Words from the Investment Wise 2.28.10

Words from the (investment) wise for the week that was (February 22–28, 2010)

As investors vacillated about the impact of developments in Greece, together with the uncertainty of strong fourth-quarter economic data possibly not carrying over to the first quarter, stock markets experienced two sharp sell-offs and two rebound rallies, limping to small gains on Friday but ending the week modestly down.

Renewed fears over Greece’s debt woes, disappointing German business confidence statistics and lower-than-expected US consumer confidence data tempered investor optimism for risky assts, triggering haven demand for government bonds and the Japanese yen.

Fed Chairman Ben Bernanke provided some support for stock markets on Wednesday by indicating in his testimony to the US House Financial Services Committee that the fed fund rate will remain at exceptionally low levels for an extended period. However, the flip side of the coin is his gloomy picture of the economy still battling high unemployment and a weak housing sector.

“Greece hasn’t gotten so much press since 146 BC when the Romans took over,” said Paul Kasriel (Northern Trust). In news after the close of the markets, the Financial Times reported: “Germany’s biggest banks are looking at a rescue plan for Greece under which they would buy Greek debt backed by financial guarantees from Berlin. One senior German bank official said serious thought was being given to a plan for the German government, working through KfW, its development bank, to issue guarantees to banks that bought Greek debt.”


Source: Patrick Blower, Guardian

The past week’s performance of the major asset classes is summarized in the chart below – a set of numbers indicating that a degree of risk aversion has crept back into financial markets. Interestingly, unlike equities, both investment-grade and high-yield corporate bonds ended the week in the black. “We believe investors can capture attractive yields and excess spread in the high-yield market with relatively low default risk,” Andrew Jessop, high-yield portfolio manager at Pimco, said in a note on the company’s website (via MoneyNews).


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.

It was essentially a flat week, with the MSCI World Index declining by 0.1%, but the MSCI Emerging Markets Index managing to eke out a positive return of 0.3%. With the Chinese returning from the lunar holiday, Hong Kong (+3.6%) put in one of the better performances among important markets, whereas mainland China (+1.1%) also closed the week in the black.

Notwithstanding the huge rally since the March lows, only the Chile Stock Market General Index has been able to reclaim its 2007 pre-crisis peak and is now trading 9.4% higher. Mexico could be the next country to eliminate the bear market losses.

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


Top performers among stock markets this week were Ukraine (+4.5%), Greece (+3.7%), Hong Kong (+3.6%), Cyprus (+3.2%) and Thailand (+3.0%). At the bottom end of the performance rankings, countries included Turkey (‑6.8%), Malta (-5.7%), Austria (-5.2%), Argentina (-4.9%) and Latvia (-4.2%). Turkey suffered from tensions between the government and the military. Debt-ridden European countries such as Italy (-3.2%), Spain (-3.2%), Ireland (-3.2%) and Portugal (-2.1%) featured strongly at the bottom end of the performance ranking.

Of the 96 stock markets I keep on my radar screen, 33% recorded gains, 60% showed losses and 7% remained unchanged. The performance map below tells the past week’s somewhat bearish story.

Emerginvest world markets heat map


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

Eight of the ten economic sectors of the S&P 500 Index closed lower for the week, with Financials and Consumer Discretionary the only two sectors not under water. (Who would have guessed the Conference Board’s Consumer Confidence Index would fall to its lowest level since July 2009 on Tuesday?)


Source: US Global Investors – Weekly Investor Alert, February 26, 2010.

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included Vanguard Extended Duration Treasury (EDV) (+4.3%), iShares MSCI Thailand (THD) (+3.9%) and CurrencyShares Japanese Yen (FXY) (+3.1%).

At the bottom end of the performance rankings, ETFs included iShares MSCI Turkey (TUR) (-8.8%), Claymore/MAC Global Solar Energy (TAN) (-7.2%) and United States Natural Gas (UNG) (down 5.1%).

Referring to a regulatory report released on Tuesday by the Federal Deposit Insurance Corp (FDIC), the quote du jour this week comes from Addison Wiggin, co-author of Financial Reckoning Day Fallout and The New Empire of Debt. He said in a column on The Daily Reckoning site: “The FDIC is even more broke than it was three months ago. The fund the FDIC uses to ‘insure’ your bank account went $20.9 billion in the red during the fourth quarter of 2009. That’s more than twice the deficit reported when the fund first entered negative territory in the previous quarter. Incredibly, the FDIC is still trying to reassure us that all is well because it’s collecting three years of advance payments on the annual assessments paid by its member banks. The fees total $45 billion – barely twice the amount of the current deficit. Yeah, we feel better.

“On top of that, the FDIC’s list of ‘problem banks’ grew during the fourth quarter from 552 to 702. That’s the highest number since 1993 (when, we presume, more independently owned banks were around, so it’s worse than it sounds). Hmmm, let’s see. The number grew 27% in just one quarter. At this pace, every bank in the country will be on the problem list by the fourth quarter of 2012. Another tidbit from the FDIC’s report: Bank lending last year dropped at the biggest clip since 1942. Of course, in that year, the entire economy was shifting to a war footing. So it’s safe to say what we’re seeing now is another unprecedented postwar occurrence.”

Next, a quick textual analysis of my week’s reading. This is a way of visualizing word frequencies at a glance. “Bank”, “debt”, “economy”, “Fed”, “rate” and “market” all featured prominently, but it was somewhat surprising to see “China” commanding more media mentions than “Greece”.


The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town when not traveling) are given in the table below. With the exception of the Dow Jones Transportation Index, the Nasdaq Composite Index and the Russell 2000 Index, the indices in the table are all trading below their 50-day moving averages, but all the indices are still above their respective key 200-day moving averages. However, a red light is starting to flash regarding the Shanghai Composite Index, which is within striking distance (20 basis points) of this key support line.

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


Commenting on the technical picture of the S&P 500, Kevin Lane (Fusion IQ) said: “The Index hit minor resistance a few trading sessions back near the 1,112 level. Until this level is taken out the near-term directional bias remains neutral. Lower down, the key level to watch is in the 1,072 area. This support level represents a much more significant uptrend line and if violated would suggest a bigger correction.

“Sentiment indicators are neutral at present, which is a positive, while market breadth remains a mixed bag. Clearly the recent trading activity suggests volatility will be more present in day-to-day trading than over the past few months.”

On the topic of charts, when considering S&P 500 monthly data, going back to 1998, three momentum-type oscillators (RSI, MACD and ROC) all still signal a bullish trend (see chart below). According to Yahoo Finance – Tech Ticker, Barry Ritholtz (The Big Picture) is not as bullish as he was last March when he called the market bottom, but is sticking with stocks. “The easy thing to do now would be to go to cash,” he said, “[But] I rarely find the easy trade is the one that makes you money.” (Incidentally, the long-term chart for US government bonds is in bearish mode.)


Source: StockCharts.com

David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, said: “Let’s face it, the surprise two months into the year is that the stock market is down more than 1% and 10-year Treasury yields are also down 20bps. It is still early in the year to be sure but it also seems clear that the economic data are starting to show some fragility. The S&P 500 has done little more than hover around the 1,100 mark now for six months in what can only be classified as a major topping formation. The VIX index is at 20, not 40; market vane sentiment is closer to 60 than 30; the US dollar is strong, not weak; policies are moving tighter, not easier; and the government is now aiming to curtail the banks whereas a year ago it was all about saving them.

“With a V-shaped earnings recovery already priced in and economic houses, like MacroEconomic Advisors, calling for 4% GDP growth for 2010, it certainly is difficult to highlight where the upside surprises for the market are going to be.”

From across the pond, David Fuller (Fullermoney) adds the following perspective: “Do we have a real crisis today? It is real enough for Southern European countries and obviously heightens sovereign debt concerns from Greece to the USA via the UK, but is this another global crisis? I do not think so, at least not yet although the OECD countries’ problems are far from resolved.

