Words from the Investment Wise 1.10.10

Back from the festive season break, traders pushed stock market indices to new highs for the rally, logging a full house of five up-days for the S&P 500 Index and pushing the CBOE Volatility (VIX) Index – also referred to as the “fear gauge” of the US stock markets – down to levels last seen pre-Lehman in 2008.

Pundits shrugged off Friday’s unexpected decline in non-farm payrolls, as well as mixed economic data earlier in the week, focusing instead on the Federal Open Market Committee’s (FOMC) communiqué for its December 15-16 meeting which maintained its “extended period” stance for easy monetary policy, i.e. more “juice” for risky assets.

Asha Bangalore (Northern Trust) said: “The details and tone of the December employment report indicate that labor market conditions remain bothersome. A meaningful pace of hiring is unlikely in the next few months given the structural unemployment in the economy, the shortened workweek, and the large number of part-time workers. In other words, the December employment report reinforces expectations of the FOMC on hold in the near term. The Fed is unlikely to undertake a reduction of monetary accommodation until the unemployment rate has peaked.”


Source: Walt Handelsman

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers that indicates renewed investor appetite for risky assets. Silver (+9.5%), “the poor man’s gold”, and platinum (+7.0%) were the stars of the week, playing catch-up on historically cheap ratios relative to gold bullion. The yellow metal (+3.7%) also resumed its uptrend with a so-called “upward price dynamic” on Monday. Bonds performed poorly as Pimco and BlackRock, among others, cut holdings of US and UK debt as the two nations’ borrowings hit record levels.


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 (+2.5%) and the MSCI Emerging Markets Index (+2.7%) experienced a strong first week of 2010. Only three emerging markets – the Shanghai Composite Index (-2.5%), the Russian Trading System Index (-0.4%) and the Venezuela Caracas General Index (-1.2%) – bucked the broader uptrend.

Notwithstanding solid gains since the March lows, only the Chile Stock Market General Index, one of the week’s strongest performers, has been able to reclaim its 2007 pre-crisis peak – now trading 6.5% higher. Mexico and Brazil could be the next countries to eliminate the bear market losses.

As far as the US indices are concerned, Wall Street managed to hit 15-month highs on Friday. This means that the S&P 500 Index and the Dow Jones Industrial Index have now retraced 55% and 54% respectively of their crisis losses. After the thin festive season period, volume on the NYSE came close to the one-year average.

Nine of the ten economic sectors (as measured by the SPDR exchange-traded funds [ETFs]) closed higher for the week, with the cyclical sectors in general outperforming the defensive sectors. Materials (+5.9%), Energy (+5.8%), Financials (+5.7%) and Industrials (+5.3%) all returned handsome gains, whereas Utilities (-1.0%) was the only sector in the red.

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


Top performers among stock markets this week were Latvia (+13.2%), Peru (+12.3%), Luxembourg (+6.1%), Greece (+6.0%) and Cyprus (+5.4%). At the bottom end of the performance rankings, countries included Slovakia (-14.1%), Bermuda (-2.5%), China (-2.5%), Nepal (-2.2%) and Venezuela (-1.2%).

The declines in the Shanghai Composite Index came in the wake of investors’ concerns about a flood of initial public stock offerings (IPOs) and the authorities’ actions to slow down lending. Of all the major indices, the Shanghai Composite is the only one trading marginally below its 50-day moving average. Also, as shown by the declining green line in the bottom portion of the chart below, Chinese stocks have since July been underperforming the S&P 500 Index – a reversal of roles since China turned the bear market corner five months before most other markets in November 2008. Interestingly, Marc Faber told CNBC (via MoneyNews): “My feeling is that the US will outperform emerging economies in the first six months of 2010.”


Source: StockCharts.com

Of the 96 stock markets I keep on my radar screen, 79% recorded gains, 15% showed losses and 6% remained unchanged. The performance map below tells the past week’s rather bullish story.

Emerginvest world markets heat map


Source: Emerginvest (Click here to access a complete list of global stock market movements.)

John Nyaradi (Wall Street Sector Selector) reports that, as far as ETFs are concerned, the winners for the week included SPDR S&P Metals & Mining (XME) (+13.8%), Claymore/Delta Global Shipping (SEA) (+12.3%) and Market Vectors Coal (KOL) (+11.4%).

At the bottom end of the performance rankings, ETFs included ProShares Short Oil and Gas (DDG) (-4.6%), HOLDRS Merrill Lynch Telecom (TTH) (-3.1%) and Vanguard Extended Duration Treasury (EDV) (-2.9%).

Referring to the issue of financial reforms, the quote du jour this week comes from Nobel economist Joseph Stiglitz. He recently warned (via MarketWatch): “Unless Wall Street’s incentive system is drastically reformed, ‘the financial sector will only try to circumvent whatever new regulations we put in place. We will simply have a short respite before the next crisis.’ Warning: nothing’s changed, it’s worse: Lobbyists run Obama, Congress and the Fed.”

To this, former IMF chief economist Simon Johnson added (according to MarketWatch): “Yes, ‘we’re running out of time … to prevent a true depression’. The ‘financial industry has effectively captured our government’ and is ‘blocking essential reform’, and unless we break Wall Street’s ’stranglehold’ we will be unable prevent the Great Depression 2.”

On a related note, The Wall Street Journal reports that the Financial Crisis Inquiry Commission, formed by Congress in 2009 to investigate the causes of the economic turmoil, will have public hearings on Wednesday and Thursday in Washington with top Wall Street bankers.

Next, a quick textual analysis of my week’s reading. This is a way of visualizing word frequencies at a glance. The usual economic terms (”economy”, Fed”, “rate”, etc.) feature prominently, but “bonds” and “silver” also mustered some attention. Will we perhaps look back at these assets a year from now and see one of the worst and one of the top performers respectively for 2010? A long silver, short Treasuries trade makes perfect sense to me.


Back to the stock markets: 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 Shanghai Composite Index (discussed above), the indices in the table are all trading above their 50-day moving averages, with all the indices also comfortably above their respective key 200-day moving averages.

As far as the S&P 500 Index is concerned, the next upside target will be at the upper end of its upwardly sloping price channel at 1,250. A break below the lower level of the channel at 1,085 (and the December low of 1,092) could signal a deeper pullback.

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


“Anecdotally investors remain very skeptical of the continued advance which suggests the ‘wall of worry’ is still in place,” said Kevin Lane of Fusion IQ.


Source: Fusion IQ, January 7, 2010.

Casting his eye on 2010, David Fuller (Fullermoney) said: “Stock market action continues to confirm a bull market in every respect. Downside risk is probably limited to periodic mean reversions towards the rising 200-day moving averages.

“The main danger signs to look for will be an eventual, persistent tightening of monetary policy and an inverted yield curve. When this next happens, and both tend to be lead indicators, I will focus on introducing trailing stops for all equity positions, actual or mental, and ideally use strength to reduce equity exposure. Currently, I maintain that we are still in the second psychological perception stage of the bull market, characterized by the ‘wall of worry’. With any luck, we can look forward to the third and climactic stage of a bull market cycle, in which investors become euphoric.

“The time to start thinking about closing long portfolios in anticipation of the next bear market, I suggest, will be when the yield curve (US 10-year yields over 2-year yields) next inverts by moving below zero. However, the lead was so early last time (early 2006) that some of us became complacent about it.”


Source: Fullermoney

While on the topic of long-term charts, when considering S&P 500 monthly data, three momentum-type oscillators (RSI, MACD and ROC) all still signal a bullish trend. (As an aside, the long-term picture for US government bonds is in bearish mode as highlighted in a post a few days ago.)


Source: StockCharts.com

“Where breadth goes, the market usually follows,” goes an old market saw. Analyzing market internals, the number of NYSE stocks trading above their respective 50-day moving averages has increased to 86% from 30% in October (see chart below). “The fact that breadth has caught up with the new highs in the overall market is a good thing for the health of the bull market. If it gets up near 90%, however, there won’t be much more room for upside in the short term,” remarked Bespoke. For a primary uptrend to be in place, the bulk of the index constituents also need to trade above their 200-day averages. The number at the moment is 89% – somewhat down from its September peak of 93%, but nevertheless firmly in bullish terrain.


Source: StockCharts.com

Not everybody shares Fuller’s optimism. Having pinpointed the bottom in March, GMO’s Jeremy Grantham now warns that our irrational nightmare will repeat. “A year ago we came dangerously close to the Great Depression 2. Unfortunately, we’ve learned nothing … condemning ourselves to another serious financial crisis in the not-too-distant future,” he is quoted by MarketWatch. “We had our bear-market rally. Next, historical cycles plus our irrational behavior guarantees another, bigger global meltdown. We learned nothing.”

