Shrugging off some lingering reminders of the credit crisis and recession, investors last week marked the one-year anniversary of the bear market low by pushing many benchmark equity indices to cycle highs.
Wall Street scaled 17-month highs on the back of easing concerns of sovereign debt defaults and increased hopes for a global economic recovery as the US dollar pulled back and the CBOE Volatility (VIX) Index approached 22-month lows. The Index is also referred to as the “fear gauge” of US stock markets and is used as a contrary indicator that moves inversely to equity prices, as seen in the chart below where it is plotted against the S&P 500 Index.
Meanwhile, US Senate Banking Committee chairman Christopher Dodd plans to introduce a revised version of a financial regulatory reform bill on Monday. Dodd had hoped to release a bipartisan bill but has been unable to do so. Not a moment too soon, as a 2,200-page report by Anton Valukas, appointed by a US court to probe the reasons for Lehman’s failure in September 2008, raised serious questions about the bank’s top management, including former CEO Dick Fuld, and auditors Ernst & Young, reported the Financial Times.
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 taking has crept back into financial markets. Interestingly, similar to a number of stock market indices, investment-grade corporate bonds also scaled fresh cycle peaks, whereas high-yield bonds are testing their January highs. Although yields on US government bonds did not change much on the week, the bond market was actually quite strong in light of the US Treasury being able to sell $74 billion in 3-, 10- and 30-year Notes and Bonds at lower-than-expected yields. Fears of further monetary tightening in China weighed on the Shanghai Composite Index (shown in the table of global stock market performance lower down) and commodities. Gold and silver were also out of favor. (Click here for Adam Hewison’s (INO.com) latest technical analysis of the outlook for gold bullion.)
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 cyclical bull market that commenced on March 9, 2009 celebrated its first anniversary with gains across a broad front. The MSCI World Index and the MSCI Emerging Markets Index gained 1.4% and 1.8% respectively. Among mature markets, Japan (+3.7%) reached its highest close in seven weeks in expectation that further easing of monetary policy by the Bank of Japan (BoJ) on Wednesday will weaken the yen and boost exporters. The only weak spots were a few emerging markets such as China (-0.6%), Russia (-0.3%) and Venezuela (-0.1%).
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 9.3% higher. Mexico and Israel could be the next countries to eliminate the bear market losses. The Dow Jones Industrial Index and the S&P 500 Index are still 25.0% and 26.5% respectively down on their October 2007 bull market peaks.
All the major US indices are back in the black for 2010 to date. The small-cap Russell 2000 Index, a clear leader among the indices, has registered 20 out of 23 up-days since the low of February 8.
Click here or on the table below for a larger image.
Top performers among the entire spectrum of stock markets this week were Kenya (+8.3%), Jamaica (+6.5%), Sweden (+5.4%), Nigeria (+5.3%) and Hungary (+4.6%). Debt-burdened Greece’s austerity plans gained favor with investors, pushing the Athex Composite Share Price Index up by +3.7 for the week. At the bottom end of the performance rankings, countries included Nepal (_3.4%), Bangladesh (-2.3%), Macedonia (-1.6%), Peru (-1.5%) and Botswana (-1.4%).
Of the 94 stock markets I keep on my radar screen, 74% recorded gains, 21% showed losses and 5% remained unchanged. The performance map below tells the past week’s mostly bullish story.
Emerginvest world markets heat map
Seven of the ten economic sectors of the S&P 500 Index closed higher for the week, with defensive sectors Health Care, Consumer Staples and Utilities the only ones under water.
Source: US Global Investors – Weekly Investor Alert, March 12, 2010.
John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included iShares MSCI Sweden (EWD) (+5.3), Claymore/Delta Global Shipping (SEA) (+5.0%), Market Vectors Indonesia (IDX) (+5.0%), First Trust Amex Biotech (FBT) (+4.5%), Claymore/NYSE Arca Airline (FAA) (+3.9%) and iShares Cohen & Steers Realty Majors (ICF) (+3.9%).
At the bottom end of the performance rankings, ETFs included iPath DJ AIG Sugar (SGG) (-12.2%), United States Natural Gas (UNG) (-4.7%), iPath DJ AIG Natural Gas (GAZ) (-4.5%), ProShares Short Financials (SEF) (-4.1%) and ProShares Short Emerging Markets (EUM) (-2.8%).
The table below, courtesy of Bespoke, highlights the performance of key ETFs across all asset classes over the last month, six months and year.
“Over the last year, just three ETFs shown are down – Natural Gas (UNG) at _48%, 7-10 Year Treasuries (IEF) at -4%, and 20+ Year Treasuries (TLT) at _13%. The best-performing ETF shown over the last year has been Russia (RSX) with a gain of 175%. India (INP) ranks second with a gain of 165%, and the Financial sector ETF (XLF) third with a gain of 144%,” said the report.
Source: Bespoke, March 9, 2010.
Referring to the ballooning US budget deficit, the quote du jour this week comes from 85-year-old Richard Russell, La Jolla-based author of the Dow Theory Letters. He said: “The estimates of budget deficits are so huge that they defy the ability of the average citizen to comprehend them. As the US continues to create more dollars, at some point our foreign creditors are going to want higher returns (rate) before they are willing to make loans to the US. Rising rates would be an extreme danger to the US. Not only would they hurt business. Rising interest rates mean a rising cost of carrying the national debt. The process of compounding the cost of the national debt would send US finances into a ‘death spiral’.
“I think institutional investors are holding off on buying stocks because they don’t see stocks as safe long-term holdings. Big money investors are looking ahead to higher interest rates. That combined with current high valuations for stocks constitutes a red flag for seasoned investors. The key here is probably the action of the bond market, and particularly long-dated Treasury bonds. The 30-year T-bonds would be particularly sensitive to Treasury financing looking years ahead.
“It is still not clear how the US is going to finance its enormous national debt. Reneging on the debt is unthinkable. To raise taxes and at the same time cut down on spending is almost an impossibility. That leaves inflation as the most probable answer. As soon as our creditors realize our ‘way out’ is inflation, they will halt their process of lending to the US, or at least halt lending at current low, low rates.”
Elsewhere, The New York Times reported that “the White House and Congressional leaders put Democrats on notice on Friday that they would push ahead next week toward climactic votes on the health care legislation.”
Next, a quick textual analysis of my week’s reading. This is a way of visualizing word frequencies at a glance. The usual suspects such as “bank”, “China”, “debt”, “economy”, “Fed”, “market”, “policy” and “rates” featured prominently, with “Greece” taking a back seat after its prominence over the past few weeks.
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 Shanghai Composite Index, the indices in the table are all trading above their 50- and 200-day moving averages.
The table provides the February lows for the various indices as these must hold in order for the cyclical bull market to remain intact. Importantly, although the Shanghai Composite Index is trading a little below its key moving averages, it is still above the February low. On the upside, a break above 3,097 is required to again put the Index on a bullish path.
The Dow Jones Transportation Index, the Nasdaq Composite Index and the Russell 2000 Index all made new cycle highs during the week, with the S&P 500 closing at exactly the same level as its January high and the Dow Jones Industrial Index still 100 points short. (The fact that the Transports recorded a new high but not the Industrials represents a so-called Dow Theory non-confirmation.) However, the indices still have more work to do in order to reach pre-Lehman levels – 1,250 in the case of the S&P 500 (i.e. a gain of 8.7% from here).
Click here or on the table below for a larger image.
Using Fibonacci retracement lines, the S&P 500 is now testing the 62% retracement line drawn from the May 2008 peak to the March 2009 bottom (see purple lines). According to John Murphy (StockCharts.com), a break of this key upside target raises the possibility that the Index could retrace 62% of the entire bear market that started in the fourth quarter of 2007, in which case the potential upside target is 1,232 (see green lines).
Also commenting on the technical picture of the S&P 500, Kevin Lane (Fusion IQ) said: “Currently individual investor allocations towards equities are slightly below the mean, which puts us in a zone where, though reduced, buying power is still ample. With buying power relatively strong and the AAII Bull Sentiment Survey still at a relatively neutral reading, it’s hard to see a big correction here. What may be a likely scenario is as follows: the market continues to move up and investors, even the non-believers, start chasing stocks, putting their last bit of buying power into the market.”
Bill King (The King Report) believes the stock market could make some kind of top in the next 3-6 weeks. “The recovery rally is stretched, the Fed is scheduled to end its monetization this month, volume is contracting, the usual small cap-tech rally has accelerated and April 30 is the end of the best seasonal rally period; expiration is next week and Q1 performance gaming looms,” he said. “But most importantly, March and April often contain important reversals or significant declines for stocks. Curfew hour is approaching.”
From London, David Fuller (Fullermoney) adds the following perspective: “All technical evidence to date suggests we have seen a normal correction to the cyclical bull market’s trend mean represented by rising 200-day moving averages. The only minor negative is that persistent rallies have replaced short-term oversold conditions with short-term overbought readings. If this matters beyond brief pauses, we would see it in the form of downward dynamics and failed upside breaks from trading ranges. However, a more important factor is likely to be the months spent by most equity indices in ranging consolidations, as they gradually worked their way over to their rising moving average mean. In the absence of downward dynamics, perhaps caused by some currently unexpected fright, stock markets remain capable of running on the upside.”