“The loss of upside momentum by most stock markets and many commodities, including precious metals, clearly indicates that global investors have reduced leveraged exposure in the last three months. Whether this is a normal correction (our previously stated 40% possibility) or likely to become a self-feeding and more significant pullback (also a 40% possibility) is hard to gauge, but action near the 200-day moving averages will be revealing. Even in the latter instance, I do not think the global economic background justifies a resumption of bear markets (20% possibility), which were discounting near-depression conditions between 4Q 2008 and 1Q 2009.”

I side with Fuller on his conclusion, but am also cognizant of the 12-month momentum of the S&P 500 narrowly tracking the US GDP-weighted PMI (see graph below). Current levels of the S&P 500 indicate the market is expecting a GDP-weighted PMI in excess of 60.0 vs a current level of 52.3. If the S&P 500 maintains its current levels around 1,100, the 12-month momentum will drop to 39% at the end of March and 27% at the end of April this year. Even this drop in momentum requires the GDP-weighted PMI to rise to 55 and higher. Although not impossible, it seems improbable given the sub-par economic recovery. It can therefore be deduced that the US equity market is somewhat overpriced even if the GDP-weighted PMI should improve to 55. Understandably, Marc Faber suggests (via a Financial Times interview) “investors should make 2010 the year of ‘capital preservation'”.


Source: Plexus Asset Management (based on data from I-Net Bridge).

For more discussion on the economy and financial markets, see my recent posts “Montier: Was it all just a bad dream? Or, ten lessons not learnt“, “Barry Ritholtz sticks with stocks, especially emerging markets“, “Q4 earnings in perspective“, “Face to face with Marc Faber” and “Is the credit malaise really over?” (And do make a point of listening to Donald Coxe’s webcast of February 26, which can be accessed from the sidebar of the Investment Postcards site.)

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“Business sentiment has improved markedly since hitting bottom about a year ago. This improvement has been about the same across the globe, with South Americans somewhat more optimistic and North Americans somewhat less so,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. Businesses are most upbeat when responding to broader questions about current conditions and the outlook into this summer, but remain cautious when responding to specific questions regarding the strength of sales, pricing, inventories and hiring.


Source: Moody’s Economy.com

Meanwhile, the Ifo Business Survey for industry and trade in Germany clouded over somewhat in February. For the first time in ten months, the business climate index has not risen, blaming especially the situation in retailing, which experienced a setback in February. On the whole, the firms have assessed their current business situation somewhat more unfavorably than in the previous month.


Source: Ifo Business Survey, February 23, 2010.

A snapshot of the week’s rather mixed US economic reports is provided below. (Click on the dates to see Northern Trust‘s assessment of the various data releases.)

Friday, February 26
• Existing home sales and inventories disappoint
• Minor revisions of Q4 real GDP

Thursday, February 25
• Have durable goods orders and shipments turned the corner?
• Total continuing claims remain at elevated level

Wednesday, February 24
• Chairman Bernanke repeats “Fed fund rate to remain exceptionally low for an extended period”
• Sales of new homes post new record low
• As Greece goes, so goes the US?

Tuesday, February 23
• Consumer confidence slips in February
• Case-Shiller Home Price Index records seventh monthly gain

Monday, February 22
• Fed’s Yellen underscores that removing monetary accommodation now is inappropriate
• Chicago Fed Index advances in January

Referring to Fed Chairman Bernanke’s testimony, Asha Bangalore (Northern Trust) said: “The most important message from Chairman Bernanke’s testimony is that the federal fund rate will be held at 0%-0.25% for an extended period. In light of the higher discount rate (0.75% vs. 0.50%) announced on February 18, 2010, market participants obtained confirmation from the Chairman that the change in the discount rate was a removal of emergency accommodation put in place to address the financial crisis and not a sign of tightening of the monetary policy stance.”

“I don’t think the Fed dares increase the fed fund or policy rate in the face of unemployment at double-digit type of levels. This is more of a technical maneuver,” Bill Gross of Pimco told Reuters (via MoneyNews).

In related news, the Treasury said on Tuesday that it would bolster its Supplementary Financing Program by selling $200 billion in short-term debt and storing the proceeds at the central bank, thereby helping the Fed remove reserves from the financial system.

Summarizing the growth outlook, Bangalore said: “Going forward, the US economy is predicted to show moderate growth in the first three quarters of 2010 and strong growth in the final three months of 2010, with the virtuous cycle of real and financial recovery working together to lift economic growth.”

Bespoke highlights a daily Life Evaluation Poll conducted by Gallup.com and Healthways in which participants are asked whether they are “thriving”, “struggling” or “suffering”. As shown below, 56% now say they’re thriving, while 41% say they’re struggling (3% are suffering, which is not shown on the chart). “These readings are at just about the widest spread we’ve seen since the markets’ recovery began,” remarked Bespoke.


Source: Bespoke, February 26, 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
Feb 23 9:00 AM Case-Shiller 20-city Index Dec -3.08% -4.5% -3.1% -5.34%
Feb 23 10:00 AM Consumer Confidence Feb 46.0 56.5 55.0 56.5
Feb 24 10:00 AM New Home Sales Jan 309K 325K 354K 348K
Feb 24 10:30 AM Crude Inventories 2/19 3.03M NA NA 3.08M
Feb 25 08:30 AM Initial Claims 02/20 496K 425K 460K 474K
Feb 25 08:30 AM Continuing Claims 02/13 4617K 4570K 4570K 4611K
Feb 25 08:30 AM Durable Orders Jan 3.0% 1.6% 1.5% 1.9%
Feb 25 08:30 AM Durable Goods – ex Transportation Jan -0.6% 0.7% 1.0% 2.0%
Feb 25 10:00 AM FHFA Housing Price Index Dec -1.6% 0.4% 0.4% 0.4%
Feb 26 08:30 AM GDP – second estimate Q4 5.9% 6.0% 5.7% 5.7%
Feb 26 08:30 AM GDP Deflator – second estimate Q4 0.4% 0.6% 0.6% 0.6%
Feb 26 09:45 AM Chicago PMI Feb 62.6 57.5 59.7 61.5
Feb 26 09:55 AM U Michigan Consumer Sentiment – final Feb 73.6 72.7 73.9 73.7
Feb 26 10:00 AM Existing Home Sales Jan 5.05M 5.10M 5.50M 5.44M

Source: Yahoo Finance, February 26, 2010.

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

Next week sees interest rate announcements by the Bank of England (BoE) and the European Central Bank (ECB) (Thursday, March 4). In addition, US economic data reports for the week include the following:

Monday, March 1
• Personal income
• Personal spending
• PCE prices
• Construction spending
• ISM Manufacturing Index

Tuesday, March 2
• Auto sales
• Truck sales

Wednesday, March 3
• Challenger job cuts
• ADP employment
• ISM Services Index
• Fed’s Beige Book

Thursday, March 4
• Jobless claims
• Productivity
• Factory orders
• Pending home sales

Friday, March 5
• Nonfarm payrolls
• Consumer credit

The performance chart obtained from the Wall Street Journal Online shows how different global financial markets performed during the past week.


Source:Wall Street Journal Online, February 26, 2010.

Final words

Sam Stovall, chief investment strategist for Standard & Poor’s Equity Research Services, said: “If everyone is forecasting something, then you know it won’t come true.” (Hat tip: Charles Kirk.) Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist readers of Investment Postcards in guarding against popular (and often wrong) market views.

That’s the way it looks from Cape Town with its sun-drenched days.

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Source: Adam Zyglis, Comics.com

Real World Economics Review Blog: Greenspan, Friedman and Summers win Dynamite Prize in Economics
“Alan Greenspan has been judged the economist most responsible for causing the Global Financial Crisis. He and 2nd and 3rd place finishers Milton Friedman and Larry Summers, have won the first – and hopefully last – Dynamite Prize in Economics.