It goes without saying that the strong rally since March is bound to be followed by a correction at some stage. But rather than pre-empting (and more often than not getting it wrong as a result of short-term noise), I will be guided by the longer-term charts and the yield curve to identify a major top. Meanwhile, I am watching valuations carefully, and specifically how the Q4 earnings reports stack up. Although I am treading with caution after the 74% rally in the mature markets and 109% in emerging markets, I am not ignoring good old stock-picking, and specifically those companies with strong balance sheets that will be growing their dividends over time with a reasonable degree of certainty.

For more discussion on the economy and financial markets, see my recent posts “Byron Wien’s ten surprises for 2010“, “Bob Doll’s crystal ball into 2010 and the next decade“, “Bill Gross: Let’s get ‘Fisical’“, “Chart du Jour: Subpar recoveries follow financial recessions“, “Chart du Jour: No signs of imminent rate hike” and “Is there a decennial pattern in equity returns?” (And do make a point of listening to Donald Coxe’s webcast of January 8, 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 readers not doing so already, you can follow my “tweets” by clicking here. You may also consider joining me as a friend on Facebook.

The Recession Status Map below, courtesy of Dismal Scientist Economy.com, aggregates growth statistics from around the world and allows one to see at a glance which economies are in recession, at risk, recovering or expanding. Click on the map to link to the interactive version.


Source: Dismal Scientist

“Business sentiment around the globe remains about where it has been since last summer – consistent with a tentative global economic recovery. Businesses are most upbeat when responding to broad questions about current conditions and expectations through the middle of this year. However, they remain cautious when responding to specific questions about sales, pricing, inventories and hiring,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. Importantly, the survey results suggest that the global recovery is holding its own, but provide no indication that the recovery is gaining significant traction.


Source: Moody’s Economy.com

Released on Monday, purchasing managers’ surveys for December exceeded expectations from China to Europe and the US, reported the Financial Times. “Across the world, the combined scores of national purchasing managers’ indices, compiled by JP Morgan, rose to 55 in December, the highest since April 2006, with the index for new orders at a 5½ year high.”

The global economic rebound is likely to be even stronger than many have anticipated and developed markets have the potential to outperform emerging markets, Jim O’Neill, head of global economic research at Goldman Sachs, told CNBC. “I think what we’ve seen since the turn of the year … is actually really strong,” he said.

Goldman Sachs analysts estimate that the world economic growth will be 4.4% this year and 4.5% in 2011.

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, January 8, 2010
• December employment report – hiring freeze yet to thaw

Thursday, January 7, 2010
• Total continuing jobless claims post new high

Wednesday, January 6, 2010
• Minutes of December FOMC meeting – vulnerable aspects of economic recovery and inflation dynamics dominated deliberations
• ISM non-manufacturing survey shows improvement

Tuesday, January 5, 2010
• Auto sales advanced in December, but declined in Q4
• Decline of Pending Home Sales Index partly due to original expiration date of homebuyer tax credit program
• Factory inventories advance; noteworthy revision of shipments of non-defense capital goods

Monday, January 4, 2010
• Factory sector survey sends a strong positive signal
• Construction outlays dip in November, but Q4 residential construction spending could be noteworthy

The minutes of the FOMC’s December 15-16 meeting also point to few changes in monetary policy over the next few months. There was a consensus that near-term growth would be only slightly above the economy’s potential, but the minutes show a growing divide between FOMC members less worried about inflation, and thus arguing for more aggressive monetary policy steps, and those more worried about inflation.

As shown below, there is a significant and positive correlation (0.73) between the composite ISM purchasing managers’ index and the year-to-year change in US real GDP. According to Asha Bangalore, the noteworthy gains in the ISM survey over the past few months “suggest that an impressive headline reading of GDP for the fourth quarter should not be surprising”.


Source: Northern Trust – Daily Global Commentary, January 4, 2010.

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
Jan 4 10:00 AM Construction Spending Nov -0.6% -0.1% -0.5% -0.5%
Jan 4 10:00 AM ISM Index Dec 55.9 55.3 54.3 53.6
Jan 5 10:00 AM Factory Orders Nov 1.1% 0.1% 0.5% 0.8%
Jan 5 10:00 AM Pending Home Sales Nov -16.0% 2.0% -2.0% 3.9%
Jan 6 07:30 AM Challenger Job Cuts Dec -72.9% NA NA -72.3%
Jan 6 08:15 AM ADP Employment Report Dec -84K -125K -75K -145K
Jan 6 10:00 AM ISM Services Dec 50.1 52.0 50.5 48.7
Jan 6 10:30 AM Crude Inventories 12/31 1.33M NA NA -1.54M
Jan 6 02:00 PM FOMC Minutes 12/16
Jan 7 08:30 AM Initial Claims 01/02 434K 455K 439K 433K
Jan 7 08:30 AM Continuing Claims 12/26 4802K 4900K 4975K 4981K
Jan 8 08:30 AM Average Workweek Dec 33.2 33.2 33.2 33.2
Jan 8 08:30 AM Hourly Earnings Dec 0.2% 0.1% 0.2% 0.1%
Jan 8 08:30 AM Nonfarm Payrolls Dec -85K -25K 0K 4K
Jan 8 08:30 AM Unemployment Rate Dec 10.0% 10.2% 10.0% 10.0%
Jan 8 10:00 AM Wholesale Inventories Nov 1.5% -0.2% -0.3% 0.6%
Jan 8 03:00 PM Consumer Credit Nov -$17.5B -$7.0B -$5.0B -$4.2B

Source: Yahoo Finance, January 8, 2010.

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

The European Central Bank (ECB) will make an interest rate announcement on Thursday (January 14). US economic data reports for the week include the following:

Tuesday, January 12
• Trade balance

Wednesday, January 13
• Fed Beige Book
• Treasury budget

Thursday, January 14
• Jobless claims
• Retail sales
• Import and export prices
• Business inventories

Friday, January 15
• Empire manufacturing
• Capacity utilization
• Industrial production
• Michigan sentiment

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

Final words
Bertrand Russell, English logician and philosopher (18721970) said: “What a man believes upon grossly insufficient evidence is an index into his desires – desires of which he himself is often unconscious. If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it. If, on the other hand, he is offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence. The origin of myths is explained in this way.” (Hat tip: David Fuller.)

Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will prevent the readers of Investment Postcards from falling into this trap, allowing them to build considerable wealth with their investment portfolios.

That’s the way it looks from Cape Town (whose balmy weather I will leave behind on Thursday for the snowy environs of Switzerland).


Source: Chuck Asay

David Fuller (Fullermoney): Themes for 2010
“Our favourite investment themes throughout 2009 were Asian-led emerging markets, South American-led resources markets and information technology. We were bullish of commodities, favouring precious metals, industrial resources and the agricultural sector subject to weather-related shortages.

“How will these Fullermoney themes perform in 2010?

“I receive at least as many bearish or cautionary stock market reports as bullish forecasts. I am inclined to regard these as contrary indicators, suggesting that we are still in the lengthy ‘wall of worry’ portion of this bull market. Crucially, monetary policy remains extremely accommodative as we approach 2010, although no one knows for how long these stimulative measures will persist, not even the central bankers. I will take my cues on monetary policy from the central banks, not the pundits.

“I am content to ride the stock market uptrends, with some provisos. For instance, most share indices have spent the last few months in a corrective phase. Having seen some partial mean reversion towards the rising 200-day moving averages, it is important that stock market indices sustain upwards breaks where sideways trading ranges are currently evident.

“Conversely, downward breaks from trading ranges would signal at least a further correction. I will give the upside the benefit of the doubt, at least while leading indices maintain their progressions of higher reaction lows. You do not need to watch them all, although I do, but I suggest monitoring the technical consistency where you have investments, and also China and the US, given their powerful leash effects.

“Incidentally, while China and India currently show additional upside scope following lengthy consolidations, Brazil may need some further ranging mean reversion towards its MA before another meaningful advance can be sustained.

“As for precious metals, they have underperformed since gold’s steepening advance was checked by a large downward dynamic on December 4. The US Dollar Index’s rally also provided a headwind, although this did not trouble many other commodities which were less overstretched on the upside than gold. Interestingly, platinum has subsequently rebounded and appears capable of extending its upward trend before long. Gold and silver appear oversold and have lost downward momentum recently, although they have yet to show reassuring upward dynamics. [PduP: This happened on Monday, January 4.] Seasonal conditions will remain favourable for precious metals through at least 1Q 2010.

