Video-Rama: Global Economy Banked Into Recession

Friday, January 30th, 2009

While financial markets remained mired in uncertainty, the who’s who of global economics descended on Davos in Switzerland for the annual meeting of the World Economic Forum. This week’s harvest of video clips therefore includes a number of interviews set against the backdrop of the snow-covered Alps.

The overall message of the video footage is aptly conveyed by titles such as “Mountains of doom” (Nouriel Roubini) and “Wall Street winter blues” (Robert Shiller). Also discussing aspects of President Obama’s stimulus plan, the mooted bad bank, and other crisis-related issues are Jamie Dimon, Edmund Phelps, Steve Forbes, Joseph Stiglitz, Barry Ritholtz, Chris Whalen, George Soros, Stephen Roach, Kenneth Rogoff, Jack Welch, Jan Hatzius, George Friedman and Michael Lewis.

But although gloom prevails, money-making opportunities do exist as highlighted by John Murphy (StockCharts.com), who expects gold bullion to be the best investment for 2009.

In lighter vein, this week’s compilation is rounded up by Bunny and Mimi (the Pinky Show) with a clip entitled “Banked into submission”.

CNBC: Dimon on economic recovery
“Jamie Dimon, JPMorgan chairman and CEO, tells CNBC’s Maria Bartiromo when he’s expecting an economic recovery.”

Source: CNBC, January 29, 2009.

CNBC: Orszag on Obama’s stimulus plan
“Peter Orszag, director of the Office of Management and Budget, discusses Obama’s stimulus package and what the final product will look like.”

Source: CNBC, January 28, 2009.

Bloomberg: Edmund Phelps says US needed “more coherent” stimulus
“Edmund Phelps, a professor at Columbia University and winner of the 2006 Nobel Prize in economics, talks with Bloomberg’s Francine Lacqua and Erik Schatzker about the US government’s plans to stimulate the economy and ease the credit crisis. Phelps, speaking at the World Economic Forum meeting in Davos, Switzerland, also discusses measures to remove toxic assets from banks’ balance sheets and the outlook for US housing.”

Source: Bloomberg, January 28, 2009.

Fox Business: Steve Forbes talks stimulus, economy & Geithner

Source: Fox Business, January 28, 2009.

CNBC: Stiglitz on the economy
“Opportunities for your money at the World Economic Forum, with Joseph Stiglitz, Columbia University professor and Nobel Prize winner, and CNBC’s Becky Quick.”

Source: CNBC, January 28, 2009.

CNBC: Barry Ritholtz – nationalize the banks

Source: CNBC, January 29, 2009.

Yahoo Finance: Chris Whalen – give money to healthy banks, let FDIC’s Bair handle the dying
“Why should taxpayers have to keep bailing out banks that aren’t lending and are black holes? Why can’t Congress just force these banks to write down their bad debt then recapitalize them? Why doesn’t the government create a bank that does not have toxic assets and will fill the void of much needed loans to businesses who need them?

“‘Lack of political courage [and] ignorance of finance’ in Congress are the answers to these and related questions, according to Chris Whalen, managing director and co-founder of Institutional Risk Analytics. ‘Our friends in Washington who’ve been receiving a lot of money from Wall Street don’t want to put these people out of work.’

Click here for the article.

Source: Aaron Task, Yahoo Finance, January 21, 2009.

BBC News: Soros on getting out of the global crisis
“Financier George Soros has outlined his recipe for stabilising the global economy to the BBC’s Business Editor, Robert Peston. Speaking against the backdrop of the World Economic Forum in Davos, he said the present problem was ‘bigger’ than in the 1930s.He was asked if he thought there were any signs of recovery in sight.”

Source: BBC News, January 28, 2009.

CNBC: Roubini – mountains of doom
“Discussing the stimulus and the disaster that is the world economy, with ‘Dr. Doom’, Nouriel Roubini, RGEMonitor.com chairman.”

Source: CNBC, January 28, 2009.

Bloomberg: Roach sees “longer and deeper” recession, weak recovery
“Stephen Roach, chairman of Morgan Stanley Asia, talks with Bloomberg’s Betty Liu about the outlook for the global economy. Roach, speaking from Zurich, also discusses the US recession and the state of the Chinese and Indian economies. Mario Gabelli, chief executive officer of Gamco Investors, also speaks.”

Source: Bloomberg, January 27, 2009.

Fox Business: Rogoff – 80’s crisis a “baby” compared to now

Source: Fox Business, January 28, 2009.

CNBC: Jack Welch on the economy
“Perspectives on the government’s stimulus plan, with Jack Welch, former GE chairman/CEO.”

Source: CNBC, January 29, 2009.

Bloomberg: Hatzius says Fed will likely buy treasuries eventually
“Jan Hatzius, chief US economist at Goldman Sachs, talks with Bloomberg’s Betty Liu about the likelihood the Federal Reserve will buy US Treasuries. Hatzius, speaking from New York, also discusses the outlook for monetary policy and need for a ‘large’ stimulus package.”

Source: Bloomberg, January 28, 2009.