“They have been judged to be the three economists most responsible for the Global Financial Crisis. More figuratively, they are the three economists most responsible for blowing up the global economy.

“More than 7,500 people voted – most of whom were economists themselves – from the 11,000 subscribers to the real world economics review. With a maximum of three votes per voter, a total of 18,531 votes were cast.

“This blog established the prize in response to attempts by economists to evade responsibility for the crisis by calling it an unpredictable, ‘Black Swan’ event. In reality, the public perception that economic theories and policies helped cause the crisis is correct.”

Source: Real World Economics Review Blog, February 22, 2010.

BCA Research: Sowing the seeds of the next fiscal crisis?
“Mushrooming government indebtedness has reemerged to the forefront as a major issue. “Global policymakers learned from the volatility during the first half of the 20th century: when faced with an adverse economic shock, the natural tendency for a modern economy with leverage is to deflate and undergo an Austrian-style cleansing process. Thus, there is an incentive for authorities to reflate each time economic and financial problems break out, encouraging a further buildup of debt and leverage in the economy (i.e. push today’s problems forward to the next generation).

“We have coined this the Debt Supercycle. Unfortunately, the dramatic increase in the policy response needed to end the current recession suggests that the Debt Supercycle is nearing an end. In fact, we would argue that the household sector in the US, UK, and many parts of the euro area have already moved beyond their natural debt ceilings, due in part by lax bank lending standards in recent years.

“Given that authorities have reached the limit of their ability to convince households to take on more leverage, governments have instead been forced to leverage themselves to prevent a deflationary economic adjustment. In addition, the nature of the synchronized global downturn meant that substantial currency depreciation was not a viable reflation option for policymakers. As such, monetary and fiscal policy had to do the heavy lifting. Sizable deficits were a necessary evil if authorities wanted to avoid a sustained period of debt-deflation.”


Source: BCA Research – Daily Insights, February 26, 2010.

David Fuller (Fullermoney): Concentrate long-term investments in low risk countries
“There has been a great deal of discussion in the financial press about whether Greece will successfully navigate the crisis it now finds itself in, if the Eurozone will survive a sovereign debt default should one occur and if there is a risk of contagion for countries such as the UK, Japan and the US. These are all important questions which we will have definitive answers for in the coming months and years but to my mind there is a more important question that needs to be addressed first.

“All the issues facing these governments are in essence related to a problem with too much debt and leverage and not enough tax receipts to pay it down. The questions so far have focused on how one country or another might survive this crisis but from the perspective of a judge at an international beauty contest do we want to invest in these countries at all since there are plenty more where these problems are relatively minor if they exist at all?

“Commodity producers such as Australia and Canada have come through this crisis comparatively unharmed. Most of the others are primarily in the so-called emerging markets. Brazil is now a net creditor, China has the biggest foreign currency reserves in the world. Large numbers of countries in Latin America and Asia run trade surpluses. If we look at the world with a broader perspective we see clearly where risk and leverage are concentrated.

“The outcome of the major challenges facing the US, UK, Eurozone and Japan are crucial because of the effect they have on the global market. However, we do not have to invest in the debt, currencies or equities of these countries. Others are better equipped to deal with these issues from a position of strength. They have shown to be credible managers of their economies in a truly testing era and it is surely in these countries one should concentrate long-term investments.”

Source: David Fuller, Fullermoney, February 24, 2010.

Financial Times: Experts eye possible Greek bail-out
“As Greece battles to stop its public finances from drowning in debt, technical experts in eurozone capitals are already looking at the shape of a possible bail-out – despite a chorus of governments insisting that no plans for such a move exist.

“Even Berlin has become so worried about the stability of the euro – and of German banks holding Greek debt – that officials have begun toning down Germany’s “No financial aid for Greece” mantra.

“One senior German official said Berlin and other eurozone governments were prepared to lend Athens money or buy its sovereign bonds, should the Greek administration run into trouble rolling over debt on the markets.

“Lorenzo Bini Smaghi, of the European Central Bank’s executive board, told Italian television that it was ‘possible that money will be needed’ to help Greece. But it would be a sum ‘much more limited’ than the figure of about €20bn ($27bn) discussed by eurozone officials this month.

“Athens has about €20bn in debt coming due in April and May, which will need to be refinanced. Eurozone nations hope that current Greek reforms will convince investors to buy its bonds – with the eurozone only covering any shortfall.

“German officials have said any funding gap the zone might have to fill could well prove ‘quite small’. Berlin might push for the symbolism of all euro nations chipping in modest amounts to meet this shortfall, according to these officials.

“A tried-and-tested allocation key under consideration for this approach is based on the gross domestic product and population-weighted shareholdings of the European Central Bank. By this measure, Berlin would cover 28 per cent of Greece’s funding gap, Paris 21 per cent and Rome 18.

“The bigger the Greek funding need, however, the more this would strain other budgets also under pressure in Italy, Spain, Portugal and Ireland. For this reason, a French official said helping Athens could yet be voluntary.

“In a sign that any help would be decided in an ad hoc manner, a German official said measures would be agreed ‘on a case-by-case basis’. It would be up to each country to decide for itself how to structure its contributions.”

Source: Gerrit Wiesmann and Peggy Hollinger, Financial Times, February 23, 2010.

The Wall Street Journal: Greek debt crisis – Athens choked by general strike
“A massive general strike to protest EU-mandated austerity measures closed banks, government offices and post offices, crippling the Greek capital on Wednesday. The Wall Street Journal’s Andy Jordan reports from the streets of Athens.”

Source: The Wall Street Journal, February 24, 2010.

MartinKronicle: Greece and California death match
“The spreads between Greece/German bunds and California/30-yr Treasuries are widening. Investors are demanding more for carrying the risk. The downgrade in CA paper yesterday will give the Greek bonds a run for their Drachmas …

“According to a Reuters report, the spread between 10-year Greek government bonds and the benchmark Euro zone German bunds has risen to an 11-month high of 298 bps, up from 265 the day before. The high is 300 bps set about a year ago. The equivalent for Spanish bonds is trading at 81 bps premium over German bunds.

“According to an article in Bloomberg, the spreads between CA debt and the 30-year bond are also widening and PIMCO was quoted as saying that the CA debt crisis is headed back to disaster levels.

“Bloomberg: ‘A taxable California bond that matures in 2039 traded today for an average yield of 7.79 percent in blocks of more than $1 million, the highest since December 28, according to Municipal Securities Rulemaking Board data. That opened a gap of 3.15 percentage points between California’s bond and 30-year Treasuries, according to Bloomberg data.’

“Yikes …!

“Add to that the fact that S&P downgraded California’s debt rating to AA- from AA … not that I hold S&P in any esteem – I don’t. But the fact is that CA will now have to pay higher coupon payments on the issuance of new debt thanks to the downgrade. They deserved it.”

Source: MartinKronicle, February 24, 2010.

Financial Times: Goldman role in Greek crisis probed
“The US central bank is looking into Goldman Sachs’s role in arranging contentious derivatives trades for Greece, which helped the country to massage its public finances, Ben Bernanke, chairman of the Federal Reserve, revealed on Thursday.

“‘We are looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece,’ Mr Bernanke said, apparently referring to Greek currency transactions structured by Goldman.

“Testifying before Congress, Mr Bernanke also responded to concerns that instability in markets for Greek debt and other securities has been heightened by trading in other derivatives, known as credit default swaps, which compensate investors in case of default.

“Mr Bernanke said default swaps are ‘properly used as hedging instruments’ and that ‘using these instruments in a way that intentionally destabilises a company or a country is counterproductive’.

“The Securities and Exchange Commission is ‘examining potential abuses and destabilising effects related to the use of credit default swaps and other opaque financial products and practices’, said a spokesman.