“Among industrial metals, copper is the most influential and it is extending its ranging upward trend.”

Source: David Fuller, Fullermoney, December 31, 2009.

CNBC: Jim O’Neill – recovery will be stronger than forecast
“The global economic rebound is likely to be even stronger than many have anticipated and developed markets have the potential to outperform emerging markets, Jim O’Neill, head of global economic research at Goldman Sachs, told CNBC Tuesday [January 5] .”

Source: CNBC, January 5, 2010.

Financial Times: Rise in factory orders spurs markets
“Manufacturers around the world are at their most optimistic for almost four years after booking a sharp rise in new orders in December as Asia’s recovery spread to the US and Europe.

“Surveys of purchasing managers from China to Europe and the US in the final month of 2009 released on Monday [January 4] exceeded expectations, sending stock markets higher in advanced economies.

“Across the world, the combined scores of national purchasing managers’ indices, compiled by JP Morgan, rose to 55 in December, the highest since April 2006, with the index for new orders at a 5½ year high.

“Manufacturers’ intentions on employment rose above 50 for the first time since March 2008, signalling that the brutal shake-out of factory jobs over the past two years is coming to an end.

“David Hensley of JP Morgan said: ‘If a rebound in the manufacturing labour market can be maintained, this should aid with sustaining the broader recovery.’

“The surveys have long been good predictors of manufacturing output, the most volatile part of the economy.

“Although there were a few pockets of gloom, notably Australia and Spain, the strength of Asia’s recovery was underlined by sharply better sentiment in China and India, and steady improvements in South Korea and Taiwan. Brighter prospects were also recorded in the US, UK and the eurozone. The US Institute of Supply Management manufacturing report stood at 55.9 in December, its highest since April 2006.”

Source: Chris Giles, Financial Times, January 4, 2010.

CNBC: John Taylor on the real crisis culprit
“Insight on whether monetary policy is not the problem, with John Taylor, Stanford University economics professor.”

Source: CNBC, January 7, 2010.

Reuters: Rate hikes not best way to burst bubbles – Bernanke
“Federal Reserve Chairman Ben Bernanke said on Sunday that vigorous financial regulation would have been the best way to restrain the housing bubble that helped cause the deep recession, but said policy makers can no longer rule out monetary policy to curb the buildup of risk.

“In a speech defending the Fed’s rock-bottom interest rates in the early 2000s, a policy many say fueled a runaway housing boom that triggered a devastating crisis when it went bust, Bernanke said regulatory and supervisory actions, rather than rate hikes, would have been more effective ways to check the run-up in house prices.

“Bernanke and the Fed face sharp criticism over actions leading up to the crisis. Bernanke’s renomination as Fed chairman faces an unusual degree of opposition, and the Fed’s responsibilities stand to be curtailed if congressional proposals become law.

“Bernanke said, however, in a speech to the American Economic Association, that policy makers can no longer eliminate rate increases from their arsenal to prevent future crises.

“‘If adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplemental tool for addressing those risks,’ he said.

“Bernanke conceded that efforts by the Fed and other regulators beginning in 2005 came too late or were insufficient to slow the housing bubble.

“‘The lesson I take from this experience is not that financial regulations are ineffective for controlling emerging risks, but that their execution must be better and smarter,’ he said.

“The US Senate is poised to begin debate over financial rules reforms that would peel away the Fed’s authority for regulating large financial firms. The US central bank would be charged instead with focusing on monetary policy.

“Bernanke and other Fed officials have argued that such a change would hurt the Fed and oversight of the system in general by removing a crucial monitor from the pulse of the financial system.

“Analyzing the Fed’s decisions to keep rates low for an extended period in the early 2000s, the Fed chairman argued that those policies were a response to the worry about a possible deflationary spiral that hobbled the Japanese economy through much of the previous decade.

“Bernanke pointed to adjustable-rate mortgages and overconfidence that house prices would continue to rise as the main culprits behind the catastrophic housing bubble.”

Source: Mark Felsenthal, Reuters, January 3, 2010.

Time: Pimco’s Bill Gross sees 2010 as year of reckoning
“Pimco managing director Bill Gross not only oversees the world’s biggest bond fund, his views often sway markets. In a late December interview with TIME’s John Curran, Gross pointed to the second half of 2010 as a period when investors large and small will reckon with a new reality of poor economic growth and a Federal Reserve that is hard pressed to offer much help.

TIME: Where do you see the economy going over the next 6 to 12 months?
Bill Gross: The economy should be relatively strong in the first half of 2010 then weaken in the second half. That’s not to say we’ll return to recession but we’ll see weakness as opposed to a continuation of what will probably be a decent first half.

What will make the first half of 2010 so good?
The first half will be dominated by government stimulus and by inventory accumulation or a lack of [inventory] liquidation among businesses. I expect nothing from consumer [spending] and nothing really from housing or really any of the standard cyclical leading sectors. It’s hard to put a number on GDP growth rates, but let’s say 4% in the first half and then 2% in the second half, which would basically call for some additional help.

You’re talking about a second shot of federal stimulus?
Yes, something else is probably needed if the [government’s] thrust is really reducing unemployment below double digits and re-normalizing the economy.

What does this say about the Federal Reserve’s hopes to start pulling its added liquidity out of the markets, either by raising short-term rates or just getting out of buying bonds, which has been keeping long rates low?

I think the Fed’s statements suggest that they really want to exit in some fashion from the buying program. The first step in that direction, logically, would be to stop buying and our sense is that they’re at least going to try that. But based on our forecasts for the second half of the year they may have to re-initiate it, and that will be difficult to do once they stop because it then becomes a political hot potato.

All that said, I think they’ll stop buying mortgage agency securities, and the trillion-and-a-half dollar check that’s been written over the past 9 to 12 months basically disappears. It’s significant from the standpoint of interest rates and interest rate spreads in certain sectors. And I would even go so far as to say it might be a mistake.

Because they might have to restart the buying program later?
Yes, I think the Fed wonders about this as well. But you have to understand that the Fed’s probably under political pressure – such as the hearings for new regulation of the Fed, the growing public unease about the supersized Fed balance sheet, etc. The Fed’s expanded balance sheet is not something that I consider to be a problem, but I think the market does – and so the Fed will probably be working in the direction of pulling some of the liquidity out of the marketplace. They won’t sell – it’s a near impossibility to unload what they’ve purchased over past 12 months. But they’ll at least stop buying.

Won’t that put upward pressure on interest rates?
I think it will. I mean the mortgage market would be your first place to look in terms of something that’s overvalued that would become normalized. Nobody knows what the Fed’s buying is worth – we think about half a percentage point on rates, but we don’t know.”

Click here for the full article.

Source: John Curran, Time, January 5, 2010

Bloomberg: Krugman sees 30-40% chance of US recession in 2010
“Nobel Prize-winning economist Paul Krugman talks with Bloomberg’s Steve Matthews about likelihood the US economy will slide into a recession during the second half of the year as fiscal and monetary stimulus fade. Krugman, an economics professor at Princeton University, also said the Federal Reserve’s plan to end purchases of $1.25 trillion of mortgage-backed securities and about $175 billion of federal agency debt in March could spur an increase in mortgage rates and lead to declines in home sales and prices.”


Source: Bloomberg, January 4, 2010.

MoneyNews: Rosenberg – economy is in post-bubble collapse
“David Rosenberg, chief economist for Gluskin Sheff & Associates, takes issue with the consensus view that a sustained economic recovery has begun.

“‘We are in a post-credit bubble credit collapse that is ongoing,’ he writes on The Big Picture.

“And that doesn’t bode well for financial markets, though the recent rally might continue for a while, Rosenberg says.

“‘Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.’

“Economists err in calling this downturn ‘The Great Recession’, Rosenberg writes.

“‘This is truly a gentle way of saying ‘Depression.”

“So first we must acknowledge that we indeed experienced a depression.

“‘Then … we can draw a conclusion that a sustainable recovery will not get under way until the ratio of household credit to personal disposable income reverts to the mean – and goes to an excess in the opposite direction,’ Rosenberg says.

“‘I know it sounds harsh, but we shall endure – believe it. Transition is rarely without pain.’”

Source: Dan Weil, MoneyNews, January 5, 2010.

Bloomberg: Stiglitz says Wall Street “talking up” recovery
“Nobel laureate Joseph Stiglitz said investors are ‘talking up’ signs of a global economic recovery in a bid to boost equities.

