting selling finished goods at higher prices. In other words, this is a strong indicator of inflationary expectations.”


Source: John Carney and Kamelia Angelova, Clusterstock – The Business Insider, November 17, 2009.

Financial Times: “Sweet spot” of low interest rates
“Treasury bonds look to be pricing in a ‘sweet spot’ of exceptionally low interest rates and benign inflation – but yields are likely to rise sharply next year, says Manoj Pradhan, global fixed income economist at Morgan Stanley.

“‘Our proprietary model puts the current fair value for 10-year Treasury bond yields at 3.3% – bang in line with actual yields,’ he says.

“But Mr Pradhan warns that significant uncertainty still surrounds inflation expectations. ‘It is hard to find investors who believe inflation over the medium to long run will be precisely in line with central bank targets.

“‘And even if you believe that inflation will play fair, investors seem to be receiving no compensation for the macroeconomic risks that have surely made an indelible impression over the past two years, or for the fiscal risks that abound.’

“Furthermore, Mr Pradhan says, the sanguine expectations in the US Treasury market have put pressure on yields elsewhere, making it difficult for early-hiking central banks to find policy traction through higher bond yields.

“‘We expect US 10-year yields to rise to 5.5% by the end of 2010 – an increase of 220 basis points that outstrips the 137 basis-point increase in the Fed funds rate expected over the same horizon. This bear steepening of the curve in 2010 may well be preceded by slightly lower 10-year yields in 2009.'”

Source: Manoj Pradhan, Financial Times, November 19, 2009.

BCA Research: Regional fixed income – allocation in a changing policy environment
“In some developed countries, a new interest rate cycle is underway. This development will be the main factor driving relative bond yields for the foreseeable future.

“In countries where the effects of the credit crunch were less severe, central bankers are becoming more confident that their economies are on solid footing. In some instances, policymakers have opted to begin renormalizing interest rates, while others are openly discussing ‘exit’ strategies. Correspondingly, the opportunities that will present in the government bond market in the coming months will take advantage of the relative timing and speed of this process. Monetary policy will tighten fastest in those countries where the recession was mildest (like in Australia) or where the boost to growth from resource-related prices is highest (as is the case in Norway).

“Our global fixed income strategists expect commodity-country bonds to continue to underperform. In contrast, the euro area and Japanese bond markets will outperform as their respective central banks have the most flexibility to stay on hold for the foreseeable future. The Fed will also remain on hold for an extended period, although a poor valuation starting point and increased debt issuance will act as a weight on Treasurys.”

Source: BCA Research, November 20, 2009.

Financial Times: Corporate bonds – all good things come to an end
“Credit markets are likely to offer lower returns in 2010 – although heightened volatility and increased supply should ensure an interesting year, says Stephen Dulake, head of credit research at JPMorgan.

“He notes that 2009 was a year when you could buy high-quality corporate debt and achieve equity-like returns. ‘However, all good things come to an end and next year we forecast high grade returns of around 3%, and coupon-like 7-8% returns for high yield.’

“But Mr Dulake says that low return does not necessarily equate to low volatility. ‘For example, we see the potential for risk markets to swing from pillar to post as investors oscillate from fearing deflation to fearing inflation,’ he says.

“He also argues that supply is likely to be greater than many expect.

“‘Our analysis suggests we could see investment grade companies issue €200 billion of bonds in 2010. This is double the average of the past decade and is a direct consequence of the sea-change in corporate liability management of the past 12-18 months. We expect this shift away from loans and toward bonds to be a multi-year process.

“‘Furthermore, a meaningful pick-up in merger and acquisition activity could also lead to an increase in supply.

“‘In high yield, we expect issuance of €35 billion in 2010, which would represent a record year and would in part be driven by leveraged corporates refinancing loans.'”

Source: Stephen Dulake, Financial Times, November 17, 2009.

Bespoke: YTD sector performance
“One would think that in a year where the average stock in the S&P 500 is outperforming the index by a wide margin (40.3% vs 22.9%), that most sectors would also be outperforming the overall index. Yet with the S&P 500 trading to a new high for the year, only three out of ten sectors are actually outperforming the index in 2009. Through this morning, Technology (55.1%), Materials (43.5%), and Consumer Discretionary (36.5%) are the three best performing sectors this year, while Telecom Services (-4.1%), Utilities (1.6%), and Consumer Staples (12.7%) have lagged the most.”


Source: Bespoke, November 16, 2009.