“Separately, Phil Angelides, chairman of the US Financial Crisis Inquiry Commission, told the Financial Times he was concerned about the practice of creating securities and ‘fully betting against them’ – and about Goldman’s role in particular. Goldman declined to comment.”

Source: Alan Rappeport, Tom Braithwaite and David Oakley, Financial Times, February 25, 2010.

Financial Times: Bernanke signals US rates to be kept low
“US interest rates will remain at exceptionally low levels for an ‘extended period’ in spite of the ‘nascent’ economic recovery, Ben Bernanke, chairman of the Federal Reserve, told Congress on Wednesday.

“Mr Bernanke painted a gloomy picture of the economy, still struggling with high unemployment and a weak housing market. Inflationary pressures, the main driver of tighter monetary policy, were likely to remain ‘subdued’, he said.

“Facing lawmakers for the first time in his second term as Fed chairman, he told the House financial services committee: ‘The Federal Open Market committee continues to anticipate that economic conditions – including low rates of resource utilisation, subdued inflation trends and stable inflation expectations – are likely to warrant exceptionally low levels of the federal funds rate for an extended period.’

“The insistence that rate rises are months away will damp fears that last week’s increase in the discount rate – at which commercial banks can borrow emergency cash from the central bank – from 0.5 per cent to 0.75 per cent heralds a swifter tightening of monetary policy.

“Fed officials, including Mr Bernanke, have indicated it was simply a move to unwind emergency liquidity measures put in place during the crisis, as a result of improving conditions in the financial markets, and not a tightening move. Goldman Sachs economists said it was ‘crystal clear’ the Fed did not anticipate raising rates soon.

“Nevertheless, the Fed this month began to lay out its vision for the sequence of measures that it expects to take to withdraw reserves from the financial system once the economic recovery is sufficiently strong. Although the economy grew at an annualised rate of 5.7 per cent in the fourth quarter of 2009, economists are expecting the pace of growth to slow over the course of the year. The Fed is expecting growth of 3 per cent to 3.5 per cent this year.

“‘A sustained recovery will depend on continued growth in private sector final demand for goods and services,’ said Mr Bernanke.

“Mr Bernanke also addressed the fallout from the financial crisis. He said the US central bank would step up surveillance of financial institutions and agreed that congressional investigators should be allowed to audit the emergency facilities put in place during the crisis.”

Source: James Politi, Financial Times, February 24, 2010.

MoneyNews: Pimco – Fed move isn’t start of tightening cycle
“The Federal Reserve’s surprise move on Thursday to raise the interest rate it charges banks for emergency loans does not mean that a full-fledged tightening cycle has begun, the manager of Pimco, the world’s biggest bond fund, told Reuters.

“‘I don’t think it’s the beginning, really, of a tightening from the standpoint of monetary policy,’ Bill Gross told Reuters soon after the Fed’s decision.

“‘I don’t think it is the beginning of an increase in the fed funds rate or in terms of interest on reserves that has been discussed as well.’

“The US central bank took pains to draw the distinction between the discount rate and its target for the overnight interbank rate, its main monetary policy tool. That rate remains unchanged near zero percent as a fragile US economic recovery struggles to gain traction.

“‘Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities,’ the Fed said in a statement.

“‘The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy,’ it said.

“‘I don’t think the Fed dares increase the fed funds or policy rate in the face of unemployment at double-digit type of levels. This is more of a technical maneuver,’ said Gross.

Source: MoneyNews, February 19, 2010.

Financial Times: Fed efforts boosted by Treasury’s $200 billion debt plan
“The Federal Reserve’s ability to drain excess liquidity from the financial system received a boost on Tuesday when the Treasury revived a plan to sell $200bn in short-term debt and store the proceeds at the central bank.

“The move comes as the Fed lays the groundwork to shrink its balance sheet in preparation for the time when the economy is sufficiently strong to require a tightening of monetary policy.

“By bolstering its Supplementary Financing Programme, the Treasury would help the Fed remove $200bn in reserves from the financial system. Some economists said that this would help bring the Fed’s main interest rate closer to the upper end of its current 0-0.25 per cent target.

“‘This move does mean there will be $200bn fewer reserves in the banking system, which could provide a little bit of lift to the effective fed funds rate,’ said Michael Feroli of JPMorgan. ‘As such, it could be seen as a first step in putting the Fed in position to raise rates.’

“However, the move was described as a ‘purely technical adjustment in liquidity’ by Joseph Abate of Barclays Capital. He said: ‘The $200bn worth of reserves drained … is unlikely to have a noticeable effect on the effective funds rate, which remains locked under 15 basis points.’

“The Fed did not comment on the move, but Ben Bernanke, chairman, could address the issue when he faces Congress on Wednesday. The Treasury programme was introduced during the crisis to help the Fed better manage its balance sheet.

“It had been wound down since last September, when the government’s borrowing capacity ran up against the US debt ceiling. Congress recently agreed to raise the debt ceiling to $1,900bn, making it possible to revive the programme.”

Source: James Politi, Financial Times, February 24, 2010.

TheStreet.com: Stiglitz says beware of double dip
“Joseph Stiglitz, Nobel prize winning economist and the author of Freefall, says the worst effects of the credit crisis may be behind us, but the American economy remains highly vulnerable to a double dip recession.”

Source: TheStreet.com, February 24, 2010.

Asha Bangalore (Northern Trust): Minor revisions of Q4 real GDP
“Real gross domestic product grew at an annual rate 5.9% in the fourth quarter of 2009, slightly higher than the previously reported increase of 5.7%. Upward revisions of inventories, exports, structures, and equipment and software more than offset downward revisions of consumer spending, government spending, and residential investment expenditures to yield a higher headline reading compared with the advance estimate.

“At the cost of reiterating, the fourth quarter headline GDP number is large but not strong because real final sales increased only 1.9% in the fourth quarter, while inventories accounted for nearly seventy percent of the increase in real GDP during the fourth quarter.


“Going forward, the US economy is predicted to show moderate growth in the first three quarters of 2010 and strong growth in the final three months of 2010, with virtuous cycle of real and financial recovery working together to lift economic growth.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 26, 2010.

Asha Bangalore (Northern Trust): Total continuing claims remain at elevated level
“Initial jobless claims rose 22,000 to 496,000 in the week ended February 20. Essentially, initial jobless claims established a bottom in January and have once again resumed an upward trend, which is very worrisome. Continuing claims, which lag initial claims by one week, were virtually steady at 4.617 million and the insured unemployment rate was unchanged at 3.5%.


“Total continuing claims, inclusive of claims under special programs, fell slightly to 10.29 million during the week ended February 6 from 10.56 million in the prior week. Total continuing claims have risen 3.95 million over the past year. The labor market remains the biggest concern of the FOMC, competing closely with the housing market.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 25, 2010.

Clusterstock: The unemployment chart you’ll love and hate
“Here’s an unemployment chart you’ll both love and hate, from Citi’s Steven Wieting.

“As shown below, since 1980, employment (in red) has fallen after corporate profits (in black) have risen, and vice versa. The relationship is very clear.

“Problem is, there’s about a one-year lag between the two trends. This highlights what should simply make sense – companies hire people once they see profits rebounding, and more importantly once they believe that adding more people will lead to higher profits. Still, this fact of economics isn’t fun for the unemployed.

“But here’s the good news. Given the recent rebound in corporate profits the US has already experienced, there is a very high chance that employment will get better over the coming twelve months. One can’t stress enough the fact that employment is a lagging indicator.”


Source: Vincent Fernando and Kamelia Angelova, Clusterstock – Business Insider), February 25, 2010.

Financial Times: US senate moves ahead on $15 billion jobs bill
“The US Senate on Monday voted to move forward on a $15 billion jobs bill proposed by Harry Reid, leader of the Democratic majority in the Senate.

“The 62-30 vote in favour of ending ‘cloture’ prevents a Republican filibuster and came as an exception to the months of gridlock in Congress. It will pave the way for a jobs bill to clear the Senate, just as other critical employment benefits are set to expire.