“‘Wall Street is talking up the recovery because it would like to sell stocks,’ Stiglitz told reporters at a conference in Paris today [Thursday, January 7].

“The MSCI World Index of stocks has surged 73% since its low of last March even while the economies of advanced nations grow below their potential rates following the worst recession since the Great Depression.

“Stocks are rallying because interest rates are low and companies have been cutting costs by reducing payrolls, factors that suggest economies remain weak, said Stiglitz, a professor at Columbia University in New York.

“‘Whenever rates are low, stock markets are often high,’ he said. By contrast, economists are ‘almost universally pessimistic’.

“Speaking at the conference, Stiglitz said US regulators haven’t done enough to address the risks posed by large banks, derivatives and executive compensation.

“He recommended a tax be introduced on financial speculation as a way of generating revenue and forcing investors to focus on the longer-term.”

Source: Isabelle Mas and Simon Kennedy, Bloomberg, January 7, 2010.

Asha Bangalore (Northern Trust): Minutes of December FOMC meeting
“The FOMC left the federal funds rate unchanged at the close of the December FOMC meeting. There is little doubt about the Fed staying on hold in the first-half of 2010. There are different points of view about when the Fed will start reducing the monetary accommodation in place. It is too early to find hints in the minutes about when the Fed is likely to implement a change of course in its monetary policy stance. The minutes of the December deliberations show varying points of view among the members of the FOMC on different aspects about the economy and monetary policy.

“Most members agreed that incoming economic data was consistent with forecast of growth and inflation envisioned in the November meeting. Employment conditions were seen to improve only gradually in 2010, in line with previous recoveries following a financial crisis. There appeared to be a broad consensus about the weakness in underlying labor market conditions. In addition to the high unemployment rate, members noted that the significant decline in production hours and the drop in the employment-population ratio as raising concern about the labor market.

“In the residential real estate sector, although home prices were showing signs of stability and sales and construction had moved up from their cycle lows, the improvements were seen as tentative. The expiration of the home buyer tax credit program in April 2010, likelihood of additional foreclosures leading to lower home prices, and the possibility of pressure in mortgage markets as the Fed winds down the mortgage securities purchase program were seen as factors that could create unfavorable conditions in the housing sector once again.

“There were three opinions pertaining to inflation. The significant slack in labor and product markets and contained inflation expectations were seen as factors helping to keep inflation subdued in the near term. Most members agreed about the forces keeping inflation under control but seemed to differ about the relative role that each would play. Inflation expectations have moved up in recent weeks and are holding at levels below the mark seen prior to the onset of the crisis in August 2007.

“There were mixed views about the monetary accommodation necessary in the future, which is evident in the following excerpt:

‘A few members noted that resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the Committee’s large-scale asset purchases and continuing them beyond the first quarter, especially if the outlook for economic growth were to weaken or if mortgage market functioning were to deteriorate. One member thought that the improvement in financial market conditions and the economic outlook suggested that the quantity of planned asset purchases could be scaled back, and that it might become appropriate to begin reducing the Federal Reserve’s holdings of longer-term assets if the recovery gains strength over time.’

“All in all, 2010 will be a year of challenges for Fed and other policymakers.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 6, 2010.

Reuters: US Fed’s Duke sees low rates for “extended period”
“The US Federal Reserve sees a moderate economic recovery continuing in 2010, but needs to keep interest rates ‘exceptionally low’ for an ‘extended period’ to foster job growth, a Fed policymaker said on Monday.

“Fed Governor Elizabeth Duke told an economic forum that slack in the economy was likely to remain above historical norms for some time, helping to keep inflation subdued.

“‘In the current environment, the FOMC continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period,’ Duke said, referring to the US central bank’s policy-setting Federal Open Market Committee.

“‘Such policy accommodation is warranted to provide support for a return over time to more desirable levels of real activity and unemployment in the context of price stability.’

“Fed watchers have focused on any changes in that language for clues to the timing of a possible tightening of monetary policy as the economy recovers. The FOMC maintained the ‘extended period’ stance in its last statement on December 15.

“In remarks to the Economic Forecast Forum in Raleigh, North Carolina, Duke said recent data on production and spending suggested that economic activity continued to increase at a ’solid rate’ during the final months of 2009 after real GDP turned positive in the third quarter.

“‘I expect to see a continued moderate recovery in economic activity in 2010, supported by a further healing in financial markets and accommodative monetary policy,’ Duke said.

“But echoing comments by Fed Vice Chairman Donald Kohn in Atlanta on Sunday [January 3], Duke said constraints on lending would slow recovery.”

Source: David Lawder, Reuters, January 5, 2010.

Bloomberg: Hoenig says Fed should eventually lift main rate to 3.5%- 4.5%
“Federal Reserve Bank of Kansas City President Thomas Hoenig said the central bank should move ’sooner rather than later’ to reduce stimulus, with a goal of eventually boosting the benchmark interest rate to ‘probably between 3.5 and 4.5 percent’.

“‘The process of returning policy to a more balanced weighing of short-run and longer-run economic and financial goals should occur sooner rather than later,’ Hoenig, who votes on monetary policy decisions this year, said today in a speech in Kansas City.

“‘Maintaining excessively low interest rates for a lengthy period runs the risk of creating new kinds of asset misallocations, more volatile and higher long-run inflation, and more unemployment – not today, perhaps, but in the medium- and longer-run.’

“Policy makers are considering how to exit from unprecedented stimulus and emergency credit programs amid signs the US economy is rebounding. They pledged at the end of their December 15-16 meeting to complete $1.25 trillion in purchases of mortgage securities and $175 billion of agency debt by the end of March, while holding the benchmark interest rate in a range of zero to 0.25 percent for an ‘extended period’.

“‘The Federal Reserve must curtail its emergency credit and financial market support programs, raise the federal funds rate target from zero back to a more normal level, probably between 3.5 and 4.5 percent, and restore its balance sheet to pre-crisis size and configuration,’ Hoenig said in remarks prepared for a speech to the Central Exchange, a group that promotes leadership development opportunities for women.

“Hoenig said he disagrees with economists who forecast the economy may falter and predicted growth will exceed 3 percent this year.

“‘Fiscal and monetary stimulus will continue to provide major support to the economy,’ he said. ‘Much of the fiscal stimulus package announced last year will have its impact in 2010, and it might well be more substantial than initially projected due to delays in implementing spending programs.’”

Source: Steve Matthews, Bloomberg, January 7, 2010.

Asha Bangalore: ISM non-manufacturing survey results show improvement
“The ISM non-manufacturing survey results showed an improvement in the service sector, with the composite index climbing to 50.1 in December from 48.6 in the prior month. The index measuring new orders slipped 3 points to 52.1 in December but the level denotes an expansion in activity.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 6, 2010.

Asha Bangalore (Northern Trust): Factory sector survey sends a strong positive signal
“The ISM manufacturing survey results of December indicate a noteworthy gain across several fronts. The composite index moved up to 55.9 in December from 53.6 in the prior month. The composite index has recorded readings above 50.0 for five straight months. Index readings above 50.0 denote an expanding sector. Indexes measuring new orders (65.5 vs. 60.3 in Nov.), production (61.8 vs. 59.9 in Nov.), employment (52.0 vs. 50.8 in Nov.), and supplier deliveries (56.6 vs. 57.7 in Nov.) advanced in December.


“The index tracking inventories (43.4 vs. 41.3 in November) is gradually moving toward the 50.0 mark. The cycle low was the 30.8 reading in June 2009. The new orders index in December (65.5) is the highest since April 2004.

“The significant and positive correlation (0.73) between the composite index and the year-to-year change in real GDP suggest that an impressive headline reading of GDP for the fourth quarter should not be surprising.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 4, 2010.

Asha Bangalore (Northern Trust): Factory inventories advance, noteworthy revision of shipments of non-defense capital goods
“Orders of factory goods rose 1.1% in November after a 0.8% gain in the prior month. Bookings of durable goods increased 0.2% and that of non-durables were up 1.1%, partly due to higher prices for food and petroleum items. The highlights of the report were the upward revision of shipments of non-defense capital goods excluding aircraft of November and the upward revision of inventories for October. The upward revision of shipments of non-defense capital goods excluding aircraft is a plus for the fourth estimate of equipment and software component of fourth quarter real GDP.

“At the same, the 0.2% increase in inventories in November and the upward revision of October estimates of inventories point to inventory liquidation being less of a drag in the fourth quarter. In other words, this reports presents a small upside risk to the headline reading of fourth quarter real GDP.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 5, 2010.