On a somewhat longer-term horizon, Fuller identifies a number of possible warning signals to look out for: “1) Strong economic growth competes for capital and invites monetary tightening by central banks; 2) strong growth and too much speculation would lift oil prices over the low $80s highs for this cycle to date, towards headwind levels of $100 or more; 3) US 10-year Treasury yields above 4% would be an advance warning but the real danger area is above 5%; 4) a very weak USD could undermine confidence but this is clearly not a threat today.”
Although the fat lady has not yet made her appearance to signal the end of the bull cycle, the steepness of the nascent rally, together with resistance in the area of the January highs, could result in stock markets consolidating in order to work off a short-term overbought condition. On the fundamental front, tighter money does not necessarily spell a declining stock market, but turning off the “juice” will certainly remove a tailwind, making earnings growth the key determinant for generating further gains (especially in light of stretched valuations).
For more discussion on the economy and financial markets, see my recent posts “Video feast: Make Markets Be Markets“, “Stock market is overvalued, overbought and overbullish, according to Hussman“, “Technical talk: Hard to see a big correction here“, “Interview: James Montier on value investing“, “Interview: James Montier on behavioral investing“, “Stock markets – celebrating one year of gains, but only Chile above 2007 peak” and “Q&A on emerging markets with Mark Mobuis“. (And do make a point of listening to Donald Coxe’s webcast of March 12, which can be accessed from the sidebar of the Investment Postcards site.)
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“There has been little change in global business confidence since the beginning of this year. Sentiment remains consistent with only a modest global economic recovery. Businesses are upbeat when broadly assessing current conditions and the outlook through this summer, but remain stubbornly cautious in their assessment of sales strength, hiring and inventories,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. South Americans are the most upbeat and North Americans the most nervous. Confidence is strongest among financial and business services firms and weakest among those working in real estate and government. Manufacturing firms are in between.
Source: Moody’s Economy.com
Referring to the precarious debt situation of many countries, Mohamed El-Erian, co-chief investment officer of Pimco, said on the company’s website: “Every once in a while, the world is faced with a major economic development that is ill-understood at first and dismissed as of limited relevance, and which then catches governments, companies and households unawares.”
As seen in the chart below (courtesy of US Global Investors), the sovereign debt-to-GDP ratio is much worse for the G-20 largest developed economies (about 100%) than for the 20 most important emerging markets (approximately 40%). The G-20 ratio is forecast to increase by another 20% over the next few years, while the emerging countries’ ratio is expected to decline as a result of smaller budget deficits.
Source: US Global Investors – Investor Alert, March 12, 2010.
Although developed markets still have higher sovereign credit ratings (left axis) than emerging markets (right axis), the ratings of emerging markets are improving, while those of developed markets are worsening significantly.
Source: US Global Investors – Investor Alert, March 12, 2010.
Back to El-Erian who said: “Governments naturally aspire to overcome bad debt dynamics through the orderly (and relatively painless) combination of growth and a willingness on the part of the private sector to maintain and extend holdings of government debt. Such an outcome, however, faces considerable headwinds in a world of unusually high unemployment, muted growth dynamics, persistently large deficits and regulatory uncertainty.
“Countries will thus be forced to make difficult decisions relating to higher taxation and lower spending. If these do not materialize on a timely basis, the universe of likely outcomes will expand to include inflating out of excessive debt and, in the extreme, default and confiscation.”
A snapshot of the week’s US economic reports is provided below. (Click the links to see Northern Trust‘s assessment of the various data releases.)
Friday, March 12, 2010
• Strength of February retail sales impressive, but Q1 consumer spending could show only tepid gain
• Rebound in business inventory accumulation in store for 2010?
• University of Michigan Consumer Sentiment Index again edges down
Thursday, March 11, 2010
• Flow of funds: Net worth of households grew, household debt reduction continues, net lending remains a challenge
• International trade: Decline in oil and auto imports account for narrowing of trade gap
• Total continuing claims holding at elevated level
Wednesday, March 10, 2010
• Budget deficits: The challenge ahead in a picture
• Wholesale inventories: Inventory-sales ratio at record low
Considering the Fed’s Beige Book (released the week before last), David Rosenberg (Gluskin Sheff & Associates) said: “The Beige Book is very useful in terms of its timeliness and granularity to the sector level. I always make a note to check and see which industries are seeing positive and negative momentum. In the latest Beige Book the list of positives was longer than I have seen in at least the last two years (twice as many positive sectors as there were negatives).
“The positive mentions are: steel, natural gas, tech (especially semiconductors), software/information services, housing (entry level), tourism, staffing firms, chemical manufacturing, rail transports, airlines (fares stabilizing, leisure and business demand improving), heavy machinery (especially mining and agriculture equipment), plastic products, health care services, negative mentions, commercial real estate, banking, commercial aircraft, automotive, coal and petrochemicals.”
A majority of economists in the National Association of Business Economists’ semi-annual survey expressed the opinion, as reported by MoneyNews, that a rise in interest rates was both likely and appropriate in the next several months. “I’m a little worried that the extended period language [used in the Fed’s statements] is conveying too much of a particular date to markets about interest rates,” added St. Louis Federal Reserve Bank President James Bullard.
Pimco’s co-chief investment officer and founder, Bill Gross, on the other hand, said he was skeptical of the economy’s ability to grow without the government programs and that it was possible for “some of the Fed’s liquidity programs to come back” if recovery was uncertain, according to CNBC reports (via MoneyNews). “When debt to GDP reaches 90%, as it looks like it will, growth slows and bad things happen. That’s the potential going forward, not a default,” he said.
Bill King is of the opinion that “the FOMC meeting next Tuesday will certify or annul the scheduled termination of quantitative easing (QE) – the monetization of mortgage-backed securities (MBS) and agencies – on March 31. The bubble meisters must also address the issue of keeping interest rates low ‘for an extended period of time’. This rhetoric is causing internecine fighting within the Fed. The financial center districts want to keep the juice flowing. Non-financial district presidents are more hawkish and concerned about inflation.”
Moving across the pond, amidst debt concerns regarding the PIIGS countries (Portugal, Ireland, Iceland, Greece and Spain), the European Union released a report on Friday showing Eurozone industrial production had increased in January at the highest rate since the start of records in 1990.
Further afield, Chinese exports increased by 45.7% in February on a year-ago basis, eclipsing forecasts and providing evidence of a strong economy. However, China’s inflation rate also rose significantly in February, registering a 2.5% increase from a year before – the highest in 16 months.
According to US Global Investors, the latest inflation figure surpassed the one-year deposit rate of 2.25%. Negative real interest rates may provide an additional incentive to drive asset prices higher, increasing the likelihood of the Chinese central bank raising interest rates from a five-year low.
Source: US Global Investors – Investor Alert, March 12, 2010.
On the question of exiting from monetary stimulus, the chart below shows Citi’s estimates (via US Global Investors) of upcoming rate increases in emerging countries in 2010. Higher rates are on the cards for countries where inflation pressures are building, notably Brazil and Turkey.
Source: US Global Investors – Investor Alert, March 12, 2010.
Week’s economic reports
|Date||Time (ET)||Statistic||For||Actual||Briefing Forecast||Market Expects||Prior|
|Mar 10||10:00 AM||Wholesale Inventories||Jan||-0.2%||-0.1%||0.2%||-1.0%|
|Mar 10||10:30 AM||Crude Inventories||03/06||1.43M||NA||NA||4.03M|
|Mar 10||02:00 PM||Treasury Budget||Feb||-$220.9B||-$223.0B||-$222.0B||-$42.6B|
|Mar 11||08:30 AM||Continuing Claims||2/27||4558K||4550K||4500K||4521K|
|Mar 11||08:30 AM||Initial Claims||03/06||462K||445K||460K||468K|
|Mar 11||08:30 AM||Trade Balance||Jan||-$37.3B||-$42.5B||-$41.0B||-$39.9B|
|Mar 11||12:00 PM||Flow of Funds||Q4||–||–||–||–|
|Mar 12||08:30 AM||Retail Sales||Feb||0.3%||-0.2%||-0.2%||0.1%|
|Mar 12||08:30 AM||Retail Sales ex auto||Feb||0.8%||0.2%||0.1%||0.5%|
|Mar 12||09:55 AM||Michigan Sentiment||Mar||72.5||74.6||74.0||73.6|
|Mar 12||10:00 AM||Business Inventories||Jan||0.0%||0.0%||0.1%||-0.2%|
Source: Yahoo Finance, March 12, 2010.