“Democrats needed to secure two Republican votes to block the filibuster and one came thanks to Scott Brown, making his first vote since he filled Edward Kennedy’s former seat in Massachusetts.

“‘I hope this is the beginning of a new day in the Senate,’ Mr Reid said, invoking Mr Brown by name for his bipartisanship.

“The scaled-back measure is expected to create 250,000 jobs through an array of tax credits and payroll tax exemptions to stimulate hiring. The bill frees businesses from payroll taxes on workers who are hired after more than 60 days of unemployment and gives them a tax credit of $1,000 for new hires that they keep for more than a year.

“The bill also provides funding for highway and transportation projects, allows companies to write-off equipment purchases as expenses and expands the Build America bond scheme to help subsidise school and energy projects.”

Source: Alan Rappeport, Financial Times, February 22, 2010.

Standard and Poors’: Home prices continue to send mixed messages
“Data through December 2009, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of US home prices, show that the US National Home Price Index fell in the fourth quarter of 2009 but has improved in its annual rate of return, as compared to what was reported in the third quarter.


“The chart above depicts the annual returns of the US National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller US National Home Price Index, which covers all nine US census divisions, recorded a 2.5% decline in the fourth quarter of 2009 versus the fourth quarter of 2008. This is a significant improvement over the annual rates reported in the first, second and third quarters of the year, at -19.0%, -14.7% and -8.7%, respectively. In December, the 10-City and 20- City Composites recorded annual declines of 2.4% and 3.1%, respectively. These two indices, which are reported at a monthly frequency, have seen improvements in their annual rates of return every month since the beginning of the year.

“‘As measured by prices, the housing market is definitely in better shape than it was this time last year, as the pace of deterioration has stabilized for now. However, the rate of improvement seen during the summer of 2009 has not been sustained,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s.”

Source: Standard and Poors’, February 23, 2010.

VisualEconomics: Cost of home ownership
“The last three years have seen a significant drop in the cost of housing in the United States; bringing prices back down from once astronomical levels.”


Source: VisualEconomics, February 23, 2010.

Asha Bangalore (Northern Trust): Existing home sales and inventories disappoint
“Sales of all existing homes fell 7.2% to an annual rate of 5.05 million units in January after a 16.2% drop in December. Sales of existing single-family homes declined 6.9% to an annual rate of 4.43 million units. Purchases of existing single-family homes have risen nearly 9.0% from the trough in January 2009. Sales of existing homes fell in all four regions across the nation during January. It appears that the extension of the first-time home buyer tax credit program is yet to translate into increased sales; the program expires in April 2010.


“The median price of an existing single-family home was down 0.4% from a year ago to $163,600. There is a gradual stabilization of home prices visible in latest movements of the median price of an existing single-family home but the recent increase in inventories of unsold homes casts a shadow on projections of further improvements on the price front.

“The seasonally adjusted inventory-sales ratio of single-family existing homes rose to 8.4-month supply during January from a 7.6-month mark in December.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 26, 2010.

Asha Bangalore (Northern Trust): Consumer confidence slips in February
“The Conference Board’s Consumer Confidence Index fell to 46.0 in February from 56.5 in the prior month. This is the lowest since July 2009. Sluggish employment conditions are seen to be a major reason for the loss of confidence in February after a string of three monthly gains. The Present Situation Index (19.4 vs. 25.2 in February) and the Expectations Index (63.8 vs. 77.3 in February) declined in February.

“The number of respondents indicating that ‘jobs are to hard to get’ rose in February (47.7% vs. 46.5% in January), while the number claiming that ‘jobs are plentiful’ fell (3.6% vs. 4.4% in January). The net of these two indexes tracks the unemployment rate closely. The difference between these two indexes widened to 44.1 in February from 42.1 in January, suggesting that the jobless rate is most likely to inch higher in February.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 23, 2010.

Asha Bangalore (Northern Trust): Have durable goods orders and shipments turned the corner?
“The headline number for orders of durable goods in January (+0.3%) is strong. But, shipments of durable goods edged down 0.2% after a 2.4% increase in the prior month. The durable goods numbers always show big swings because of large ticket items. The January increase in orders was lifted by the 126% increase in orders of aircraft, with orders excluding transportation posting a 0.6% drop. One way to sort out the large deviations of month-to-month data is to look at year-to-year changes. On a year-to-year basis, orders (+9.9%) and shipments (+1.5%) of durable goods posted gains in January, after an extended period of declines going back to early-2008. This change in trend is noteworthy and warrants close watching.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 25, 2010.

Financial Times: Foreclosures in the US
“Aline van Duyn, US markets editor of the Financial Times, says that a number of American homeowners whose houses are worth less than their mortgages are choosing to let their homes go into foreclosure and let the banks suffer the losses.”


Source: Financial Times, February 22, 2010.

Clusterstock: Bankers getting paid a lot to sit on their hands and do nothing
Yesterday we pointed you to the latest data from the St. Louis Fed showing that bank lending continues to plunge. Rather than ply businesses with loans, banks are instead opting to hoard cash and buy Treasuries.

“And yet despite the lending shutdown, bonuses are back up, per fresh data out today from the New York Comptroller. In other words, sitting on your hands and doing nothing is a pretty lucrative gig.”


Source: Joe Weisenthal and Kamelia Angelova, Clusterstock – Business Insider, February 23, 2010.

Financial Times: Number of US “problem” banks soars
“The number of problem banks in the US continued to soar in last year’s fourth quarter, hitting their highest level since 1993, according to a regulatory report released on Tuesday.

“The findings by the Federal Deposit Insurance Corp suggest that, although the US economy is on the mend, the financial industry, bedevilled by souring residential and commercial real estate loans, will take longer to recover.

“The FDIC said 702 banks were considered troubled at the end of 2009, up from 552 three months earlier. Problem assets totalled $402.8bn in the final period, compared with $345.9bn in the third quarter. By contrast, Lehman Brothers listed $639bn in assets at the time of its bankruptcy filing in September 2008.

“No longer confined to Wall Street, the financial crisis has cascaded over to regional and community banks that are feeling a disproportionate amount of the pain. ‘The great recession has very much become a Main Street problem,’ said Richard Brown, the FDIC’s chief economist.

“Although bank earnings showed a slight improvement in the fourth quarter, totalling $914m against a $37.8bn loss in the year-ago period, they still remain below historical highs. Any improvement in earnings, the FDIC said, was concentrated among the largest institutions.

“For the full year, banks earned $12.5bn, up from $4.5bn in 2008 but far below the $100bn recorded in 2007.

“Loan losses jumped for the 12th consecutive quarter to total $53bn, an increase of 37 per cent over the year-ago period. On an annualised basis the rate of losses accounted for in the quarter was the highest in more than two decades.

“Losses rose in all significant categories, including residential mortgage loans and credit card debt. One of the fastest growing categories for uncollectable debt was commercial real estate.

“Although the level of bank failures is alarming, it pales against the troubles of the savings and loan crisis. At the height of that meltdown, in 1987, some 2,165 banks were considered troubled and problem assets totalled $833bn.

“But the full weight of the current crunch has yet to be felt. The FDIC took over 140 banks in 2009 and analysts expect more to follow. The FDIC said on Tuesday it set aside another $17.8bn in the fourth quarter for bank failures. It expected total bank failures to cost $100bn from 2008 to 2013.”

Source: Suzanne Kapner, Financial Times, February 23, 2010.

John Authers (Financial Times): US yield curve
“We ignore the yield curve at our peril. That is one of the lessons from the financial implosion that started in 2007, but how do we apply it now?

“The yield curve is the popular name for the spread between the yields on 10-year and two-year Treasury bonds. Usually, investors require a bigger yield to compensate them for the greater risks that come with lending money over a longer term.