Asha Bangalore (Northern Trust): Pending Home Sales Index declines
“The Pending Home Sales Index (PHSI) plunged 16% in November, reflecting the temporary impact of the home buyer tax credit program. Sales of homes surged prior to the original expiration date (November 30, 2009) of the first-time home buyer tax credit program in order to beat the deadline. The program has been extended to April 30, 2010 and it is likely that the PHSI index following this extension will show a rebound.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 5, 2010.

Asha Bangalore (Northern Trust): Hiring freeze yet to thaw
“The unemployment rate held steady at 10.0% in December. The average jobless rate for 2009 is 9.3% vs. 5.8% in 2008. The October jobless rate was revised to 10.1% following annual revisions, which is a new cycle high reading; it was previously reported as 10.2%. The broader measure of unemployment which includes the number looking for working, discouraged workers, and those seeking full-time employment but able to find only part-time employment rose to 17.3% from 17.2% in November. The cycle high is 17.4% in October 2009.


“The labor force fell 1.07% from a year ago, the largest decline since June 1951. The participation rate and employment-population ratio continue to show a downward trend. The employment-population ration fell to 58.2 in December from 58.5 in the prior month. As the economy moves along the recovery path, folks who have left the labor force will gradually resume hunting for employment, which is most likely to keep the jobless rate at an elevated level.

“Non-farm payrolls declined 85,000 in December, after a revised gain of 4,000 jobs in November. The revisions of October-November data result in a net loss of 1,000 jobs. The bulk of the loss in employment was in the goods sector (-81,000), while the services sector recorded a loss of 4,000 jobs. A total of 7.242 million jobs have been lost since the recession commenced in December 2007.

“Conclusion: The details and tone of the December employment report indicate that labor market conditions remain bothersome. A meaningful pace of hiring is unlikely in the next few months given the structural unemployment in the economy, the shortened workweek, and large number of part-time workers. In other words, the December employment report reinforces expectations of the FOMC on hold in the near term.

“The FOMC will need to ensure that a self-sustained economic recovery in underway before it can tighten monetary policy and justification for its actions in the current politically charged environment has to be rock solid. Therefore, the Fed is unlikely to undertake a reduction of monetary accommodation until the unemployment rate has peaked. In the jobless recoveries following the 1990-91 and 2001 recessions, the Fed waited it was abundantly clear that the unemployment rate had peaked before implementing a tightening of monetary policy, despite gains of real GDP for several quarters. The unemployment rate peaked at 7.8% in June 1992 and the Fed raised the federal funds rate only in February 1994 when the unemployment rate has declined to 6.6%. After the 2001 recession, the Fed held the funds rate at 1.00% between June 2003 and June 2004 during which period the unemployment had dropped to 5.6% from 6.3%.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 8, 2010.

Asha Bangalore (Northern Trust): Total continuing jobless claims post new high
“Initial jobless claims were virtually unchanged at 434,000 during the week ended January 2 compared with the 433,000 reading of the previous week. Continuing claims, which lag initial claims by one week, fell 179,000 to 4.802 million. The insured unemployment rate declined to 3.6% from 3.8% in the prior week.

“Total continuing claims which include seasonally adjusted continuing claims (4.981 million for the week ended 12/19) and not seasonally adjusted claims under emergency programs (5.44 million) climbed to 10.42 million for the week December 19 (continuing claims under emergency programs lag initial jobless claims by two weeks).

“The initial jobless claims numbers indicate that the pace of layoffs has slowed but total continuing claims suggest that firms remain reluctant to hire and the budgetary costs of unemployment insurance continue to advance.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 7, 2010.

Clusterstock: Welcome to the jobless manufacturing recovery
“Manufacturing employment was smashed by the recent economic downturn, and remains down 18% vs. two years ago (when things began to tank) according to employment data released by ADP.

“Yet the Federal Reserve’s manufacturing output index has begun to recover. Either we’re currently experiencing a jobless (at best job-lite) recovery or the hiring is just around the corner.”


Source: Vincent Fernando and Kamelia Angelova, Clusterstock – Business Insider, January 6, 2010.

Clusterstock: How the government payroll replaced goods-producing jobs
“In the just-so story of the evolution of our economy, our old manufacturing based economy has been replaced by an innovative knowledge economy. That’s not quite true.

“In fact, the decline of the jobs in goods producing sectors of the economy – construction, manufacturing, mining and agriculture – has largely been met with an increase in jobs on the government payroll. We’ve gone from providing jobs in profit-making private industry to providing jobs in profit-eating government work. Toward the end of 2007, the total number of government jobs exceeded the total number of goods producing jobs. Welcome to the government payroll economy.”


Source: John Carney and Kamelia Angelova, Clusterstock – Business Insider, January 5, 2010.

Asha Bangalore (Northern Trust): Auto sales advanced in December, but declined in Q4
“Auto sales rose in December to an annual rate of 11.2 million units vs. a sales pace of 10.9 million in November. Attractive year-end incentives helped to push sales in December. However, the auto sales average in the fourth quarter was 10.9 million units compared with 11.5 million units sold in the third quarter. Therefore, despite an increase in auto sales during December, consumer spending is most likely to post an increase around 2.0% in the fourth quarter following a 2.8% annualized gain in the third quarter.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 5, 2010.

MoneyNews: Huffington – send Obama a message, shun big banks
“Moving your money from bailout banks into smaller, more local, more traditional community banks can help stabilize the financial system, Arianna Huffington says.

“‘Think of the message it will send to Wall Street – and to the White House,’ Huffington writes in The Huffington Post.

“‘That we have had enough of the high-flying, no-limits-casino banking culture that continues to dominate Wall Street and Capitol Hill,’ Huffington writes. ‘That we won’t wait on Washington to act, because we know that Washington has, in fact, been a part of the problem from the start.’

“Since April, the Big Four banks – JP Morgan/Chase, Citibank, Bank of America, and Wells Fargo – all of which took billions in taxpayer money, have cut lending to businesses by $100 billion, Huffington points out.

“‘The government policy of protecting the Too Big and Politically Connected to Fail is badly hurting the small banks, which are having a much harder time competing in the financial marketplace,’ Huffington says.

“‘As a result, a system which was already dangerously concentrated at the top has only become more so.’”

Source: Julie Crawshaw, MoneyNews, January 4, 2010.

Financial Times: Top banks invited to Basel risk talks
“The Bank for International Settlements will gather top central bankers and financiers for a meeting in Basel this weekend amid rising concern about a resurgence of the ‘excessive risk-taking’ that sparked the financial crisis.

“In its invitation, the BIS cited concerns that ‘financial firms are returning to the aggressive behaviour that prevailed during the pre-crisis period’.

“The BIS, known as the central banks’ bank, outlined in a restricted note to participants some specific proposals that it believes could create a healthier financial system. Those proposals include lowering return-on-equity targets for the banks as a way to discourage such risk taking.

“Private sector bank chiefs attending the meeting at the BIS in Basel include Larry Fink of BlackRock, Vikram Pandit of Citigroup, and John Stumpf of Wells Fargo.

“Lloyd Blankfein, Goldman Sachs chief executive, and Jamie Dimon, chief executive of JPMorgan Chase, were invited but are not planning to attend.

“The meeting comes at a moment of intense uncertainty, with the global economy’s tentative recovery shadowed by ‘the overhang of private-sector debt and rapidly rising public debt’, and high unemployment.

“‘The concern here is that the prolonged assurance of very cheap and ample funding may encourage excessive risk-taking,’ the BIS invitation note says.”

Source: Henny Sender, Financial Times, January 6, 2010.

Financial Times: US public pensions face $2,000 billion shortfall
“The US public pension system faces a higher-than-expected shortfall of more than $2,000 billion that will increase pressure on many states’ strained finances and crimp economic growth, according to the chairman of New Jersey’s pension fund.

“The estimate by Orin Kramer will fuel investors’ concerns over the deteriorating financial health of US states after the recession. ‘State and local governments are correctly perceived to be in serious difficulty,’ Mr Kramer told the Financial Times.

“‘If you factor in the reality of these unfunded promises, their deficits will rise exponentially.’

“Estimates of aggregate funding requirement of the US pension system have ranged between $400 billion and $500 billion, but Mr Kramer’s analysis concluded that public funds would need to find more than $2,000 billion to meet future pension obligations.

“A shortfall of that size could force state governments to take unpalatable decisions such as pouring more public money into their funds or reducing pension benefits. State and local governments have already cut spending to close budget deficits.”