Next week sees interest rate announcements by the Federal Open Market Committee (FOMC) (Tuesday, March 16) and Bank of Japan (BoJ) (Wednesday, March 17). In addition, US economic data reports for the week include the following:
Monday, March 15
• Empire Manufacturing Survey
• Net long-term TIC flows
• Capacity utilization
• Industrial production
Tuesday, March 16
• Building permits
• Housing starts
• Import and export prices
Wednesday, March 17
Thursday, March 18
• Jobless claims
• Current account balance
• Leading indicators
• Philadelphia Fed
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.
Warren Buffett said: “The person that turns over the most rocks wins the game. And that’s always been my philosophy.” (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 to “turn over many rocks”, i.e. research matters properly in order to take prudent investment decisions.
That’s the way it looks from Cape Town (where a blogger is finishing off this post in order to celebrate his birthday for the rest of Sunday, while Lance Armstrong and over 40,000 cyclists are battling a stiff wind in the 2010 Cape Argus cycle race).
Source: John Darkow, Comics.com, March 5, 2010.
The Wall Street Journal: What was Lehman hiding?
A 2,200-page report on pre-collapse Lehman Brothers raises serious questions about Enron-style accounting, Peter Lattman reports on the News Hub panel.
Source: The Wall Street Journal, March 12, 2010.
Financial Times: New York ties with London for finance crown
“London has lost its crown as the pre-eminent home of banking and finance, as it tied for the first time with New York in the latest ranking of financial centres.
“Fears about a regulatory backlash and new taxes drove down London’s score by 14 points to tie with New York at 775 points, in the Global Financial Centres Index compiled by Z/Yen for the City of London Corporation.
“London was one of only four cities to lose points in the semi-annual ranking, which combines a survey of financial professionals with factors such as office rental rates, airport satisfaction and transport. New York’s score rose by only one point.
“Asian cities continue to rise in the ranking of 75 global centres. Hong Kong and Singapore posted double-digit gains in third and fourth place and the gap between London and New York and the rest of the world is at its narrowest since the survey began in 2007.
“‘This research is a wake-up call for decision-makers,’ said Stuart Fraser, policy chairman for the City of London Corporation, which promotes the UK financial services sector and provides local services. ‘You can’t take this route [of bashing banks and bankers] without endangering the competitiveness of London.’
“New York fared better than London for business environment, availability of people and infrastructure, even though those participating in the survey agreed that New York had taken the bigger hit from the financial crisis.
“The most recent rankings were based on surveys taken from July to December 2009, when discussion of tougher regulation and higher taxes in the UK was at fever pitch.”
Source: Brooke Masters, Financial Times, March 12, 2010.
David Rosenberg (Gluskin Sheff & Associates): What’s beige and what isn’t
“The Fed’s Beige Book is very useful in terms of its timeliness (information taken from mid-January to February 22) and granularity to the sector level. I always make a note to check and see which industries are seeing positive and negative momentum. In the latest Beige Book the list of positives was longer than I have seen in at least the last two years (twice as many positive sectors as there were negatives). Although, the number of Districts reporting improved economic conditions did fall to 9 from 10 in the prior report published on January 13th.
“In the latest Fed Beige Book, looking at the industry breakdown, we see that the list of positive outweighed the negatives. The positive mentions are:
Tech (especially semiconductors)
Housing (entry level)
Airlines (fares stabilizing, leisure and business demand improving)
Heavy machinery (especially mining and agriculture equipment)
Health care services
Commercial real estate
Source: David Rosenberg, Gluskin Sheff & Associates, March 5, 2010.
MoneyNews: Fed’s Bullard impatient about low rate pledge for “extended period”
“A second senior Federal Reserve official has joined the ranks of those doubting whether the Fed should continue to commit to hold rates exceptionally low for an extended period, a sign pressures are building to drop the wording.
“‘I’m a little worried that the extended period language is conveying too much of a particular date to markets about … interest rates,” St. Louis Federal Reserve Bank President James Bullard recently told reporters before speaking on a panel organized by St. Cloud State University.
“‘I think the extended period language, to the extent it’s dictating a particular time horizon, is not what the committee wants to do,” said Bullard, a voter on the Fed’s interest-rate setting panel. ‘And that’s making me a little less patient with the extended period language.’
“Bullard’s stance allies him with Kansas City Fed Bank President Thomas Hoenig, who dissented at the central bank’s January meeting, saying economic conditions have improved sufficiently to drop the promise. Both are voters this year on the 10-strong policy-setting Federal Open Market Committee.
“Most policymakers want to maintain the pledge and the Fed is expected to renew it at its meeting this month. Discarding it would signal that the Fed could be within several months of raising borrowing costs.”
Source: MoneyNews, March 8, 2010.
MoneyNews: Gross – Fed will have to support economy if weakness remains
“The Federal Reserve might continue to buy mortgage-backed securities and take other measures to inject liquidity into a still ailing economy, says Bill Gross, co-chief investment officer and founder of Pimco and manager of the world’s largest bond fund.
“Many of the Fed’s liquidity programs are set to expire at the end of March, but monetary authorities might consider renewing such measures because growth won’t be strong enough without them.
“‘These things have all been very critical but let’s face it – they’re expiring at the end of March,’ Gross says. ‘The critical question … is do we really need Uncle Sam and the check writing to continue?’
“Gross says he is skeptical of the economy’s ability to grow without the government programs and adds it’s possible for ‘some of these programs to come back’ if recovery is uncertain, CNBC reports.
“He said sees economic struggles continuing over a three- to five-year period – and even as long as 10 years, depending on circumstances.”
Source: Forrest Jones, MoneyNews, March 8, 2010.
MoneyNews: Former Fed Gov. Heller – double dip recession in cards
“The economy is headed back down, thanks to the exploding budget deficit, which will send interest rates soaring, says former Federal Reserve Gov. Robert Heller.
“‘A double dip recession is still very much in the cards,’ the now retired he says.
“‘The big elephant in the room that nobody talks about is the huge federal deficit, and that will eventually force up interest rates,’ Heller told CNBC.
“The deficit totaled $1.4 trillion last year and is expected to register about the same amount this year.
“‘As interest rates go up, it will kill both the business and consumer recovery,’ Heller said.
“‘Therefore, the economy is likely to go down again. Sooner or later we’ll see a spike in interest rates, and that’s the danger awaiting investors.'”
Source: Dan Weil, MoneyNews, March 5, 2010.
Bloomberg: Pimco’s El-Erian says public finance shock may deepen
“Mohamed El-Erian, whose company runs the world’s biggest mutual fund, said deteriorating public finances may affect the global economy more than is currently realized.
“‘The importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood,’ El-Erian, co-chief investment officer at Pacific Investment Management Co., wrote in an article on the Financial Times website. The potential damage from increased government borrowings is ‘at present being viewed primarily – and excessively – through the narrow prism of Greece.’
“Governments may have to raise taxes and slash spending to cope with swelling deficits after borrowing unprecedented amounts to stave off the global financial crisis, said El-Erian, who shares his job title with Bill Gross. A failure to carry out fiscal measures in time would raise the possibility of governments seeking to eliminate excessive debt through inflation or default, he said.
“Pimco has said debt strains in Greece, Portugal and Spain underscore its view that 2010 will be a year of slower-than- average growth, and predicts there will be a shrinking global role for the US economy.”
Click here for the full article.
Source: Garfield Reynolds, Bloomberg, March 11, 2010.
Bloomberg: Obama spending plan underestimates deficits, budget office says
“President Barack Obama’s budget proposal would create bigger deficits than advertised every year of the next decade, with the shortfalls totaling $1.2 trillion more than the administration projected, according to the Congressional Budget Office.
“The nonpartisan agency said yesterday the deficit will remain above 4 percent of the nation’s gross domestic product for the foreseeable future while the publicly held debt will zoom to $20.3 trillion, amounting to 90 percent of GDP by 2020. By then, interest payments on the debt will have quadrupled to more than $900 billion annually, the report said.
“Deficits between 2011 and 2020 would total $9.76 trillion, the CBO said.
“Economists generally consider deficits topping 3 percent of GDP to be unsustainable because that means government debt is growing faster than the ability to pay back the money.
“‘The news today from CBO is clear: The president’s budget will continue to lead our nation into a fiscal catastrophe – an ever worse one than the president’s own numbers suggest,’ Representative Paul Ryan of Wisconsin, the top Republican on the House Budget Committee, said yesterday.
“White House Office of Management and Budget spokesman Kenneth Baer said the report ‘highlights how sensitive and uncertain budget projections are’.
“Baer also said, ‘What is certain is that the irresponsibility of the past put the country on an unsustainable fiscal trajectory.’
“The CBO report is designed to give Congress an independent assessment of the administration’s budget request. The difference between the two outlooks is largely attributable to varying economic assumptions that affect projections of how quickly tax revenues will pour into the Treasury.
“Revenues will be about $2 trillion less than the administration projects, while spending will be lower by about $600 billion, according to the CBO report.”
Source: Brian Faler, Bloomberg, March 6, 2010.