“When short-term yields rise above long-term ones, then market jargon holds that the yield curve is “inverted”. This has been a great recession indicator, as it implies the market thinks short-term interest rates must imminently be cut. Each of the past seven recessions was preceded by a brief period when the yield curve was inverted and there has only been one false signal.

“But what happens when the yield curve gets very steep? That is happening now and there are few, if any, precedents. Last week, 10-year yields exceeded two-year ones by 2.94 percentage points, the highest figure since the Federal Reserve’s records for this indicator began in 1976.

“Its previous peaks were at about 2.5 percentage points in October 2003, when a brief bull market in equities was gathering pace, and October 1992, when years of expansion for both markets and the economy lay ahead.

“Should this, then, be regarded as a big reason for optimism? Perhaps not. An implicit bet that rates will rise over the next 10 years is not daring when rates are virtually at zero. Neither is a call for an intermediate economic recovery after a savage recession.

“In any case, the extremes that financial markets have touched in the past few years make it dangerous to read any indicator with too much confidence. But it does seem to suggest that the market is more convinced than economists both that central banks will be raising rates sooner rather than later and that the US economy is enjoying a true recovery.”

Source: John Authers, Financial Times, February 22, 2010.

MoneyNews: Rogers – China will keep dumping US Treasuries
“China will continue to sell US Treasuries in the future, says Jim Rogers, co-founder of the Quantum Fund.

“China will unload more debt as the ‘euro scare’ continues, he said.

“The government reported that appetite for Treasuries declined by the largest amount in December as China reduced its allocation by $34.2 billion to $755.4 billion. Japan made a similar move and lowered its amount by $11.5 billion to $768.8 billion.

“‘I am surprised China has not dropped more,’ Rogers told CNBC.

“The United States should be concerned about this change in investments, he said.

“‘The US should be worried about everyone lightening up – not just China,’ Rogers said.

“Lawrence Summers, director of the White House National Economic Council, said the paring back is not a concern, CNBC reported.

“‘The truth is that these numbers fluctuate and that there’s a wide range of holders of Treasury debt. What’s been very clear from the market responses over the last two years is that the United States is seen as a major source of quality and a place people run to when they’re uncertain,’ he said.

“Other analysts said the amount of US government debt held by the Chinese is likely to be a larger amount since they also buy anonymously via banks in Switzerland, Britain and other countries, the Associated Press reported.

“‘We do not believe that the Chinese are dumping Treasuries. What they are doing is diversifying the channels through which they make these purchases so that it is much more difficult for the market to ascertain what they are doing,’ said Arthur Kroeber, managing director of GaveKal Dragonomics, a Beijing research firm.”

Source: Ellen Chang, MoneyNews, February 25, 2010.

MoneyNews: Pimco – junk bonds may post double digit returns in 2010
“US high-yield bonds could post investment returns in the high single digits to the low double digits this year after their record 58 percent return in 2009, Pimco, the world’s biggest bond fund, said in a new report.

“With yields still attractive and the risk of a financial system collapse largely in the past, ‘we believe investors can capture attractive yields and excess spread in the high-yield market with relatively low default risk,’ Andrew Jessop, high-yield portfolio manager at Pacific Investment Management Co, said in a note on the company’s website.

“High-yield bonds also look attractive compared with equities, which typically depend on faster growth to perform well at this point in the economic cycle, Jessop said.

“However, Pimco’s forecast is that slower economic growth will become the ‘New Normal’ amid broad deleveraging trends, increased regulation and deglobalization, he said.

“‘In that environment, many investors believe equities could continue to underperform high-yield’ bonds, he said.”

Source: MoneyNews, February 24, 2010.

Bespoke: Country and region ETFs
“Below we highlight the recent action in a number of country and region ETFs. For each ETF, we provide its 5-day price change, its percentage from its 50-day moving average, and its percentage overbought or oversold. An ETF is overbought if it’s trading more than one standard deviation above its 50-day, and the percentage number shown indicates how far the ETF is trading above its overbought level. One standard deviation below represents the oversold level.

“As we highlighted in our prior post, the US has been outperforming emerging markets recently. Where the various country ETFs are trading versus their 50-days shows a similar trend. The S&P 500 tracking SPY ETF is one of just four ETFs highlighted below trading above its 50-day moving average. The only other country ETFs trading above their 50-days are Australia (EWA), Canada (EWC), and Mexico (EWW). All of North America is doing well. If we look at the various regional ETFs (Europe, Emerging Markets, Asia, etc.), all of them are still trading below their 50-days.”


Source: Bespoke, February 22, 2010.

Bespoke: Welcome back – USA back in style
“In the charts below, we show the performance of ETFs which track the S&P 500 (SPY) and the MSCI Emerging Market Index (EEM). The third chart shows the relative strength of emerging markets versus the S&P 500. In the relative strength chart, a rising line indicates that emerging markets are outperforming the US, while a falling line indicates the US is outperforming.

“Based on the performances of both ETFs over the last several years, investors have become conditioned to the theme that when equities are rising, emerging markets typically outperform the US. On the other side of the coin, during periods when equities are weak, US stocks have typically held up better than their emerging market peers. As seen on the relative strength chart, the only period where US stocks meaningfully outperformed emerging markets was during the credit crisis (red line in all three charts).

“The existence of this long-term trend makes recent developments all the more interesting. Since the recent lows in early February, equity markets around the world have all recovered to some degree. However, unlike prior rebounds, emerging markets have been underperforming. In fact, while the major US averages (S&P 500, DJIA and Nasdaq) closed above their 50-day averages on Friday, all four BRIC countries (Brazil, Russia, India, and China) had yet to achieve that milestone. Whether or not this trend fizzles out or is an early warning sign for the global economy is debatable, but in either case, emerging market investors would be wise to be on alert.”


Source: Bespoke, February 22, 2010.

Bespoke: S&P 500 sector stats
“As shown below, Consumer Discretionary and Consumer Staples are currently trading the farthest above their 50-day moving averages of the ten sectors. The other two sectors currently above their 50-days are Industrials and Financials. Below we provide the year-to-date change, % from 50-DMA, dividend yield, P/E ratio, price to sales ratio, and price to book ratio for the various sectors. Across the board, we use red to green as the color code from lowest to highest, but obviously for ratios, the lower the better.

“While it used to have one of the highest yields, the Financial sector currently has the second lowest yield at 1.15%. It also has the highest P/E ratio at 66.44, but it has the lowest price to book at 1.14. Consumer Staples, Consumer Discretionary and Telecom have the lowest price to sales ratios, while Technology has the highest. Technology also has the highest price to book.”


Source: Bespoke, February 24, 2010.

Bespoke: Retail sector closes at new bull market high
“Yesterday’s weak Consumer Confidence report has many worried that the consumer is still down in the dumps. If so, no one has told the consumer sectors of the stocks market. As shown below, the S&P 500 Retail sector actually made a new bull market high today. The S&P 500 still has a ways to go to get back to new highs. While the Consumer Confidence report is indicating a weak consumer, the market still seems to be predicting strength from the consumer. If it weren’t for groups like retail, the overall market would be doing worse.”


Source: Bespoke, February 24, 2010.

Bespoke: Percentage of stocks above 50-day moving averages
“As shown below, 55% of stocks in the S&P 500 are currently trading above their 50-day moving averages. The index itself is still trading below its 50-day, so breadth in this case is strong. Looking at sectors, Energy and Consumer Discretionary have the highest percentage of stocks above their 50-days at 69%. Consumer Staples ranks third at 64%. Technology, Materials, Utilities, and Telecom are the four sectors with readings that are still below 50%.”


Source: Bespoke, February 19, 2010.

Bespoke: Final earnings season stats
“The fourth quarter earnings season came to an end yesterday with Wal-Mart’s report. Below we highlight the final earnings and revenue beat rate for all US companies that reported this earnings season. For the third quarter in a row, 68% of companies beat earnings estimates. The revenue beat rate was really strong this quarter at 70% – the highest reading since Q4 ’04. Does this put the ‘strong bottom line, but weak top line’ bearish argument to rest?”