Source: Francesco Guerrera and Nicole Bullock, Financial Times, January 4, 2010.

Rockefeller Institute: States see third consecutive double-digit drop in tax collections
“Tax collections nationwide declined by 10.9% during the third quarter of 2009, the third consecutive quarter during which tax revenues fell by double-digit percentages, according to the latest report from the Rockefeller Institute of Government.

“Combining current data with comparable historical figures from the US Census Bureau, the Institute reported that the first three quarters of 2009 marked the largest decline in state tax collections at least since 1963.

“Western states saw especially sharp declines in tax collections during the third quarter, while revenues fell by more modest levels in the Southeast, New England, Mid-Atlantic, and Plains regions.

“For the fourth quarter of 2009, early data showed continuing declines, although the negative trend of the past year appeared to be moderating. For 38 early-reporting states, personal income taxes fell by 6.5% during October and November while sales tax collections declined by 5.5%.

“‘While the recession may be over for the national economy, it is far from over for the finances of state governments, and many states are still uncertain as to when expect a return to positive revenue growth,’ said report authors Lucy Dadayan, a senior policy analyst at the Rockefeller Institute, and Donald Boyd, a senior fellow at the Institute. ‘Such improved news may begin in the early part of calendar year 2010. However, even if tax collections in the coming year move up from 2009 levels, the depth of the decline over the past two years will almost certainly leave state revenues significantly lower than those of any of the past several years.’”

Source: Rockefeller Institute, January 7, 2010.

David Fuller (Fullermoney): Bond yields on the up
“With the Fed and BoE buying most of the US Treasury and UK Gilts issues month after month, there is only one scenario under which long-term rates would not rise once the central banks complete this form of quantitative easing.

“Basically, for UK 10-Year Yields to retest their lows just beneath 3%, investors would need to anticipate once again the economic depression scenario briefly feared during 1Q 2009. The same would apply to US 10-Year Yields which bottomed at yearend 2008, just above 2%. While I will be guided by the chart action, I see no reason why this should happen, given all the quantitative easing that has occurred. Moreover, I see no technical action to suggest that long-dated yields will fall significantly.

“Instead, I expect long-dated yields to rise over the medium to longer term, although they may temporarily back away from the 4% level before eventually moving higher, reaching at least 5%.

“If correct, this would theoretically make 10-Year T-Bonds and Gilts attractive short-sale candidates. A number of institutional traders, not least hedge fund managers, also hold this view. However these trades are complicated by the presence of large, insider participants in the form of central banks, anxious to prevent yields from rising too quickly. They have deep pockets as a consequence of their unique freedom to print money.

“The Fed and BoE would happily lure speculators into helping them to finance the purchase of their government paper. Consequently, they almost certainly attempt to squeeze shorts from time to time, as the choppy chart action suggests. Therefore timing is critical. For those wishing to short long-dated US and UK debt, I would avoid upside momentum moves in yields and aim to establish shorts within the lower half of the ranges evident. Since one would be using futures, this would mean selling after price rallies towards prior resistance, and either covering on tests of prior support or any evidence of a loss of downside momentum for bond prices.”

Source: David Fuller, Fullermoney, January 5, 2010.

Eoin Treacy (Fullermoney): Bonds – increased supply assured
“Sovereign bond markets are one area of the financial markets where increased supply is practically assured. Nevertheless, prices remain relatively high in a number of markets, due to the distorting influence of central banks, acting as buyers of last, and increasingly first, resort.

“A number of countries share Gilts’ chart pattern. 10-year yields for the UK, USA, Canada, Singapore, South Korea, New Zealand, Australia, South Africa and Norway have all rallied from last year’s lows. Some are pressuring their range highs but the general theme is one of relative yield strength.

“Elsewhere the story is somewhat different. Swiss 10-year yields just tested their 2005 low near 1.8%. The yield jumped back to 2% in the last week and looks likely to form a failed downside break from the previous yearlong range. A sustained move to new lows is now needed to question scope for further upside. The respective price chart hit a 20-year peak in late December and is pulling back from the area near 138. A sustained move to new high ground would be required to question potential for some further weakness.

“Swiss bonds price action is notable but the same pattern, although less emphatic is evident across a large number of continental European bonds The Generic European 10-year found support in the region of 3% early last year but retested the low from September to late December and is currently pressuring the upper side of that range. A downward dynamic would now be required to question potential for some further upside. The Japanese 10-year has a similar pattern.

“Due to the interference of just about every central bank in their respective sovereign debt market, the risk of attempting to trade against them is higher than might normally be the case. This would suggest that the lowest risk time to short government bond futures is following major advances such as in Swiss bonds rather than UK government bonds which have already had a relatively large move.”

Source: Eoin Treacy, Fullermoney, January 6, 2010.

Bloomberg: Pimco cuts US, UK bonds as borrowing increases
“Pacific Investment Management Co., which runs the world’s biggest bond fund, is cutting holdings of US and UK debt as the two nations increase borrowing to record levels.

“Pimco is ‘more cautious’ on corporate bonds and holds fewer mortgage-backed securities than the percentages in the benchmarks it uses to gauge performance, wrote Paul McCulley, a portfolio manager and member of the investment committee, in his 2010 outlook. The company is also underweight Treasury Inflation Protected Securities, according to the report on Newport Beach, California-based Pimco’s website.

“‘This all leaves us with portfolios that appear, more than at other times, to be hugging the benchmarks with no bold positioning,’ McCulley wrote. ‘We’re making a very active decision to run light on risk.’

“Yields, which move opposite to prices, will rise in the US and the UK this year, according to Bloomberg surveys of economists. Treasuries fell 3.7 percent in 2009, the most in more than three decades, according to indexes compiled by Bank of America’s Merrill Lynch unit, as the US increased debt sales to snap the biggest economic slump since the 1930s. UK gilts fell 1.3 percent last year, the indexes show.

“Yields will climb to 3.97 percent by year-end, according to a Bloomberg survey, with the most recent forecasts given the heaviest weightings. U.K. 10-year rates will advance to 4.31 percent from today’s 4.01 percent, a separate survey showed.

“Under what Pimco has termed the ‘new normal’, investors will face lower-than-average returns with heightened government regulation, lower consumption, slower growth and a shrinking global role for the US economy.”

Source: Wes Goodman, Bloomberg, January 4, 2010.

Bespoke: High yield bonds continue to do well
“Over the past month or so, the only area of the bond market that has done well is junk. Both Treasuries and investment grade corporates have struggled, while high yield bonds have continued to surge. Below we highlight a six-month performance chart of the high yield bond ETF (HYG) and the investment grade corporate bond ETF (LQD). As shown, HYG is up 18.17% over the last six months, while LQD is only up 5.50%. You can see a clear split in performance (shaded in gray) at the start of December, where HYG continued to trade higher and LQD began to trade lower.”


Source: Bespoke, January 7, 2010.

Bespoke: Final 2010 strategist predictions
“Below is a list of the 2010 S&P 500 year-end price targets of major Wall Street strategists as surveyed by Bloomberg prior to the first trading day of the new year. As a whole, strategists are looking for a year-end price of 1,225 for the S&P 500, which translates into a gain of 9.82%. Deutsche Bank’s Binky Chadha has the highest target at 1,325, while Barclays’ Barry Knapp has the lowest at 1,120. All strategists are forecasting a 2010 gain.”


Source: Bespoke, January 5, 2010.

Bloomberg: Pessimism on US stocks drops to lowest since 1987
“Pessimism about US stocks among newsletter writers fell to the lowest level since April 1987, six months before the equity market crash known as Black Monday, following the biggest rally in the Standard & Poor’s 500 Index in seven decades.

“The proportion of bearish publications among about 140 tracked by Investors Intelligence fell to 15.6 percent yesterday from 16.7 percent a week earlier. Sentiment has improved since October 2008, when the financial crisis drove the figure to a 14-year high of 54.4 percent. After plunging 38 percent in 2008, the S&P 500 has risen 25 percent this year.

“Some analysts consider lower pessimism a sign stocks will stop advancing, under the theory that there are fewer bearish investors left to change their minds and purchase shares. The S&P 500 plunged 20 percent on October 19, 1987.

“‘Wow, I know things are better than they were one year ago, but are they so dramatically better with little downside risk?’ Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York, wrote in an e-mail to clients today. ‘Combine this sentiment reading with the VIX at 20 and 2010 will be interesting, especially with the very likely prospect of higher interest rates.’