Bespoke: The deficit blob
“Yesterday’s release of the monthly budget statement showed that the Federal government took in $108 billion and spent $328 billion, for a total monthly deficit of $221 billion. This marks the single largest monthly deficit reading in the history of the United States. The charts below show Federal Government revenues, spending, and deficits on a twelve month rolling basis. Not surprisingly, at a level of $1.48 trillion, this level is also at a record.
“With the stock market bottom more than a year in the past, and the economy showing clear signs of recovery, there is now widespread agreement that the US economy is emerging from crisis and no longer on the brink of collapse. For nearly two years now, Americans have been told by both Administrations that increased government spending was needed medicine to take the economy off of life support. Now that the economy is no longer on the brink, how much longer will Americans, and more importantly, the markets, accept this line of reasoning?”
Source: Bespoke, March 11, 2010.
MoneyNews: Romer – deficit a problem but don’t stop spending
“The gaping US budget deficit is cause for concern but clamping down on spending immediately would be ‘pound foolish’ and derail the recovery, a top White House economic adviser said Tuesday.
“Christina Romer, who heads the Council of Economic Advisers, said cutting back now ‘would inevitably nip the nascent economic recovery in the bud – just as fiscal and monetary contraction in 1936 and 1937 led to a second severe recession before the recovery from the Great Depression was complete.’
“Romer, in a speech to the National Association for Business Economics, also said President Barack Obama’s $787 billion stimulus package had been successful in pulling the economy out of a deep recession.
“However, she said additional measures were necessary to bring the jobless rate down from the current level of 9.7 percent, which she called ‘a terrible number by any metric’.
“Romer said Obama’s job creation proposals – a hiring tax credit, additional aid for cash-strapped states, and providing capital to small banks – would help to bring down the jobless rate although she acknowledged that the economy probably would not grow fast enough to quickly close the labor gap.”
Source: MoneyNews, March 9, 2010.
Richard Russell (Dow Theory Letters): Heading for inflation or deflation?
“It’s hard to believe, but there’s no consensus opinion on whether we’re headed for inflation or deflation. The fact is that the US national debt is now over $12 trillion. If the Treasury and the Fed just stare at this figure and don’t do anything the compounding interest on $12 trillion will ‘eat us up alive’. That’s the deflation part of the story. If the Fed and the administration cut back on the bail-out and stimulus programs, the US will probably sink back into an even more severe recession.
“The number one problem on the administration’s collective minds is the chronic unemployment that seems to be imbedded in the guts of the nation. The main ambition of every politician is to get reelected. Nobody’s going to get reelected while almost 20% of the voters in his district can’t find a job. So the problem for the Obama crowd is – how to create jobs. I believe their prescription for job-creation is ‘more inflation’. More printing of Federal Reserve Notes means that the banks will have even more money that they don’t want to lend. Thus, small business can’t get loans, and unemployment remains high.
“The reckless creation of fiat money is basically inflationary, but the trade-off is that the National Debt increases. Is there any painless way out of this predicament? None that I can figure out. With $12 trillion in national debt, the US must try to inflate the debt away or renege on it. Reneging on the debt is unthinkable, which leaves the inflation strategy. The problem must be addressed, since if it is not, the compounding factor will simply make the problem that much more intractable.
“The question becomes, will inflation produce more jobs? It was tried before during the Carter years, and the answer is that increased inflation does not guarantee more jobs.
“What about a lower dollar? A lower dollar helps US exports, but a lower dollar presents other problems. In the old days it was said that ‘we owe the debt to ourselves, so that it’s not a problem’. But today a large portion of our debt is owed to our friends overseas, and a lower dollar is the last thing they want to see.
“So what’s the argument for coming deflation? In my opinion, a collapse in the stock market and a severe consumer strike. A cutback on dollar production and a halt to the bail-out and stimulus strategy would also be very deflationary.
“The bottom line is that nothing has been decided yet, which is why the stock market has been acting so ‘spooky’. In the meantime, unemployment continues to be the main headache for the administration and with unemployment comes a consumer strike on spending. As Oliver Hardy would say to Stan Laurel, ‘A fine mess you got us in.’ Yes, indeed.
“Inflation or deflation or both. We’ll know when it hits. And we will survive.
“Meanwhile, the so-called ‘Greatest Generation’ is passing on into history. There aren’t a lot of the old guys and gals left. Maybe it’s time for a new ‘Greatest Generation’.”
Source: Richard Russell, Dow Theory Letters, March 5, 2010.
Asha Bangalore (Northern Trust): Flow of funds – net worth of households grew, household debt reduction continues
“Net worth of households increased $682 billion to $54 trillion in the fourth quarter of 2009. In 2009, net worth of households moved up $2.8 trillion following a $13.1 trillion loss on 2008. The gains in equity prices in 2009 more than offset the losses of real estate holdings (-$905 billion) of households. There has been an 11.7% increase in household net worth from the trough in the first quarter of 2009.
“Although households experienced an increase in their wealth during 2009, they have significantly cut back on borrowing. In the fourth quarter of 2009, household net borrowing fell $54.4 billion, putting the annual decline at nearly $237 billion. The significant pace of debt reduction is a big negative for consumer spending.
“At the same time, net lending in the economy continues to be problematic. Net lending fell at annual rate of $577 billion in the fourth quarter vs. $361 billion drop in the third quarter. Self-sustaining economic growth is unlikely to occur if this situation persists in 2010.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 11, 2010.
Asha Bangalore (Northern Trust): International trade – decline in oil and auto imports account for narrowing of trade gap
“The trade deficit narrowed to $37.29 billion in January from a revised $39.9 billion deficit in December 2009. Exports and imports of goods and services dropped in January. Inflation adjusted exports of goods declined 1.6% and that of imports fell 3.1%.
“Exports of food (-2.3%), autos (-5.6%0, and capital goods excluding autos (-2.6%) accounted for a large part of the weakness in exports. On the imports side, autos (-8.0%), petroleum (-3.1%), and consumer goods excluding autos (-2.6%) posted the significant declines. The real trade deficit of goods narrowed to $41.0 billion in January from $43.8 billion in December. However, the January reading of the real trade deficit nearly matches the fourth quarter average, implying that international trade will have a positive effect on real GDP in the first quarter if the trade gap narrows noticeably in February and March.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 11, 2010.
Asha Bangalore (Northern Trust): Rebound in inventory accumulation in store for 2010?
“Total business inventories held steady in January. Factory inventories increased 0.2% in January, while wholesale and retail inventories dropped 0.2% and 0.1%, respectively. Total business sales advanced 0.6% during January, after a 1.00% increase in the prior month.
“The inventory-sales ratio of the business sector was down one notch to 1.25 in January; the record low for this ratio is 1.24 set in 2005. As the economy gathers momentum, inventories are projected to make a sizable contribution to real GDP, which could be in the first-half of 2010 or later in the year. The timing is unclear but it is nearly certain that an inventory accumulation led spike in real GDP is in store for 2010.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 12, 2010.
Asha Bangalore (Northern Trust): Total continuing claims holding at elevated level
“Initial jobless claims fell 6,000 to 462,000 during the week ended March 6. The four-week moving average of initial jobless claims is up nearly 8,000 from a low of 469,000 in February. Continuing jobless claims rose 37,000 to 4.558 million and the insured unemployment rate held steady at 3.5%.
“Total continuing jobless claims, inclusive of those under special programs, edged down slightly to 10.2 million during the week ended February 20; these claims have held at over 10 million for eleven consecutive weeks. A meaningful decline of these claims should signal that labor market conditions are indeed improving.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 11, 2010.
Asha Bangalore (Northern Trust): Strength of February retail sales impressive
“Retail sales increased 0.3% in February, after a downwardly revised 0.1% increase in January (previously reported as a 0.5% increase) and a 0.2% drop in December (prior estimate was 0.1% decline). Excluding gasoline and autos, retail sales advanced 0.9% in February reflecting gains in sales of furniture (+0.7%), apparel (+0.6%), electronics and appliances (+3.7%), sporting goods (+1.2%), and general merchandise (+1.0%).
“However, the January-February data of retail sales show a smaller increase in retail sales compared with the fourth quarter tally. Unless consumer outlays on services and March retail sales are significantly strong, the gain in consumer spending during the first quarter is most likely to be smaller than the fourth quarter’s annualized increase of 1.7%.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 12, 2010.
MoneyNews: Obama may pay homeowners to sell at loss
“The Obama administration, which has been trying to keep defaulting owners in their homes, reportedly will start paying some of them to leave under a new program that would let owners sell for less than they owe and will give them a little cash to boot.
“The new program implemented by President Barack Obama reportedly will allow homeowners to make short sales and receive a payment from the government to do so. A short sale occurs when someone sells his or her house for less than the value of the mortgage.
“With five million households behind on their mortgages, the Obama administration faces loud cries for more assistance. Its $75 billion mortgage modification plan hasn’t helped many homeowners.
“The new program, which takes effect April 5, makes mortgage lenders accept the short sales, which means they won’t be paid back the full amount of their loans, The New York Times reports.
“To entice all parties to participate, servicing banks will receive $1,000 for the first mortgage and another $1,000 for the second if there is one. That’s the same payment as in the mortgage modification plan.