27-02-10-16 27-02-10-17

Source: Bespoke, February 19, 2010.

MoneyNews: Biggs – US, Asian stocks will rally higher
“Stocks have further room to rise, thanks to buoyant global economic growth, says Barton Biggs, managing partner at hedge fund firm Traxis Partners.

“‘There is every reason to believe the US is in a strong recovery, and Asia is in a very strong recovery,’ he says.

“While Europe’s growth has been a bit disappointing, the Greek crisis could actually help economies on the continent by pushing the euro down, he told Bloomberg.

“‘A little weakness in the euro is probably good for European exports and for the European economy.’

“Biggs thinks the European Union is handling the Greek situation properly.

“‘The Europeans sent the right message, saying if you can convince us you’re going to practice some discipline, then we’ll take care of you. And I think that’s going to happen.’

“Biggs also approves of China’s steps to deflate its credit bubble.

“‘The Chinese authorities are doing the right thing in terms of gradually tightening. … In all probability China is going to have a soft landing.’

“So what does all this mean for stocks?

“‘On balance, … I’m pretty bullish here,’ Biggs said.”

Source: Dan Weil, MoneyNews, February 22, 2010.

BCA Research: Hot money flows are driving the US dollar trend
“Recent data shows that speculative flows have been a major driver of the bounce in the dollar, especially versus the euro. ‘Hot money’ positions have now reached levels where marginal dollar buyers will be increasingly scarce. For the dollar’s recovery to persist and to be a genuine cyclical advance, it needs the tailwind of long term capital inflows.

“Foreign flows into US equities and Treasury bonds have accelerated smartly and net sales of agency bonds have come to a halt. But capital flows should be analyzed alongside trade and current account deficit positions. While foreign portfolio flows into the US are improving, the US trade account is deteriorating anew. Moreover, capital outflows by US-based investors have resumed. The sum of net long term portfolio inflows and the trade deficit, a monthly proxy for the basic balance, remains well below the 2002 – 2007 average, which was a period of steady dollar weakness.

“Over the coming months, the cyclical economic recovery and the record low national savings rate should keep the US current account deficit on a widening path. This will make it difficult for the basic balance to improve. Indeed, the healthiest environment for the dollar is when the current account deficit is financed by private sector capital inflows. This is typically a sign of strong US growth and attractive expected returns.

“History shows that whenever the US becomes reliant on foreign monetary authorities, the dollar has been under pressure. Foreign reserve accumulation can prevent a dollar crash, but it has never led to sustainable dollar strength. Bottom line: Trends in long term capital flows suggest that the dollar is not yet in a sustainable bull trend.”


Source: BCA Research, February 25, 2010.

MoneyNews: Soros – euro’s future in question even if Greece saved
“A makeshift assistance should be enough to rescue Greece but bigger problems facing Europe would leave the future of the euro currency in question, billionaire investor George Soros said.

“Writing in the Financial Times, Soros said what the European Union needed was more intrusive monitoring and institutional arrangements for conditional assistance.

“He said a well organized euro bond market was desirable.

“‘A makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland. Together they constitute too large of a portion of euro land to he helped in this way,’ Soros said.

“‘The survival of Greece would still leave the future of the euro in question.’

“Greece’s deficit swelled to 12.7 percent of gross domestic product in 2009, way above the EU’s cap of 3 percent.

“Greece has pledged to reduce its budget deficit to 8.7 percent in 2010.”

Source: MoneyNews, February 22, 2010.

Bespoke: Commodity snapshot
“Below we highlight the year-to-date change for ten key commodities. As shown, orange juice has gotten off to a nice start (+13.15%), while natural gas has once again resumed its seemingly perpetual decline (-13.75%). Platinum is the second best performing commodity shown with a gain of 5.34%, followed by gold at +1.59%, and oil at +0.34%. While gold and platinum are up in 2010, silver is down 2.69%.”


Source: Bespoke, February 26, 2010.

Reuters: India seen as potential buyer for IMF gold
“India’s central bank, which has increased its gold holdings to diversify its reserves, looks set to be a buyer again when the International Monetary Fund begins selling 191.3 tonnes of the precious metal amid volatility in major currencies.

“The uncertain outlook for two of the world’s major reserve currencies – the dollar and euro – provides a spur for central banks, including India’s, to buy gold. India’s gold holdings lag those of major economies despite a big purchase in October.

“‘India is no stranger to gold. They are gearing up for growth and want to recalibrate their reserves,’ said Mark Pervan, senior commodities analyst at ANZ.

“‘They can’t lift their gold holdings from domestic output, unlike China. And they have shown an appetite to buy in the past.’

“Reserve Bank of India officials declined to comment on their gold plans but some said the central bank considered gold to be a safe investment strategy.

“The IMF said last Wednesday it would soon begin selling the gold in the open market in a phased manner to avoid disrupting the market.

“The sale is part of an IMF programme announced last year to sell a total of 403.3 tonnes of gold, or about one-eighth of its total stock.

“China, with about $1.6 trillion in reserves, is a producer of gold and is unlikely to buy the gold being offered by the IMF, the official China Daily reported on Wednesday.”

Source: Abhijit Neogy and Suvashree Dey Choudhury, Reuters, February 24, 2010.

BusinessWeek: Soros more than doubled gold ETF stake in Q4
“Billionaire George Soros’s Soros Fund Management LLC more than doubled its holding in the biggest gold exchange-traded fund in the fourth quarter after bullion advanced 8.9 percent to a record.

“The $25 billion New York-based firm became the fourth-largest holder in the SPDR Gold Trust, adding 3.728 million shares valued at $421 million, according to a filing with the US Securities and Exchange Commission yesterday. Its investment was worth about $663 million, the fund’s largest single investment, as of December 31.

“Soros joined China Investment Corp. and central banks including those in China and India in acquiring gold. China Investment, the $300 billion sovereign wealth fund based in Beijing, took a 1.45 million-share stake in the SPDR Gold Trust worth $155.6 million, according to a SEC 13F filing posted on February 5.

“SEC filings are done quarterly, with a 45-day lag, so Soros could have sold some or all of the position since then. Soros, speaking last month at the World Economic Forum in Davos, called gold the ‘ultimate asset bubble’ and said the price could tumble, according to a report in the UK’s Daily Telegraph newspaper.”

Source: Katherine Burton and Glenys Sim, BusinessWeek, February 17, 2010.

MoneyNews: Credit Suisse – gold set to surge to $1,227
“Credit Suisse analyst David Sneddon says the price of gold is poised to move sharply higher.

“‘If we look at the (rising) momentum chart … it suggests to us that price should follow suit,” he told CNBC.

“‘We think gold is going all the way back up to $1,227.’

“Gold denominated in euros shows a much more bullish position than denominated in dollars, Sneddon says. ‘Gold in euros has moved to an all time high with all the euro weakness that’s been going on,’ Sneddon observes.

“Gold priced in euros reached a record today as European Union finance ministers failed to agree on measures to help Greece reduce its budget deficit, Bloomberg reports.

“The precious metal climbed to a four-week high in New York, before paring gains, on speculation that wider Greek budget deficits will spur demand for the metal as an alternative to holding currency.”

Source: Julie Crawshaw, MoneyNews, February 23, 2010.

Financial Times: China taps more Saudi crude than US
“Saudi Arabia’s oil exports to the US last year sank below 1m barrels a day for the first time in two decades just as China’s purchases climbed above that level, highlighting a shift in the geopolitics of oil from west to east.

“The drop in US demand for oil from the kingdom, traditionally one of its primary sources, is the result of overall lower energy consumption but also greater reliance on imports from Canada and Africa.

“China’s economic growth, meanwhile, is prompting Beijing to buy more Saudi oil, a trend Riyadh has encouraged through refinery joint ventures.