“The VIX, as the Chicago Board Options Exchange Volatility Index is known, is posting a record annual drop as investors pay less for protection from declines in the S&P 500. It has fallen 75 percent since a record high of 80.86 in November 2008. The dollar climbed to a three-month high against the yen today on speculation the Federal Reserve will withdraw stimulus measures as the economy recovers.

“The percentage of surveyed newsletter writers who are bullish declined to 51.1 percent from 52.2 percent. Advisers expecting a correction, or 10 percent retreat, rose to 33.3 percent from 31.1 percent. Investors Intelligence, based in New Rochelle, New York, has examined forecasts in newsletters since 1963.

“When the S&P 500 and Dow Jones Industrial Average climbed to records in October 2007, the bullish percentage was 62 percent. The S&P 500 fell 57 percent from that record to a 12- year low of 676.53 on March 9, 2009. The benchmark index has since rebounded 67 percent to 1,126.42.”

Source: Nikolaj Gammeltoft, Bloomberg, December 31, 2009.

CNBC: Mobius – bull run at risk of 20% corrections
“Stocks are still in the grip of a secular bull market, but investors shouldn’t expect the same level of returns seen in 2009 and there is a risk of 20% corrections, Mark Mobius, executive chairman of Templeton Asset Management, told CNBC Thursday [January 7].”

Source: CNBC, January 7, 2010.

John Authers (Financial Times): Bear market rally
“The S&P rally may well be a rally within a bear market.”


Click here for the article.

Source: John Authers, Financial Times, January 5, 2010

David Fuller (Fullermoney): Stock markets remain in “sweet spot”
“… we remain bullish of Fullermoney themes – Asian-led emerging markets, South American-led resources markets and information technology – provided that primary trend consistency and momentum is maintained. We also remain bullish of commodities.

“How do we reconcile these bullish themes with the ‘awful’ economic background, at least for many OECD countries? Easily, for the time being, because even the worst affected economies are showing some evidence of recovery, and crucially, monetary policy remain extremely positive. What I fear is strong and / or synchronised global economic recovery, which would compete for liquidity currently flowing into stock markets and commodities, at a time when central banks would have little excuse not to tighten monetary conditions.

“Stock markets move in cycles, for which monetary policy is often the crucial influence, not least near turning points. Stock markets are also discounting mechanisms and the better they do now – they are doing very well – the more they will have discounted future economic recovery. Recognising this, more companies will rush to raise capital in the form of IPOs and secondary offerings, adding to the supply of equities which will eventually overwhelm demand as the easy money conditions dry up.

“Today, we remain in what I have previously described as a ’sweet spot’ in terms of opportunity. Enjoy it while it lasts, in the certain knowledge that it won’t last. No market trend ever does. I do not know how long these uptrends in equities and commodities will last and neither does anyone else because the outcome depends on events, not least eventual changes in monetary policy, among the known unknowns. Fortunately, this is something that we can monitor on a daily basis, along with our guiding price charts.”

Source: David Fuller, Fullermoney, January 6, 2010.

MoneyNews: Faber – buy stocks, US investments in 2010
“Choose US investments over emerging markets and buy stocks, not bonds, advises Gloom, Boom and Doom investment letter editor Marc Faber.

“‘My feeling is that the US will outperform emerging economies in the first six months of 2010,’ Faber told CNBC.

“‘Whether the outperformance comes because markets continue to move up or because the S&P goes down less than emerging stock markets … is debatable.’

“Faber believes that putting money into Treasurys is the worst thing investors can do for the long-term.

“‘More forecasters are very negative about Treasury bonds,’ Faber says.

“A year ago, when the yield on 10-year Treasuries dropped to 2.08 percent, the bullish sentiment on bonds was very high, Faber notes. ‘That was the perfect time to short US government bonds,’ he says.

“Government leveraging will continue to cause problems for investors, Faber says, even though the private sector has been de-leveraging.

“‘When it becomes apparent that the economy is not very strong, the Fed will continue to monetize,’ he says, thus causing inflation that will be bad for government bonds but relatively good for equities.

“‘I think 2010 will be a year of capital preservation because I expect a lot of volatility,’ Faber says.”

Source: Julie Crawshaw, MoneyNews, January 4, 2010.

Financial Times: Bill Miller – GDP boost for US stocks
“The US stock market could rise by as much as 20 per cent this year because markets are underestimating potential GDP growth, says Bill Miller, chairman of Legg Mason Capital Management.

“He believes a big restocking of inventories will help drive the US recovery. ‘The fall in industrial output seen in the US has far exceeded the actual drop in demand, the shortfall having been made up from inventories. I expect to see a rapid restocking by US companies that will stimulate a sharp rise in economic growth over several quarters,’ he says.

“The US economy will grow by 2.6 per cent this year, according to consensus estimates, and by 2.7 per cent according to the Federal Reserve – but Mr Miller believes there is a ‘good chance’ that growth will be higher, and possibly as high as 8 per cent.

“He also believes that equities are ‘extremely undervalued’ compared to bonds. He says US stocks are delivering earnings consistently above expectations and nearly always do well in the decade following a period of negative returns. ‘Every time stocks have performed poorly for 10 years, they have performed better than average for the next ten years and have beaten bonds every time by an average of two to one,’ he notes.

“Mr Miller says technology and financials are the sectors most likely to benefit from any upturn.”

Source: Bill Miller, Financial Times, April 2009.

Bespoke: Average P/E ratio by decade
“Even as some would have you believe that you have to be insane to buy stocks heading into 2010, there are many positive factors that investors can point to as reasons to be bullish. However, one that you won’t hear being cited is valuation. Based on trailing earnings, the average P/E ratio of the S&P 500 during the decade that just ended was higher than any other decade in its history. Even after declining since the turn of the century, the average P/E ratio for the ’00s rose to a record high of 20.2, and at the end of December ‘09 it stood at 27.9 (on an operating basis).


“Before rushing to hit the sell button, however, investors should be aware that the currently stratospheric P/E ratio of the S&P 500 is skewed by the negative quarterly results in Q4 2008 ($-0.09). That number will be replaced by an estimate of $16.73 in Q4 ‘09, which would drop the P/E ratio to a still lofty, although relatively more reasonable level of 20.1 times. What the bulls are really banking on, though, is strong results throughout 2010. Based on current forecasts from S&P, analysts are expecting S&P 500 earnings to rise to $74.98 per share in 2010. With the S&P 500 currently trading at 1,130, the P/E ratio on a forward basis comes all the way down to a much more manageable 15 times. Now all the companies have to do is deliver.”

Source: Bespoke, January 5, 2010.

Jeffrey Saut (Raymond James): Lessons
“Last Monday we wrote, ‘As we enter the New Year, we are once again turning cautious because the Treasury market is breaking down (higher rates) and the US dollar is rallying. Therefore, we think it prudent to ‘bank’ some trading profits and hedge some investment positions as we approach the new year.’

“Moreover, one of the lessons we have learned is that the beginning of a new year is often punctuated with head fakes, both on the upside as well as the downside. One of the greatest upside head fakes was in January 1973 when in the first two weeks of that year the DJIA rallied to a new all-time high of 1051.70 before sliding ~20%. While we are clearly not predicting that, what we have indeed experienced since the March ‘lows’ is the second greatest percentage rally (69%), adjusted for time (nine months), since the 1933 rally. Following that 1933 explosion of 116% in just five months came a pretty decent downside correction. Since we tend to be ‘odds players’, prudence suggests some caution is again warranted.”

Source: Jeffrey Saut, Raymond James, January 4, 2010.

Reuters: US stock trading volume hits 19-month low in December
“The volume of stocks traded in the United States hit a 19-month low in December and fell more than 14 percent from 2008 as investors shifted from equities to other assets.

“Average daily volume for the New York Stock Exchange, Nasdaq, NYSE Arca and NYSE Amex fell to 7.4 billion shares in December, down 14.3 percent from November and down 14.6 percent from December 2008, Sandler O’Neil Partners said in a research report on Monday.

“It was the lowest volume since May 2008 when 6.8 billion shares traded hands.” Source: Rodrigo Campos, Reuters, January 4, 2010.

Bespoke: S&P 500 sector technicals
“Below we provide our six-month trading range charts for the S&P 500 and some of its sectors. For each chart, the red zone represents between one and two standard deviations above the 50-day moving average, and vice versa for the green zone. Throughout the entire bull market, the S&P has been moving in an upward sloping trend channel, bouncing from its 50-DMA to the top of its red zone. As shown below, the S&P 500 is currently trading close to extreme overbought territory, but it’s not quite at the level that would suggest an immediate reversal.