“The new angle is $1,500 in ‘relocation assistance’ for the homeowner.
“‘We want to streamline and standardize the short sale process to make it much easier on the borrower and much easier on the lender,’ said Seth Wheeler, a Treasury senior adviser.
“But lenders emphasize that participating homeowners won’t have it easy.
“‘This is not an opportunity for the customer to just walk away,’ J. K. Huey of Wells Fargo told The Times.
“‘If someone doesn’t come to us saying, ‘I’ve done everything I can, I used all my savings, I borrowed money and, by the way, I’m losing my job and moving to another city, and have all the documentation,’ We’re not going to do a short sale.'”
Source: Dan Weil, MoneyNews, March 9, 2010.
Bloomberg: Fannie, Freddie ask banks to eat soured mortgages
“Fannie Mae and Freddie Mac may force lenders including Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.
“That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says US banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the US government, stuck the four biggest US banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.
“The surge shows lenders are still paying the price for lax standards three years after mortgage markets collapsed under record defaults. Fannie Mae and Freddie Mac are looking for more faulty loans to return after suffering $202 billion of losses since 2007, and banks may have to go along, since the two US-owned firms now buy at least 70 percent of new mortgages.
“‘If you want to originate mortgages and keep that pipeline running, you have to deal with the push-backs,’ said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, and former examiner for the Federal Reserve. ‘It doesn’t matter how much you hate Fannie and Freddie.’
“Freddie Mac forced lenders to buy back $4.1 billion of mortgages last year, almost triple the amount in 2008, according to a Feb. 26 filing. As of Dec. 31, Freddie Mac had another $4 billion outstanding loan-purchase demands that lenders hadn’t met, according to the filing. Fannie Mae didn’t disclose the amount of its loan-repurchase demands. Both firms were seized by the government in 2008 to stave off their collapse.”
Source: Bradley Keoun, Bloomberg, March 5, 2010.
Financial Times: Big bank oversight to stay with Fed
“Banks with more than $100bn of assets will be overseen by the US Federal Reserve in a regulatory reform plan that represents a partial victory for the central bank after months of attacks in Congress.
“Chris Dodd, the Senate banking committee chairman, had proposed hiving off all bank supervision to a single regulator but is set to propose this week that the 23 largest institutions stay under the Fed’s oversight, according to people familiar with the plans.
“At issue over the weekend was the regulation of several hundred state chartered institutions that also want to remain under the Fed’s supervision.
“While attention has been focused on argument between Democrats and Republicans over the powers and location of new consumer protection functions, which may also be housed within the Fed, other elements of regulatory reform – deemed more important by many institutions and policymakers – are close to fruition.
“A new ‘resolution’ regime to deal with failing, but systemically important, institutions would allow the government to wind up a company quickly to avoid contagion spreading through the financial system.
“But in a concession to Republican fears about giving government too much power over business, a bankruptcy judge would provide checks and balances.
“The regime is designed to prevent a repeat of the costly bail-out of AIG or the damaging bankruptcy of Lehman Brothers.
“But Democrats have had to come up with a complex system that incorporates a role for the judiciary to meet Republican concerns, while also limiting the time and scope of a judge’s intervention to prevent an unruly process that infects the entire financial system.
“The Fed’s retention of authority over the biggest banks is partly a result of demands by Tim Geithner, Treasury secretary and former president of the New York Fed, who has told senators that only the central bank is qualified to oversee the core of the system.”
Source: Tom Braithwaite, Financial Times, March 7, 2010.
The Wall Street Journal: Cracking down on swaps
“Following Greece’s economic crisis, European leaders are considering banning credit-default swaps, WSJ Brussels bureau chief Stephen Fidler reports on the News Hub.”
Source: The Wall Street Journal, March 10, 2010.
Financial Times: France and UK seek hedge fund deal
“Gordon Brown and Nicolas Sarkozy will on Friday try to hammer out a compromise deal over European Union reforms that the US and UK believe could damage the hedge fund and private equity industries.
“The British prime minister shares the concerns of Tim Geithner, US treasury secretary, that a draft EU directive to introduce tighter regulatory controls could impose new barriers to business.
“London believes that French cultural opposition to hedge funds lies behind the drive to clamp down on the operation of ‘alternative investment funds’. British officials say Mr Brown will discuss the issue when he meets the French president in London on Friday, ahead of an EU summit this month.
“The debate over the shape of financial regulation and the EU directive has raised transatlantic tensions.
“Mr Geithner, in a letter to Michel Barnier, Europe’s internal market commissioner, voiced concern about ‘various proposals that would discriminate against US firms’.
“The US has stopped short of threatening retaliatory action. However, if the directive becomes law in its current form, Europe-based fund managers could face reprisals in the US Congress for what is being seen as an attempt to dictate the global regulatory landscape.
“Senior EU officials hit back on Thursday at the US criticism. A spokesman for Michel Barnier, the new EU internal market commissioner who is responsible for financial services regulation and to whom Mr Geithner addressed his concerns, said that the EU decision to act on hedge funds was in line with a G20 decision to reinforce transparency in the financial system.
“Britain, Europe’s biggest centre for hedge funds, is leading opposition to aspects of the directive, which it fears could impede the operations of funds based in London.”
Source: George Parker, Sam Jones, Nikki Tait and Tom Braithwaite, Financial Times, March 11, 2010.
Financial Times: Eurozone eyes IMF-style fund
“Germany and France are planning to launch a sweeping new initiative to reinforce economic co-operation and surveillance within the eurozone, including the establishment of a European Monetary Fund, according to senior government officials.
“Their intention is to set up the rules and tools to prevent any recurrence of instability in the eurozone stemming from the indebtedness of a single member state, such as Greece.
“The first details of the plan, including support for an EMF modelled on the International Monetary Fund, were revealed at the weekend by Wolfgang Schäuble, the German finance minister.
“‘I am in favour of stronger co-ordination of economic policies in the EU and in the eurozone,’ Mr Schäuble told newspaper Welt am Sonntag.
“If France and Germany can agree on such proposals – long urged by Paris – they are likely to set the basis for the most radical overhaul of the rules underpinning the euro since the currency was launched in 1999.
“The German thinking emerged as George Papandreou, the Greek prime minister, flew to Paris to seek the support of Nicolas Sarkozy, French president, for his government’s drastic austerity programme.
“‘We must support Greece, because they are making an effort,’ Mr Sarkozy said before the meeting. ‘If we created the euro, we cannot let a country fall that is in the eurozone. Otherwise there was no point in creating the euro.’
“His words appeared to underline the greater readiness in France than in Germany to provide some sort of financial support or guarantee for the Greek economy. Angela Merkel, the German chancellor, insisted that no such support had been sought or discussed when she met Mr Papandreou on Friday.
“Both France and Germany agree Greece should not turn to the IMF for support, so the idea of an EMF has clear attractions for Paris, though it could hardly be set up in time to help Greece.”
Source: Quentin Peel and Scheherazade_Daneshkhu, Financial Times, March 7, 2010.
John Authers (Financial Times): Credit market – no news is good news
“John Authers says that it is good news that the credit market is much less newsworthy than it used to be.”
Click here for the article.
Source: John Authers, Financial Times, March 10, 2010.
David Fuller (Fullermoney): What about US Treasury bonds?
“I remain a long-term bear of US Treasuries. It seems self-evident that US 10-year Treasury yields will revert to more normal levels of 5% to 6%, sooner or later. In the event of serious inflationary problems resulting from spiralling debt and money printing, they could even soar to levels not seen since the early 1980s.
“However, I remain an agnostic on timing. Arguments for yields remaining low for an indefinite period are equally convincing and this uncertainty is reflected by the ranging price action. So I will continue to watch, perhaps being tempted if rangebound 10-year yields retest their lower boundary near 3.15% and hold, or when they eventually maintain a break above 4%.
“Meanwhile, the longer they remain rangebound near current levels, signalling neither a Japan-style deflationary slump or growing inflationary pressures, the better it will be for the global equity bull market.”
Source: David Fuller, Fullermoney, March 9, 2010.
MoneyNews: China embraces US Treasuries, wary about buying more gold
“China, the world’s biggest holder of foreign exchange reserves, renewed its commitment to the US Treasury market on Tuesday but said it would be wary of adding to its gold holdings.
“The country’s chief currency regulator said China would attract more capital inflows this year, partly reflecting expectations of a stronger yuan, but he left the market none the wiser as to when Beijing might let the currency resume its rise.
“‘The US Treasury market is the world’s largest government bond market. Our foreign exchange reserves are huge, so you can imagine that the US Treasury market is an important one to us,’ Yi Gang, head of the State Administration of Foreign Exchange (SAFE), told a news conference.
“The exact composition of China’s reserves, the world’s largest, is a state secret and the subject of intense scrutiny by global investors aware that, with such large sums at stake, even marginal portfolio shifts have the potential to move markets.