“‘China offers demand security, something that for a long time the oil-producing countries including Saudi Arabia have called for,’ said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh. ‘As global demand has been picking up in the east … Saudi Arabia has been looking east.’

“Barack Obama, US president, wants to reduce US dependence on foreign oil and encourage renewable fuels. Meanwhile, Saudi Arabia wants stable markets for its oil reserves.

“The divergence will provide the backdrop as Steven Chu, US energy secretary, visits Riyadh on Monday. His agenda reflects Washington’s focus, with an emphasis on technology research rather than oil politics.”

Source: Gregory Meyer, Financial Times, February 21, 2010.

Financial Times: Harsh winter hits European recovery hopes
“Severe winter weather could have hit economic growth significantly in continental Europe, and especially Germany, at the start of this year, dealing another blow to the region’s recovery hopes.

“Disruption in the construction, retail and leisure industries caused by exceptionally low temperatures and persistent snow is likely to have set back further an economic turnround that had already shown signs of losing momentum in the final months of last year – before the bitter weather took grip.

“In Germany, growth in the first quarter of this year could have been reduced 0.3 percentage points, according to Frankfurt-based Commerzbank. January’s weather was the coldest since 1987 and the 12th coldest January since 1900, according to the German weather service.

“Axel Weber, Bundesbank president, told Reuters this month that German gross domestic product ‘could move sideways or even contract slightly in the first quarter’.

“Jörg Krämer, Commerzbank’s chief economist, said, however, that lost business could be made up, and ‘people’s perceptions of the performance of the German economy are driven by the data on manufacturing – that is, excluding construction’.

“Purchasing managers’ indices on Friday showed that German manufacturing ‘grew strongly’ in February, he added.”

Source: Ralph Atkins, Financial Times, February 21, 2010.

Nationwide: House prices slip in the winter snow during February
“The price of a typical UK property fell by a seasonally adjusted 1.0% month-on-month (m/m) in February, ending a strong run of nine consecutive monthly increases. The relatively smoother three month on three month rate of inflation remained positive at +1.6%, though this is down from +2.0% in January and a peak of +3.7% in September 2009. The annual rate of price inflation still managed to increase from 8.6% to 9.2% year-on-year, as this month’s fall was smaller than the 1.5% m/m decline recorded in February 2009. The average price of a typical property sold in the UK during February was £161,320.

“There is evidence from a range of indicators that the market may have lost momentum in early 2010 as the stamp duty holiday ended and house hunters were obstructed by the icy weather. New buyer enquiries dropped sharply in the New Year and there was also an associated drop in the number of new mortgages taken out by homebuyers in January. This drop in demand seems to have fed into agreed prices during February.

“Judging from the fall in retail sales during January, however, the housing market does not appear to be the only sector of the economy to have experienced a setback related to adverse weather and the expiry of economic stimulus measures. At this stage, it is difficult to gauge how much of the drop in housing activity is attributable to one-off factors and therefore whether February’s fall in prices is just a temporary blip or the start of a new trend.”


Source: Nationwide, February 26, 2010.

Nouriel Roubini (Forbes): Easy money in China
“When will Beijing tighten monetary policy?

“A credit-fueled investment boom successfully boosted China’s growth to 8.7% in 2009, but cheap money drove up asset prices as well, especially in property markets. As China’s output gap closes, loose money is now set to become inflationary, particularly if China’s potential growth rate has come down slightly, as we think it has. The People’s Bank of China (PBoC) has twice hiked banks’ required reserve ratios (RRR) in 2010, following a return to net liquidity reductions through open-market operations in October 2009, but we suspect that the tightening moves have had little effect. China’s monetary policy has shifted toward a neutral stance in recent months, but it will have to tighten further if inflation and the property bubble are to be contained.

“China has not yet started to tighten liquidity significantly, nor has it laid out a clear path for its exit from the extraordinarily loose monetary conditions put in place at the end of 2008. The recent RRR hike, which came into effect on Feb. 25, will drain just over 300 billion renminbi (RMB) in liquidity, but in the first two weeks of February, the PBoC injected a net RMB 508 billion into the banking system through open-market operations to ensure that banks had enough cash on hand for last week’s Chinese New Year holiday. It is widely expected that the bank will drain this liquidity after the holiday, and the RMB300 billion withdrawn through the RRR hike will prove helpful but insufficient in this effort. Tuesday’s RMB 17 billion one-year bill sale suggests that the central bank may be waiting to see the effect of the RRR hike before moving to a more aggressive tightening stance. It will be difficult, however, for the central bank to tighten very much, even if it had the political backing to do so.

“Other sources of liquidity make this task harder. There are RMB 1.2 trillion in central bank bills and repurchase agreements set to expire in the next two months. In March alone, RMB 680 billion in bills will expire, more than double the RMB 290 billion monthly average over the past four months. Banks are already thought to be holding about 1.5% of deposits in additional excess reserves at the PBoC, dulling the impact of the RRR hike even further.

“The political will to tighten monetary conditions looks weak in China, particularly concerning any appreciation of the RMB. On Monday President Hu Jintao headed a Politburo meeting on economic issues that reiterated the ‘active’ fiscal and ‘moderately loose’ monetary policies put in place at the end of 2008. On March 5 Premier Wen Jiabao will present the government’s work plan to the National People’s Congress (nominally China’s highest government authority), likely reiterating this stance.

“Still, we expect the gradual tightening of monetary policy will continue in the coming weeks and months. Rising inflationary pressures are likely to push China’s policymakers to tighten monetary conditions in Q2. This will cause some pain to important interest groups this year, and in our view, policymakers will look to distribute the pain, including by allowing higher consumer inflation.”

Click here for the full article.

Source: Nouriel Roubini, Adam Wolfe and Rachel Ziemba, Forbes, February 25, 2010.

Financial Times: Japan exports jump on Asian recovery
“Strong shipments to Asia helped Japan report the biggest increase in exports in almost 30 years in January, underlining the strength of the country’s economic recovery.

“The value of exports increased 40.9 per cent last month from a year earlier, the fastest pace since February 1980, according to the Ministry of Finance. The increase, however, has been helped by a plunge in exports in the same period a year ago as a result of the global financial crisis.

“Shipments to Asia, which accounted for more than half of total exports, were up 68.1 per cent on the previous year while exports to China, its biggest trading partner, rose 79.9 per cent.

“Like other Asian economies, Japan has benefited from the robust recovery of China, which spurred demand for everything from cars to cement.

“In January, shipments of motor vehicles were up 342.8 per cent while the value of auto parts sales rose 156.6 per cent.

“China’s expanding manufacturing sectors also led to strong demand for chemicals from Japan, which jumped 107.5 per cent, and machinery, which rose 68.8 per cent.

“Japan’s trade data came after Taiwan and Thailand reported unexpectedly strong economic growth this week due to solid exports to China. Taiwanese exports to China, its biggest trading partner, rose 45 per cent year-on-year in the fourth quarter. In Thailand, January’s exports to China grew 94 per cent year-on-year.

“Economists warned that the pace of increase in exports was likely to moderate in the coming months.

“‘Fiscal stimulus programs that supported auto exports in 2009 have now expired in China, the US and EU economies. The boost from inventory adjustment abroad is also beginning to wane,’ said Nikhilesh Bhattacharyya at Moody’s Economy.com.

“‘This should result in slower growth in exports, which would be reflective of the weak growth now being seen in advanced economies across the globe,’ he said.

“In January, imports rose for the first time since October 2008, rising 8.6 per cent. Japan posted a trade surplus of Y85.2bn last month.”

Source: Justine Lau, Financial Times, February 24, 2010.

Financial Times: Toyota’s damaged reputation
“Spencer Jakab, Lex columnist of the Financial Times, says Toyota’s slow response to addressing safety problems brought the world’s largest carmaker to its knees.”


Source: Financial Times, February 24, 2010.

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