MoneyNews: Whitney – more bearish now than in a year
“Meredith Whitney says she hasn’t been as bearish as she is now in a year.

“‘I look at the board, and every stock from Tiffany to Bank of America to Caterpillar is up,’ Whitney told CNBC.

“‘But there’s no fundamental rooting for why these names are up, particularly in the consumer space.’

“Moreover, Whitney says she has never seen so much consumer credit contraction.

“‘You didn’t see this much even in the Great Depression,’ she says.

“‘$1.5 trillion in credit cards has been pulled from the system.’

“‘There’s nowhere to hide at this point.’

“Whitney expects banks will do another round of capital raising because the sector is inadequately capitalized at present and foresees ‘another leg down’ in the residential real estate market when mortgage rates and prices begin moving lower.

“Whitney still sees a much bigger risk related to residential mortgage exposure, rather than commercial, and advises investors to sit on their cash for a while because everything’s too expensive right now.

“However, though she expects a double-dip recession, Whitney says the second half of the ‘W’ will not be as severe.”

Source: Julie Crawshaw, MoneyNews, November 18, 2009.

Bloomberg: Mobius expects 40% BRIC stocks gain, says buy on dips
“Mark Mobius said stocks in Brazil, Russia, India and China are likely to rise by 30 to 40 percent within three to four years as higher economic growth and lower government debt spurs corporate earnings.

“Mobius, chairman of Templeton Asset Management Ltd., said he’s increasing holdings in all emerging markets, with particular focus on the four biggest developing-nation economies collectively known as the BRICs.

“‘BRIC countries are really at the top’ of our favorite holdings, Mobius, who oversees about $25 billion of emerging-market assets, said in an interview at the sidelines of a press conference in Istanbul today. ‘You can see BRIC countries have been best performing.’

“Russia’s RTS Index has surged 135 percent this year, the biggest gainer among 89 equity gauges worldwide, and Brazil, China and India rallied more than 75 percent as the global economic recovery spurred demand for commodity exports. While developed countries may shrink 4 percent this year, emerging markets as a whole may avoid a contraction with zero change in gross domestic product, Mobius said.

“While a ‘sudden violent correction’ is likely in a bull market, investors should be ‘ready to buy’, Mobius told reporters.

“The biggest growth areas in emerging markets are in the consumer and commodity industries, with China and Brazil offering among the cheapest stocks worldwide, Mobius said.”

“The MSCI gauge of 22 developing countries is valued at 20 times reported earnings, according to data compiled by Bloomberg. The MSCI China Index trades at 17.7 times profit, while the MSCI Brazil Index is valued at 18.2 times earnings. That compares with a price-earnings multiple of about 30 for the MSCI All Country gauge of developed and emerging economies. The S&P 500 is valued at 22 times profit of the companies in the index.”

Source: Seda Sezer and Tian Huang, Bloomberg, November 18, 2009.

Bespoke: Checkup on China and the Baltic Dry
“China’s Shanghai Composite stumbled significantly during the late summer, but it has come back nicely with a gain of 24.5% off of its lows at the end of September. While its rally has been impressive, Shanghai has yet to take out its 2009 highs made in early August. At the same time, the cost to ship goods as measured by the Baltic Dry Index has increased 115% since its lows in September and has made a new 2009 high. Traders like to relate the Baltic Dry Index to how things are going in China, so with the Baltic Dry charging to new highs, will the Shanghai Composite follow?”


Source: Bespoke, November 19, 2009.

Times Online: Dollar carry trade could herald the next global crisis, analysts warn
“The global economy could be poised for the creation of a potentially explosive dollar carry trade, analysts said yesterday.

“The trade allows investors to borrow dollars at near-zero interest rates, which they use to fund asset-buying sprees around the world, and has been possible since the collapse of Lehman Brothers last year and the extreme monetary response to its aftermath.

“The warning was issued at the Apec summit of Asia Pacific leaders in Singapore and came after a variety of assets started to display bubble-like patterns of inflation: everything from gold and copper to fine wine and Hong Kong penthouses.

“As the carry trade grows more popular it could add more downward pressure to the already falling dollar, particularly if the ‘carried’ – borrowed – dollars are immediately sold to buy non-dollar denominated assets in China or Singapore.

“Analysts believe that it was the sudden unwinding of the yen carry trade – immense pockets of investment funded by cheaply borrowed yen – that sent the destructive ripples of the Wall Street crisis around the world last autumn.