“On the most recent rally to new highs, the defensive sectors (Health Care, Utilities, Telecom and Consumer Staples) have traded flat to down, while the cyclical sectors have picked back up. Energy and Materials have really moved up and are now trading at the very top of their ranges. The Financial sector has broken out of its short-term downtrend, and its move has really helped the overall market over the last week. Technology has been and remains in overbought territory, but it has yet to show signs that a pullback is imminent.”


Source: Bespoke, January 6, 2010.

Financial Times: Yen slides on finance minister’s U-turn
“Naoto Kan, Japan’s newly appointed finance minister , abruptly reversed his predecessor’s currency strategy immediately on taking office on Thursday, with his call for a weaker yen provoking an immediate sell-off in global markets.

“Mr Kan used his first press conference to express his support for a weaker yen and further stimulus measures to revive Japan’s economic health in a marked departure from Hirohisa Fujii, who stepped down earlier this week.

“‘It would be good if the yen would weaken a little more,’ said Mr Kan.

“His comments are likely to be welcomed by the business community, which relies heavily on exports.

“The yen, which rose to a high of Y86 against the dollar in late November, on Thursday weakened on Mr Kan’s comments, slipping at one point to Y92.90 against the US dollar.

“Mr Kan noted that many in the business community believed an appropriate level for the yen was about Y95 to the US dollar.

“He said: ‘We have to work to bring the exchange rate to an appropriate level, including co-operating with the Bank of Japan.’

“Mr Kan also suggested there would be pressure on the central bank to ease monetary policy further should the yen strengthen.

“Japan has not intervened in the foreign exchange market since 2004.”

Source: Michiyo Nakamoto, Financial Times, January 7, 2010.

MoneyNews: Eurozone set to collapse amid economic weakness
“The economic weakness of many members of the 16-nation eurozone has raised fears that the monetary union could crumble.

“Portugal, Ireland, Italy, Greece and Spain, the so-called “Piigs”, especially suffer from sluggish economies and burgeoning debt burdens.

“Credit rating agencies recently downgraded Greece and put Spain on credit watch.

“The rubber will meet the road for the eurozone when economic recovery in Northern Europe, particularly Germany and France, requires the European Central Bank (ECB) to raises interest rates.

“The question is whether the Piggs can weather a rate hike, given that their economies are likely to remain sluggish.

“‘If inflation picks up in France and Germany, the smaller economies will be left behind in stagnation and deflation,’ Jordi Gali, head of the Barcelona Center for Research in International Economics, told The New York Times.

“‘Such an asymmetric recovery is pretty likely. And if the ECB raises rates, it could get very ugly.’

“But many experts fear that governments in the weak economies might be reluctant to take the unpleasant steps necessary to restore fiscal prudence.

“And the weak countries can’t count on a bailout from the ECB.

“‘The ECB has no mandate or intention to take into account the situation of a specific country, especially not with regard to public finances,’ Ewald Nowotny, a member of the ECB’s Governing Council, told The Wall Street Journal.”

Source: Dan Weil, MoneyNews, January 5, 2010.

Bespoke: Commodity snapshot
“Below we highlight our trading range charts for a number of commodities. For each chart, the green zone represents between two standard deviations above and below the commodity’s 50-day moving average. Moves above or below the green zone are considered extremely overbought or oversold.

“Most commodities are trading at or near extreme overbought territory at the moment. Both oil and natural gas are right at the top of their trading ranges, and the same goes for platinum, copper and corn. After moving down to the middle of their ranges at the end of 2009, gold and silver have had a strong start to 2010 as well.”


Source: Bespoke, January 6, 2010.

Richard Russell (Dow Theory Letters): Silver – “poor man’s gold”
“They call it ‘the poor man’s gold’. But don’t turn your nose up at silver. The dollar was originally defined in terms of silver. When precious metals are on the rise (as now), silver tends to be seen as a monetary metal. When times are bad, silver is seen as an industrial metal. Silver has a huge number of industrial uses, silver is the best conductor of electricity. Unlike gold, silver is actually used (and used up) in industry. Thus, a large amount of silver is lost every year. In contrast, 85% of all the gold ever mined in all history is still around; it’s in your teeth or in your sweeties’ bracelet or in that ancient Egyptian ring that you see in your local museum.

“Historically, when silver gets going, it tends to make huge percentage moves. I think you can see that from the long-term chart below. For instance, back in November 2008, silver was selling for 8.65 an ounce. Today an ounce of silver is selling for 18.10 an ounce, more than double.

“Silver is now climbing back from a drastic correction, as you can see via the chart below. In December silver hit a high of over 19 dollars an ounce. Back in 1980 (and I remember this well) silver climbed wildly (limit up day after day), and it hit $50 dollars an ounce around January of 1980.

“Silver is now in an erratic bull market. How high it may go I don’t know, but I would not be shocked to see silver ultimately climb above its 1980 price of $50 bucks an ounce. Historically, once ounce of gold will buy around 15 ounces of silver. Today an ounce of gold will buy 62 ounces of silver. Silver compared with gold is dirt-cheap today.

“How to invest in silver? I like the 100 ounce bars if you can find them (they weigh about 8.5 pounds each). Or buy the 10 ounce bars. Or you can buy the exchange traded fund SLV.

“Yesterday, both gold and platinum closed at new highs for the move. Silver is lagging behind, but when silver finally catches up, it may be a stunner. Over the last year the price of silver doubled; gold didn’t perform that well.

“Below I show a point & figure chart of silver. The white metal is now in a well-established rising trend. The upside target is the 21 box. If silver hits the 22 box, that will light the fuse. If silver hits the 22 box, I will view the whole structure that you see on this chart as one huge base.

“To put it briefly, I like silver. Gold has one advantage over silver, every central bank owns some gold, and most want more.”


Source: Richard Russell, The Dow Theory Letters, January 6, 2010.

Financial Times: Chinese demand drives regional recovery
“Asian exports to China soared at the end of last year according to a slew of data released on Thursday [January 7], suggesting that Chinese demand is emerging as a stronger than expected engine of economic recovery in the region.

“The biggest jump came in South Korea, which said December exports to China jumped 94 per cent compared with the same month a year ago. Taiwan reported a 91.2 per cent jump in the value of shipments for December, and Malaysia said exports jumped 52.9 per cent in November from a year earlier.

“The strong demand from China compared with generally falling exports to the US and Japan, although shipments to the European Union were generally higher. Malaysia said exports to the US fell by 13 per cent, and to Japan by nearly 30 per cent.

“Overall export performance was more mixed, with South Korea reporting a rise of 33.67 per cent and Taiwan up 46.9 per cent while Malaysia was down 3.3 per cent.

“Australia said it suffered a 27.5 per cent drop in exports in November from the same period a year earlier, and New Zealand said exports in the same month were down by 16.7 per cent.

“However, economists said it was becoming clear that China’s strong economic growth in 2009 had generated much stronger consumer demand for Asian products than forecast.

“Frederic Neumann, an economist at HSBC in Hong Kong, said the size of the spike in exports to China in Thursday’s data was in part a reflection of the size of the falls in exports as the global financial crisis developed. However, Mr Neumann said there was ‘plenty of evidence’ that Chinese demand for consumer products such as flat television screens had replaced a large part of the falling demand in North America and elsewhere.”

Source: Kevin Brown and Justine Lau, Financial Times, January 7, 2010.

Nationwide: UK house prices up 5.9% over 2009
“House prices rose by a further 0.4% in December, continuing the recent trend of moderate month-on-month increases. The 3 month on 3 month rate of change – a smoother indicator of the near term price trend – dropped from 2.8% in November to 2.1% in December, as house price increases toward the end of the year moderated in comparison to those seen in the summer.

“At £162,103, the average price of a typical UK property has ended the year 5.9% higher than at the end of 2008. Few could have foreseen this development at the start of the year, when the near term price trend was still pointing to a repeat of the double digit annual decline experienced in 2008. Although house prices are still 12.2% lower than their October 2007 cyclical peak, they have now rebounded by an impressive 8.9% since their February 2009 trough.

“Looking ahead into next year, a number of factors appear key to the outlook for house prices. As ever, the prospects for interest rates will be an important driver. Although house prices remain quite high relative to earnings, the low level of interest rates has led to a significant improvement in mortgage affordability that has supported prices. At this stage, it looks like the Bank of England base rate will not increase until at least the second half of 2010, as the Monetary Policy Committee (MPC) will need to see firmer evidence of economic recovery before it considers increasing the cost of borrowing.”


Source: Martin Gahbauer, Nationwide, December 31, 2009.

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