“Speaking during the annual session of parliament, Yi expressed the hope that China’s presence in the US Treasury market would not become a political football. China, he stressed, was not in the game of short-term currency speculation.
“‘It is market investment behavior, and I don’t want it to be politicized,’ he said. ‘We are a responsible investor, and we can surely achieve a win-win result in the process of investing.’
“Yi dampened hopes of gold bugs that China might be itching to add to the 1,054 tons of the metal in its reserves.
“On a 30-year horizon gold was not a great investment, he said, and China would simply drive up prices if it piled into the market.
“‘It is, in fact, impossible for gold to become a major investment channel for China’s foreign exchange reserves. I have 1,000 tons now, and even if I doubled that holding, according to current prices, that would be about $30 billion,’ Yi said.”
Source: MoneyNews, March 9, 2010.
The Wall Street Journal: Bull market turns one
“As the bull market notches its first year anniversary, the News Hub panel weighs in on whether investors can still make money and how the market will react when the interest rates inevitably adjust.”
Source: The Wall Street Journal, March 9, 2010.
John Authers (Financial Times): Price of Nasdaq’s crash
“In a week of anniversaries, it is 10 years since the Nasdaq Composite peaked, crashed and burned. The dotcom bubble seems to be from another world, a speculative aberration that is now over.
“But we are still living with its consequences.
“The dotcoms were a classic tale of speculative excess and overvaluation, to be compared with Japan in the 1980s or the US in the 1920s. As a chart shows, the fallout was identical.
“But the Federal Reserve took deliberate steps to avoid a repeat of the US in the 1930s or Japan in the 1990s. It slashed interest rates, helping ensure that the macroeconomic damage from the dotcom crash, in the form of a very brief and shallow recession, was remarkably light.
“The consequences of those steps have proved to be long lasting. The 1990s were driven by ‘irrational exuberance’ – huge and naively confident investments in the stock market by retail investors.
“The past decade was driven by leveraged investors. Those low interest rates made it far cheaper for investors such as hedge funds to magnify their returns with leverage. Thus they came to drive the market.
“They were helped by another artefact of the dotcom crash. Mutual funds (and the portfolios of the new breed of day traders) crashed with the Nasdaq. Hedge funds, able to sell short and to switch between asset classes, were able to make money during the years of the dotcom bust. That in turn attracted huge new flows from institutions, who are as prone to chase performance as anyone else.
“As a result, many of the technical and leverage-driven strategies used by hedge funds, and by banks’ proprietary trading operations, became top-heavy. Far too much money was thrown at structured credit investments, or at emerging markets’ currencies.
“We all now know the consequences. A decade on, they are the consequences of the Nasdaq boom.”
Source: John Authers, Financial Times, March 9, 2010.
Bespoke: Bespoke’s international snapshot
“Below we provide our trading range charts for 20 major country indices around the world. For each chart, the blue shading represents the index’s ‘normal trading range’, which is between one standard deviation above and below the 50-day moving average (white line). The red shading represents between one and two standard deviations above the index’s 50-day moving average, and vice versa for the green shading. In general, the red shading is an initial overbought level, and a move above the red zone is an extreme overbought reading that suggests a short-term pullback is in the cards.
“Only Sweden and Malaysia are currently trading above the red zone into extreme overbought territory. Canada, Brazil, the UK and Switzerland are trading within their red zones and are trending nicely higher, while the rest of the country indices are within their normal trading ranges. None of the countries are currently oversold, but some of them don’t have attractive chart patterns. China, Hong Kong, Taiwan, South Korea and Spain are all struggling to stay above their 50-days at the moment and have a lot of work to do to return to long-term uptrends.”
Source: Bespoke, March 11, 2010.
Bespoke: S&P 500 sector breadth
“The percentage of stocks in the S&P 500 currently trading above their 50-day moving averages stands at 78%. As shown in the chart below, this is getting up to the top end of the range the indicator has seen during the bull market. It still has a little bit farther to go before it reaches extreme overbought territory.
“On a sector basis, Financials currently has the highest reading at 94%. This level is at the top of its range over the last year, and it’s the most overbought of any sector. Consumer Discretionary has the second highest reading at 89%, followed by Materials and Industrials which both stand at 81%. Telecom and Utilities – two sectors that have been severely lagging recently – have the lowest readings at 56% and 51% respectively.”
Source: Bespoke, March 11, 2010.
Bespoke: Large caps vs small caps
“While the last year has been a period where practically all stocks, regardless of style or size, have risen, some stocks have risen more than others. Small caps (Russell 2000) have risen 95%, while large caps (S&P 500) are up a relatively modest 68.5%. This trend, however, is anything but a recent one. Small caps have essentially been outperforming large caps for the last decade. The chart below shows the ratio of the S&P 500 divided by the price of the Russell 2000. When the line is rising, large caps are outperforming small caps, and when the line is declining, small caps are outperforming.
“Based on the relationship between the S&P 500 and the Russell 2000, relative performance between large and small cap stocks follows long-term cyclical trends. As shown in the chart below, periods of outperformance and underperformance by either category are measured in years rather than months. Even with the typical cycle lasting several years, though, the current cycle has been the longest of them all. After peaking out in 1999, large caps have been consistently underperforming small caps for ten years and counting. When it ends is anyone’s guess, but it’s hard not to argue that large caps are at least due for their day in the sun.”
Source: Bespoke, March 9, 2010.
Bespoke: Estimated earnings growth for Q1 ‘2010 and beyond
“Below we highlight the estimated year-over-year earnings growth for the S&P 500 for the next three quarters, along with expected growth ex financials. While ex-financials growth was low in Q4 ’09, it is also beginning to pick up again. For the first quarter, S&P 500 earnings are expected to be up 28.7% versus Q1 ’09. Earnings are expected to grow 28.6% in Q2 ’10, and then drop a little to 22.3% in the third quarter.
“For the first quarter, seven sectors are expected to see year-over-year growth, while three sectors are expected to see a decline. The Materials sector is expected to see the most growth versus Q1 ’09 at 144%, followed by Financials (86.6%), Technology (51.9%), Consumer Discretionary (47.8%), and Energy (44.7%). Telecom is the only sector expected to see a noteworthy decline at -15.1%. Utilities and Industrials are currently estimated to see year-over-year earnings fall by about 1%.”
Source: Bespoke, March 10, 2010.
Bloomberg: S&P rally slowed by fastest cash depletion since 1991
“Equity mutual funds are burning through cash at the fastest rate in 18 years, leaving them with the smallest reserves since 2007 in a sign that gains for the Standard & Poor’s 500 Index may slow.
“Cash dropped to 3.6 percent of assets from 5.7 percent in January 2009, leaving managers with $172 billion in the quickest decrease since 1991, Investment Company Institute data show. The last time stock managers held such a small proportion was September 2007, a month before the S&P 500 began a 57 percent drop, according to data compiled by Bloomberg.
“For Parnassus Investments and Janney Montgomery Scott LLC, depleted reserves is a sign returns will fall from last year, when the S&P 500 rose 23 percent, the most since 2003. Bulls say any pullback is a buying opportunity because investors have $3.17 trillion in money-market funds and may return to stocks after putting 16 times more money into bonds since last March.
“‘It’s not a red light, but it’s a flashing yellow light that the strongest part of the rally is probably over,’ said Jerome Dodson, who oversees $3.6 billion as president of Parnassus in San Francisco and estimates the S&P 500 will climb 6 percent to 9 percent this year. ‘There’s not as much buying power out there.’
“Investors are trying to gauge how much money is left to move shares after the S&P 500 surged 70 percent in the 10 months starting in March 2009, and then began an 8.1 percent slide on Jan. 19. The drop, which matches the average size of 117 ‘moderate corrections’ tracked by Birinyi Associates Inc. since 1945, may herald a second phase of the bull market after last year’s advance surpassed every rally since the 1930s.”
Source: Lynn Thomasson, Bloomberg, March 8, 2010.
David Fuller (Fullermoney): Stock markets have further upside potential
“It has been a good four weeks and counting for global stock markets. All technical evidence to date suggests that we have seen a normal correction to the cyclical bull market’s trend mean represented by rising 200-day moving averages. The only minor negative is that persistent rallies have replaced short-term oversold conditions with short-term overbought readings. If this matters beyond brief pauses, we would see it in the form of downward dynamics and failed upside breaks from trading ranges.
“However, a more important factor is likely to be the months spent by most equity indices in ranging consolidations, as they gradually worked their way over to their rising MA mean. In the absence of downward dynamics, perhaps caused by some currently unexpected fright, stock markets remain capable of running on the upside.
“Meanwhile, Wall Street has not led – it seldom does – but its all-important leash effect is positive. The US’s rally has been led by small-cap indices and the S&P is approaching its January high. Some temporary resistance may be encountered in this region but once again, a downward dynamic would be required to suggest more than a brief pause.
“China’s leash effect is second only to Wall Street and stopped being negative with the upside key day reversal on February 3. A break above 3,110 would reaffirm a new pattern of higher reaction lows, although considerably more strength is required to make the overall pattern unequivocally bullish once again.”