“Carry trades, which essentially mean borrowing at low rates to fund higher return assets, make sense until markets turn sour and exchange rates shift too violently. At that point, the rush for the exit wildly exacerbates any crash. A collapse of the dollar carry trade has the potential to be particularly harmful because of its scale.

“While a few prominent financial figures have already warned of the threat of an emerging dollar carry trade, governments have steered clear of commenting on the issue until now.

“But talking on the sidelines of the Asia Pacific summit, Donald Tsang, chief executive of Hong Kong, admitted openly that the dollar carry trade had started to spread and that the prospect ‘scared’ him.”

Source: Leo Lewis, Timesonline.co.uk, November 14, 2009.

The Wall Street Journal: It’s time to get dollar bullish
“After a dramatic decline in the USbcurrency, investors should consider going long the dollar via an ETF, says Barrons.com’s Bob O’Brien.”

Source: The Wall Street Journal, November 18, 2009.

Financial Times: IMF chief urges stronger renminbi for global balance
“A stronger Chinese renminbi is part of the reforms that Beijing needs to implement to increase domestic consumption and help ease global imbalances, the head of the International Monetary Fund said on Monday.

“Dominique Strauss-Kahn, managing director of the IMF, said the countries at the heart of global imbalances needed to take various measures to ease them.

“In the case of China, that means an increasing emphasis on domestic demand, especially private consumption, Mr Strauss-Kahn said in remarks prepared for a financial conference in Beijing.

“‘A stronger currency is part of the package of necessary reforms,’ he said. ‘Allowing the renminbi and other Asian currencies to rise would help increase the purchasing power of households, raise the labour share of income, and provide the right incentives to reorient investment.’

“Mr Strauss-Kahn noted that Chinese authorities were already taking steps to boost household consumption, including health care reforms.

“‘But more can be done to secure a lasting, structural shift towards consumption, by expanding the scope of social policies, moving ahead on financial sector reform, and undertaking corporate governance reforms,’ he said.

“Conversely, countries with large current account deficits need to increase savings, and for many of them, including the United States, fiscal consolidation must take priority, he said.

“Overall, the global economy appears to have turned a corner, Mr Strauss-Kahn said, but the biggest risk to the outlook is a premature withdrawal of policy stimulus.”

Source: Financial Times, November 16, 2009.

BCA Research: Asian currencies – near-term risks, but structurally sound
“There are strong long-term trends supporting further appreciation in Asian currencies, although a near-term pullback is likely if Chinese authorities do not allow the renminbi to appreciate. Valuations vary, but these currencies tend to be inexpensive.

“The real effective exchange rates of many Asian currencies have been quite subdued. Similarly, in nominal trade-weighted terms, many Asian currencies have not yet appreciated much over the past decade. As a result, from a ‘fair value’ perspective the Chinese RMB, the Korean won and the Taiwanese dollar currently look cheap, while the Singapore dollar is slightly expensive.

“Meanwhile, from a structural viewpoint, Asian currencies are being supported by the following trends: robust productivity gains, firming domestic demand, rising relative returns on capital, solid fiscal positions and widening trade surpluses with China. However, a major concern is that weak export prices will cause a pullback in EM currencies in the near-term. A large divergence has emerged between Asian export prices and appreciating regional currencies. This divergence will cap currency rallies in Asia, if China keeps the RMB at current levels.

“Our EM team concludes that on a long-term perspective, Asian currencies will benefit from decent valuations and structural backdrops but are at risk in the near-term. Stay tuned.”


Source: BCA Research, November 17, 2009.

Bespoke: Gold closing in on 20% above 200-day moving average
“Gold’s move over the past couple of months has been pretty incredible but not without precedent. As shown in the first chart below, the most recent leg up for gold has put it at 19% above its 200-day moving average. In the second chart, we highlight the historical 200-day moving average spread for gold. As recently as 2006 and 2008, the 200-day spread moved well above 25%, and back in 1980, the spread briefly got up to 136%! Gold is definitely overbought right now, enough so that the risk/reward tradeoff in the short-term is probably favoring the risk side. However, it has gotten much more overbought in the past than it is now, so it could still go higher before correcting.”



Source: Bespoke, November 18, 2009.

Richard Russell (Dow Theory Letters): Gold bull market – great persistency
“I think the most interesting action in the current picture is the action of gold. I get the feeling of a ground swell, some irresistible force that is driving gold higher. What’s interesting is that there are no wild spikes in gold, no fireworks, but a steady, persistent climb. This is powerful bull market action, and where it comes from nobody really knows. Is this the buying of millions of Chinese? Or is it the late-entrance of US hedge funds? Or is it short-covering on the part of squeezed COMEX speculators.

“In the end, does it matter who’s doing the buying? I know this – most Americans have been brain-washed after may years of anti-gold propaganda. Most Americans don’t know anything about gold. Most Americans have not been buying gold. Most Americans don’t realize that gold is the time-honored ultimate form of money. So the buying is probably coming from some place other than the US populace.

“So far the gold action is coming in via almost measured increases of 3 to 10 dollars a day. It’s as if the buyers are waiting for a correction, and when no correction arrives, they say ‘What the heck’ and they buy a quantity of gold, maybe not as much as they’d like, because they keep waiting for that elusive correction.”

Source: Richard Russell, Dow Theory Letters, November 18, 2009.

Richard Russell (Dow Theory Letters): The case for gold
“I like to keep it simple, and I like to understand the fundamentals. So here goes. The Fed and the other central banks can create ‘money’ out of thin air. By now, everybody on earth knows that. People also figure that if it’s an item that can be created without work and through an accounting entry, it can’t be real money, rather it’s simply a brand of ‘Monopoly money’.

“OK, then how about this? You can take the phoney money that the Fed creates and you can actually buy something real with it. That ‘real something’ can be gold or it can be a foreclosed home or it can be top-grade stocks like the thirty stocks that make up the Dow. Trade Fed-created junk for something real? Why not, it certainly makes a lot of sense.

“But there’s something else. Sophisticated investors are beginning to distrust ALL fiat or central bank-created ‘money’. Moreover, they distrust a situation where central banks all over the world are creating huge additional amounts of their phoney money. Knowledgeable investors are starting to place all fiat money into a single class. And they distrust that class. They distrust it because they think of it as ‘junk money gone wild’. Their reaction – turn in your junk money for the one type of intrinsic money that has represented wealth for 6000 years – gold.

“I’ve written many times that gold seems to be imbedded into the DNA of mankind. Today, with the world in turmoil, rich men may be saying to themselves, ‘I don’t know what’s going on any more, and frankly, I don’t know where I’ll be in ten years. But if I own a thousand ounces of gold, I’ll know I’m rich. I don’t know what the price of gold will be when this whole mess is over, but I know I’ll still be wealthy if I own a thousand ounces of gold.’ And that, to my mind, is some of the thinking behind the rising price of gold and maybe even of stocks.”

Source: Richard Russell, Dow Theory Letters, November 17, 2009.

The Wall Street Journal: John Paulson making big new bet on gold
“One of the biggest investors is placing a huge new bet on gold.

“John Paulson, who scored about $20 billion of profits between 2007 and early 2009 wagering against the housing market and financial companies, is launching a hedge fund dedicated to buying up shares of gold miners and other bullion-related investments, according to investors.

“Mr. Paulson told his investors he personally would invest between $200 million and $250 million in the new fund, which he said will begin on January 1, according to an investor at the meeting.

“Paulson & Co. already is a major holder of gold shares including AngloGold Ashanti and Kinross Gold, doing most of its buying early this year. Mr. Paulson currently has more than 10% of his $30 billion or so under management in gold-related investments, according to his investors. The moves have benefited from the recent surge in gold prices to nearly $1,150 an ounce.

“The gold fund will invest in gold-related shares and gold derivatives and will aim to outperform gold prices.

“Mr. Paulson noted that central banks around the globe have gone from sellers of gold to buyers, and that the global supply of gold is constrained.

“While harmful inflation isn’t on the horizon, he said, Mr. Paulson argued that there is a risk of a burst of inflation down the road. That’s because in the past there’s been a lag between a surge in money supply and higher inflation. Gold often does well when inflation rises.”

Source: Gregory Zuckerman, The Wall Street Journal, November 19, 2009.

Clusterstock: How the old gold bugs lost control of gold
“Latest data from the World Gold Council shows just how much the gold market has changed in just under two years. Essentially, the more traditional sources of demand for gold, i.e. jewelry, industry, gold bar hoarders, and coins have been falling.

“Meanwhile, gold demand from new retail investment products has skyrocketed from just 7% of total gold demand in 2007 to a whopping 27% most recently. That’s almost a 4x increase in their share of demand in under two years. Given that market prices are generally driven by incremental changes in supply and demand, clearly the new retail style gold players are now driving the market.

“The true gold bugs of yesteryear are no longer in charge. Though they’re probably not complaining given that retail demand is making them rich. Just realize that retail demand can be a fickle friend.”