Source: David Fuller, Fullermoney, March 9, 2010.
David Fuller (Fullermoney): What will be the warning signs for equities?
“In reverse order, I maintain that we are in a cyclical bull market for equities and a secular bull trend for precious metals and most industrial commodities. For instance, gold has a 10-year uptrend – the S&P 500 clearly does not.
“However there has been a high degree of correlation so any sharp sell-off in equities will weigh on commodities for which there has also been considerable investment interest. Nevertheless, most commodities have bounced back quickly, bottoming in October 2008, for instance, in line with most other Fullermoney themes, while the S&P and most other OECD country stock markets did not reach their lows until March 2009.
“The main point behind my stock market warning signals, which I have mentioned before and will again, is that too much good news is bad news. 1) Strong economic growth competes for capital and invites monetary tightening by central banks; 2) strong growth and too much speculation would lift oil prices over the low $80s highs for this cycle to date, towards headwind levels of $100 or more; 3) US 10-year Treasury yields above 4% would be an advance warning but the real danger area is above 5%; 4) a very weak USD could undermine confidence but this is clearly not a threat today. Also watch the February lows for stock market indices; the cyclical bull is intact while they hold.”
Source: David Fuller, Fullermoney, March 5, 2010.
Bloomberg: Buy Asia stocks before “green” light, Goldman says
“Investors should buy Asian stocks outside Japan after valuations dropped and before sentiment strengthens further, Goldman Sachs Group Inc. said.
“‘By the time all the lights turn green, the race will already be well under way,’ Goldman Sachs analysts led by Timothy Moe wrote today. ‘Sentiment and valuation will improve as the year progresses, and we would prefer to be early.’
“The MSCI Asia-Pacific excluding Japan Index remains 0.5 percent lower this year, having rebounded from year-to-date losses of as much as 9.7 percent. Stocks slid earlier this year on concern that China will tighten lending to combat faster inflation and that Greece’s debt crisis will spread.
“Analysts’ earnings growth estimates for this year have climbed to 26 percent on average, near Goldman Sachs’s 30 percent forecast, according to the report. The most profitable securities firm in Wall Street history is predicting a 21 percent increase in Asian corporate earnings in 2011.
“The MSCI index’s valuation has dropped to 14.4 times estimated earnings from as high as 29.3 times in November, after profit estimates were upgraded, according to weekly data compiled by Bloomberg.
“‘We view the risk/reward balance very positively from a strategic perspective,’ the Goldman Sachs analysts wrote.
“Goldman Sachs said it remains most optimistic on the outlook for stock markets in China, South Korea and Taiwan. Indexes tracking Chinese shares traded in Shanghai and Hong Kong and Taiwan’s Taiex index have retreated at least 5 percent this year, among the 10 worst performers globally. South Korea’s Kospi index has fallen 1.4 percent.”
Source: Shiyin Chen, Bloomberg, March 11, 2010.
MoneyNews: S&P – US debt level poses risk to strong dollar
“The US dollar is still the most important world currency, Standard & Poor’s said on Thursday, but added that rising levels of US debt and dependence on foreigners to finance much of pose risks to the currency’s primacy.
“Without a credible plan to rein in fiscal spending, the agency said external creditors could reduce dollar holdings, which could put pressure on the United States’ ‘AAA’ credit rating, which keeps government borrowing costs low.
“For now, the credit ratings agency said the size of the US economy – the world’s largest – and the depth of its financial markets mean the dollar will continue to dominate global trade and foreign exchange transactions.
“Those advantages helped the dollar retain its top status despite the financial crisis of 2008-09, which began in the United States, S&P said in the report.
“The agency also said the dollar’s role is an important factor supporting the United States’ AAA credit rating – the highest investment-grade rating.
“The main risk to the dollar’s status comes from the growing amount of US government debt, S&P said, particularly the share held by foreign central banks and sovereign wealth funds.
“It also said widening US fiscal deficits were a risk, adding ‘without a medium-term fiscal consolidation plan that the market views as credible, external creditors could reduce their dollar holdings, especially if they conclude that euro zone members are adopting stronger macroeconomic policies.'”
Source: MoneyNews, March 11, 2010.
Financial Times: Beijing studies severing dollar peg
“China’s central bank chief laid the groundwork for an appreciation of the renminbi at the weekend when he described the current dollar peg as temporary, striking a more emollient tone after months of tough opposition in Beijing to a shift in exchange rate policy.
“Zhou Xiaochuan, governor of the People’s Bank of China, gave the strongest hint yet from a senior official that China would abandon the unofficial dollar peg, in place since mid-2008. He said it was a ‘special’ policy to weather the financial crisis.
“‘This is a part of our package of policies for dealing with the global financial crisis. Sooner or later, we will exit the policies.’
“Mr Zhou’s comments contrasted with recent Chinese comments on its currency policy in the face of international criticism that the renminbi was undervalued. In December, premier Wen Jiabao said: ‘We will not yield to any pressure of any form forcing us to appreciate.’ Chinese officials have repeatedly emphasised the need for a stable exchange rate.
“However, while the recent increase in consumer prices in China has strengthened the hand of those officials who think the currency should now rise, it is not clear that this argument has yet won over the country’s senior leaders.
“Indeed, Mr Zhou gave no hint about the possible timing of a shift in policy.”
Source: Geoff Dyer, Financial Times, March 6, 2010.
Bespoke: Bespoke’s commodity snapshot
“The stock market is up about 65% since the 3/9/09 low, but oil has actually outperformed stocks over this time period with a gain of 72.64%. Below we highlight the performance of ten major commodities over the last year. As shown, copper is up the most with a gain of 108%, while orange juice ranks second with a gain of 101%. Of the three main precious metals, platinum is up the most at 50%, followed by silver at +33.73%, and then gold at +22.16%. Even natural gas is up since the March 9th, 2009 low with a gain of 16%. Wheat and corn are the only commodities shown that are down over the last year. Corn is down 11%, while wheat is down 18.27%.”
Source: Bespoke, March 9, 2010.
Bill King (The King Report): Why is gold declining?
“Our view is gold is retrenching because:
• UK QE has ended (for now)
• US QE will end in three weeks (for now)
• The ECB did a massive €295B drain (can you imagine the market reaction if Bennie Mae drained $500B in one shot?]
• China is signaling that it wants to rein in inflation by tightening credit, hiking real estate down payments to 50% and allowing the yuan to appreciate
• Europe’s sovereign debt crisis has ebbed (for now)
• Food commodities have broken down
• Gold stocks have greatly underperformed gold since mid-January (gold stocks tend to lead)”
Source: Bill King, The King Report, March 11, 2010.
Financial Times: Goldman and JPMorgan enter metal warehousing
“As piles of base metals from aluminium to nickel build up due to poor demand, Goldman Sachs and JPMorgan have entered the little known but very profitable business of metal warehousing. The deals reflect banks’ appetite for exposure to physical commodities beyond traditional commodities derivatives.
“Stockpiles at London Metal Exchange’s registered depots surge to an all-time high of 6m tonnes – up from 1m in 2007. Traders and bankers say warehousing is a classic ‘anti-cyclical’ business as it flourishes when demand for metals is lacklustre and stockpiles mount.
“‘The business is booming right now,’ says a commodities banker in London.
“The current prosperous period contrasts with much of the 2000-2008 cycle, when strong economic growth and metals consumption reduced LME inventories to near-record lows, sharply cutting warehouses’ income.
“Traders say the bank decision will reshape the close-knit warehousing industry as Goldman Sachs and JPMorgan will control the depots where more than half of the LME’s registered stocks are held. The LME is the world’s largest metal exchange.”
Source: Javier Blas, Financial Times, March 2, 2010.
The Wall Street Journal: What’s behind oil’s spike?
“Oil prices hit an eight-week high today at $82 a barrel. WSJ’s Grainne McCarthy explains what’s behind the spike, including the potential for demand to pick up as the economy begins to recover. She joins Dennis Berman and Simon Constable in the News Hub.”
Source: The Wall Street Journal, March 10, 2010.
Bloomberg: Copper imports by China may fall 16%, analyst says
“China’s net imports of refined copper may fall 16 percent this year as manufacturers run down stockpiles and domestic production increases, an analyst at Shanghai Nonferrous Metals, said.
“Net inbound shipments may fall to 2.6 million metric tons, said Zhou Qian in an interview at a Nanjing conference today. Real demand may grow 14 percent to 7.55 million tons, he said.
“Inbound shipments of refined copper fell for the first time in three months in January as domestic supplies increased and seasonal demand slowed. The country has been running down stockpiles in bonded warehouses, Macquarie Group Ltd. has said. Traders store shipments in a bonded zone before paying duties.
“‘Downstream demand is expected to be quite strong from real estate and transport industries in 2010, and still grow modestly from the home appliance sector,’ Li Lan, a researcher at Beijing General Research Institute of Mining and Metallurgy, said in Nanjing. In addition, ‘demand from electronics makers may increase too as exports improve.’