Source: Vincent Fernando and Kamelia Angelova, Clusterstock – The Business Insider, November 19, 2009.

Financial Times: Global recovery threatens food price surge
“Conditions are ripe for a fresh surge in food prices as the global economy recovers, says the senior United Nations agriculture official.

“Jacques Diouf, director-general of the UN’s Food and Agriculture Organisation (FAO), believes that the world is not doing enough to avert another food crisis. His warning comes as leaders are expected to gather in Rome on Monday for the World Food Summit .

“‘When the recovery picks up, we will be back to square one,’ Mr Diouf told the Financial Times in an interview.

“He said the same structural problems behind last year’s spike in food prices were still affecting the market. These included lack of investment, surging demand in Asia and diversion of food commodities into biofuels.

“‘We have all the elements of the crisis,’ he said, adding that a weakening US dollar could exacerbate the upward price pressure in food commodities.

“Although the prices of some commodities, such as wheat and rice, have halved since their peak in mid-2008 because farmers in rich countries have expanded their output, they remain well above the pre-crisis level and near record levels in poor countries.

“Other food raw materials – particularly the so-called breakfast commodities such as cocoa, sugar and tea – are now trading at their highest level for about 30 years.

“Mr Diouf’s warning came as global food companies urged policymakers to strive for regulatory transparency and a boost in infrastructure spending to tackle the food crisis.”

Source: Javier Blas and Vincent Boland, Financial Times, November 15, 2009.

Financial Times: Fears of China property bubble
“A large bubble is forming in China’s property market as a result of Beijing’s credit-driven stimulus programme, one of the country’s most prominent real estate developers warned.

“Zhang Xin, chief executive of Soho China, one of the country’s most successful privately owned property developers, told the Financial Times the asset bubble was leading to rampant wasteful investment in the sector, undermining the country’s long-term growth prospects.

“‘Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real estate segment,’ Ms Zhang said. ‘The rising prices are a direct result of so much money coming from the banks and the Chinese banks should be very worried.’

“Ms Zhang’s assessment was echoed by Fan Gang, a member of the central bank’s monetary policy committee, who warned on Wednesday that real estate in cities such as Beijing, Shanghai and Shenzhen was expensive and there was a growing risk of asset price bubbles.

“Urban property prices in 70 big and medium-sized Chinese cities rose 3.9% in October from a year earlier, accelerating from September’s 2.8% rise, according to government figures.

“Price rises in top-tier markets such as Beijing and Shanghai have been much faster. Analysts say the rebound has largely been driven by an unprecedented government-led expansion of bank lending. It is also being driven by government policies, including tax breaks, low interest rates and smaller down-payment requirements.

“‘In Manhattan, they have vacancy rates of 10-15 per cent and they feel like the sky is falling, but in Pudong [the central business district in Shanghai] vacancy rates are as high as 50 per cent and they are still building new skyscrapers,’ Ms Zhang said.

“‘If you look at GDP growth, then China looks like a new engine driving the global economy, but if you look at how growth is being created here by so much wasteful investment you wouldn’t be so optimistic.'”

Source: Jamil Anderlini, Financial Times, November 18, 2009.

Financial Times: Pace of growth picks up in Japan
“Japanese gross domestic product grew 1.2 per cent quarter-on-quarter between July and September, as stimulus-fuelled consumer spending joined a growing trade surplus to help the world’s second-largest economy continue its climb out of its sharpest postwar recession.

“Monday’s preliminary data showed growth at its fastest in over two years and left little doubt the worst is over for an economy battered by collapsing external demand after last year’s financial crisis.

“The pace of third-quarter growth was equivalent to 4.8 per cent on an annualised basis, compared with the 2.6 per cent forecast by economists in a Kyodo News survey. However, Japan’s economy was still 4.4 per cent smaller than in the same quarter of 2008, showing how far it still has to go to make up the damage inflicted by global woes last winter.

“With stimulus programmes such as car subsidies due to expire and the temporary process of inventory restocking also a big contributor to GDP growth, many economists remain downbeat on prospects for the first half of 2010.

“‘It is difficult to interpret the Q3 inventory build-up as supportive of further strong growth in production,’ wrote Chiwoong Lee, economist at Goldman Sachs in a research note.

“Economists said worries about fragility in consumer sentiment meant Japan was likely to remain dependent in the near-term on the strength of export markets such as China.”

Source: Mure Dickie and Robin Harding, Financial Times, November 16, 2009.

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