“A steeper fall in imports may be avoided by firm demand and as scrap supplies fail to return to levels before the financial crisis, said Zhou. Buyers may run down stockpiles by about 350,000 tons this year, he said, without giving figures for total current inventories. China may produce 4.6 million tons of copper in 2010, up 12 percent from an estimated 4.11 million tons last year, Zhou said.”
Source: Richard Dobson and Tan Hwee Ann, Bloomberg, March 9, 2010.
Bloomberg: China may start raising interest rates as prices gain
“China’s inflation accelerated in February, according to a survey of economists, and exports climbed in the month, increasing the likelihood of the central bank raising interest rates from a five-year low.
“Consumer prices rose 2.5 percent from a year before, the most in 16 months, according to the median of 29 estimates in a Bloomberg News survey before tomorrow’s report. While the gain was likely exaggerated by seasonal factors, economists project the momentum to continue, sending the rate to as high as 4.4 percent during the year, a separate survey showed last week.
“Inflation, property speculation and risks for banks are among Premier Wen Jiabao’s prime concerns after a record 9.59 trillion yuan ($1.4 trillion) of loans jumpstarted growth last year. Central bank Governor Zhou Xiaochuan said March 6 that while stimulus policies must end ‘sooner or later’, China needs to be cautious in timing an exit because a global recovery ‘isn’t solid’.
“‘We believe the central bank sees inflation as a big danger to the economy,’ said Wang Qian, an economist with JPMorgan Chase & Co. in Hong Kong. ‘As such, the central bank is likely to hike interest rates soon to manage inflation expectations.’
“Wang sees a 0.27 percentage point increase in the one-year lending and deposit rates as early as this month. In January, consumer prices rose 1.5 percent, the third monthly increase after a nine-month run of deflation.
“Price pressures are stemming from rising commodity costs, an overhaul of resource prices and the expansion of credit, the nation’s top economic planning agency said in a report to lawmakers last week. Producer prices may have climbed 5.1 percent in February, the biggest gain in 16 months, the Bloomberg News survey showed.”
Source: Paul Panckhurst and Chris Anstey, Bloomberg, March 10, 2010.
Financial Times: China export growth beats estimates
“Chinese exports rose 45.7 per cent in February from a year earlier, beating forecasts and providing fresh evidence of a robust recovery in the economy poised to overtake Japan this year as the world’s second-largest.
“‘The export number points to solid underlying improvement in external demand, which should provide significant support to China’s recovery in 2010,’ said Brian Jackson, an analyst at RBC Capital Markets. ‘This should make policymakers in Beijing more comfortable with the idea of allowing currency appreciation to help deal with building price pressures.’
“Chinese exports registered their biggest fall of the financial crisis in February 2009 and analysts were expecting high growth figures as a result but the performance last month was better than most had predicted. Exports had risen 21 per cent in January.
“Imports rose 44.7 per cent in February from a year before.
“‘The strong trade figures are partly due to a low base in February last year and but it is clear that exports are recovering strongly and this trend is likely to continue,’ said Zhu Jianfang, chief economist at Citic Securities in Beijing. ‘Rising imports show domestic demand is also very strong.'”
Source: Jamil Anderlini, Financial Times, March 10, 2010.
CNBC: China needs to drive consumption
“China needs to encourage consumption, says Tomo Kinoshita, deputy head of economics, Asia ex-Japan at Nomura International. He explains why inflation is not a big threat and why shifts in labor could become a problem, with CNBC’s Chloe Cho and Anna Edwards.”
Source: CNBC, March 11, 2010.
Financial Times: Debunking the myth of a China collapse
“Global sentiment towards China’s economy and asset markets has turned from exuberance just a few months ago to overriding concern about the side-effects of last year’s remarkable credit growth. A number of commentators have warned of credit excesses and an over-investment bubble, which they say could bring economic turmoil.
“Critics have also pointed to China’s Rmb 4,000bn stimulus programme and last year’s 33 per cent surge in new bank lending as obvious hallmarks of excess liquidity and a lowering of lending standards. Some have raised concerns about hidden debt risks among local government investment entities, while media reports of Chinese “ghost cities” and empty commercial property are cited as evidence of local excesses.
“The worst-case fears concerning the property market are based on a layer of truth and we have previously highlighted the untenable nature of price increases in some big cities, as well as the possibility that last year’s boom was partly fuelled by misdirected bank loans. However, there are crucial differences between China’s property markets and those of the US or Dubai.
“Unlike the dramatic increase in household leverage that precipitated the US sub-prime crisis, Chinese household debt amounts to approximately 17 per cent of GDP, compared to roughly 96 per cent in the US and 62 per cent in the eurozone. Homebuyers in China are required to make minimum downpayments of 30 per cent before receiving a mortgage, and at least 40 per cent for a second home.
“Although price increases in the Chinese residential market appear rapid (over 20 per cent in 2009), such headline figures cannot be viewed in isolation. Over the past 5 years, urban household incomes grew at a 13.2 per cent compound annual growth rate, compared to an 11.9 per cent CAGR in home prices. Pockets of overheating can be found in some regional markets: in Beijing, Shanghai, Shenzhen and Hangzhou, for instance, prices outpaced income growth by more than 5 percentage points over the same period. But this can be seen as a symptom of new urban wealth being put to speculative use rather than the profligate use of leverage.
“The combination of excessive leverage and mortgage securitisation were at the epicentre of the US sub-prime crisis. Both these factors are absent in the Chinese context. The commercial property sector has inspired just as much concern, with prices rising 16 per cent in 2009, despite low rental yields and prime office vacancy rates as high as 21 per cent and 14 per cent in Beijing and Shanghai, respectively. Yet occupancy and rental rates have started to pick up for prime properties.”
Click here for the full article.
Source: Jing Ulrich, Financial Times, March 10, 2010.
Bloomberg: Greek crisis is over, rest of region safe, Prodi says
“The worst of Greece’s financial crisis is over and other European nations won’t follow in its path, said former European Commission President Romano Prodi.
“‘For Greece, the problem is completely over,’ said Prodi, who was also Italian prime minister, in an interview in Shanghai today. ‘I don’t see any other case now in Europe. I don’t think there is any reason to think the euro system will collapse or will suffer greatly because of Greece.’
“Greek officials are trying to convince investors they can cut the nation’s budget deficit, which at 12.7 percent of gross domestic product was Europe’s largest in 2009. The government last week announced spending cuts and tax increases totaling 4.8 billion euros ($6.5 billion), the third round of austerity measures this year.
“French President Nicolas Sarkozy said on March 7 the 16-nation euro region must support Greece, which has more than 20 billion euros of debt falling due in April and May, or risk destroying the currency. German Chancellor Angela Merkel, who runs Europe’s largest economy, has so far refused to give the green light to any aid package.
“Intervention by European nations to date ‘was enough’ and countries such as Spain and Portugal have ‘plenty of time’ to get their finances in order, said Prodi.
“Investors don’t yet share Prodi’s optimism about Greece. While the extra yield they demand to hold Greek 10-year debt rather than German equivalents has eased 88 basis points from a record of 396 in January, it’s still more than four times the level of two years ago. The premium on Spanish 10-year bonds is 69 basis points, twice what it was two years ago.
“Greek Prime Minister George Papandreou, during a trip to the US yesterday, said President Barack Obama supported the measures that Greece is taking to put its public finances in order.
“‘We’re not asking for a bailout, we’re not asking for financial help from anyone,’ Papandreou told reporters in Washington yesterday. ‘We are taking measures to put our economy on the right path.'”
Source: Bloomberg, March 10, 2010.
Telegraph: Fitch warns Britain and questions Greek rescue as sovereign risks grow
“Brian Coulton, the agency’s head of sovereign ratings, said the UK has seen ‘the most rapid rise in the ratio of public debt to GDP of any AAA-rated country’ and is courting fate with its leisurely plan to halve the deficit by the middle of the decade.
“‘It is frankly too slow, a pedestrian pace. Why the UK thinks it has more time than other countries, we’re not sure. This needs to be reoriented,’ he told the Fitch forum on sovereign hotspots.
“A string of European states are stepping up the pace of retrenchment, aiming to cut deficits to 3pc of GDP within three years. The risk is that Britain will soon stick out like a sore thumb, left behind with a shockingly large deficit long after such loose fiscal policy can be justified as a crisis measure. The UK deficit this year is 12.6pc of GDP, the highest among G10 states.
“The Government is clearly counting on a ‘Korean’ recovery, modelled on Korea’s fast return to trend growth following the Asian crisis in 1998. It relies on rising output and tax revenues to plug much of the deficit. ‘This is an optimistic assumption,’ said Fitch.
“There is a ‘distinct possibility’ that Britain will face something closer to Japan’s ‘Lost Decade’ when a bursting debt bubble left the country on a permanently lower growth path. ‘The UK faces the same massive deleveraging by the private sector,’ said Mr Coulton.”
Source: Ambrose Evans-Pritchard, Telegraph, March 9, 2010.