John Authers (Financial Times): Housing and the Fed
“If there is a single key variable to determine when the crisis in the US banking system can be brought under control, it is house prices. The further they fall, the higher the likely default rate on the mortgage-backed securities that banks now hold on their balance sheets.”

Click here for the article.

Source: John Authers, Financial Times, January 27, 2009.

Barron’s: Santoli’s market outlook: 8,000 and 800
“Barron’s Mike Santoli explores whether the Dow hovering around 8,000 and the S&P around 800 carries a certain significance and what this could mean.”

Source: Barron’s, January 26, 2009.

CNBC: Robert Shiller – Wall Street winter blues

Source: CNBC, January 28, 2009.

CNBC: Steve Forbes discusses outlook for stocks

Source: CNBC, January 28, 2009.

Bloomberg: StockCharts’s Murphy sees gold at $1,000 by year end
“John Murphy, chief technical analyst at StockCharts.com, talks with Bloomberg’s Brennan Lothery about the outlook for the gold price in 2009. Murphy also discusses commodity prices, the US equity market and investment strategy.”

Source: Bloomberg, January 27, 2009.

BBC News: Trichet – system must be more resilient
“The president of the European Central Bank, Jean-Claude Trichet, has warned about imbalances in the global economy for some time. He told the BBC’s Tanya Beckett that it was a question of ensuring that by being extremely bold in the short term, long term confidence was not hampered.”

Source: BBC News, January 29, 2008.

CNBC: China – the next world superpower?
“China is unlikely to replace the US as the world’s dominant superpower, says George Friedman, CEO of Stratfor. He tells Kirby Daley from the Newedge Group & CNBC’s Amanda Drury why. He also reveals the other key challenges we may face in the next 100 years.”

Source: CNBC, January 30, 2009.

YouTube: Michael Lewis on how to avoid bankruptcy

Source: YouTube, January 28, 2009.

Pinky Show: Banked into submission
“Part III of the globalization comic series. In this mini-episode, Bunny tells Mimi about the World Bank and IMF and how wonderful they are.”

Source: Pinky Show (via YouTube), March 21, 2007.

Tags: 2006 Nobel Prize In Economics, Barry Ritholtz, Credit Crisis, Davos Switzerland, Director Of The Office Of Management And Budget, Edmund Phelps, Emerging Markets, George Friedman, George Soros, Gold, Gold Bullion, India, Jamie Dimon, Joseph Stiglitz, Kenneth Rogoff, Maria Bartiromo, Nobel Prize In Economics, Peter Orszag, Stephen Roach, Steve Forbes, Stimulus Package, Stockcharts, World Economic Forum
Posted in Credit Markets, Economy, Emerging Markets, Gold, India, Markets, Outlook | Comments Off

Jeremy Grantham: Riveting Interview with Steve Forbes

Thursday, January 29th, 2009

Whoa! Jeremy Grantham gives a riveting, in-depth, specific and eloquent must-see interview. It is a clear and enlightening discussion with one of the finest and quiet geniuses in the investment world.

Subsequent to publication of Jeremy Grantham’s quarterly newsletter a few days ago, Steve Forbes conducted this interview with the chairman of Boston-based GMO. The video clip and transcript are published below.

Click here or on the image to view the video.

Click here for the transcript of the interview.

Here are the topical headings from the interview:

• Steve: China’s Long Tale
• Grantham’s Big Call
• A Whole New Bubble
• Time To Buy
• Cheapest in 20 Years
• Japan A Blue Chip?
• Emerging Markets
• Buy Big US Stocks
• Stimulus!
• Our Leaders Failed
• Dysfunctional Markets
• China Bubble

Here are a few paragraphs:

Steve Forbes: Well thank you, Jeremy, for joining us today. First, since you have bragging rights in this situation, what made you a bear, [a] great skeptic? Between 1999 until about a couple of months ago, you were saying, “Stay out.”

Jeremy Grantham: Well, really very simple. Not rocket science. We take a long-term view, which makes life, in our opinion, much easier.

Steve Forbes: Well everyone says it, but you certainly practiced it.

Jeremy Grantham: We actually do it. Well, we tried the short-term stuff and it was so hard; we thought we’d better do the long-term. We just assume that at the end, in those days, of 10 years, profit margins will be normal and price-earnings ratios will be normal. And that will create a normal, fair price. And more recently, we’ve moved to seven years, because we’ve found in our research that financial series tend to mean revert a little bit faster than 10 years–actually about six-and-a-half years. So we rounded to seven.
And that’s how we do it. And it just happened from October ’98 to October of ’08, the 10-year forecast was right. Because for one second in its flight path, the U.S. market and other markets flashed through normal price. Normal price is about 950 on the S&P; it’s a little bit below that today.

And on my birthday, October the 6th, the U.S. market, 10 years and four trading days later, hit exactly our 10-year forecast of October ’98, which is worth talking about if only to enjoy spectacular luck. The P/E was a little bit lower than average and the profit margins were a little bit higher, so they beautifully offset. And given our methodology, that would mean that on October the 6th, the market should have been fairly priced on our current approach. And indeed it was–that was even more remarkable–950, plus or minus a couple of percent.

Steve Forbes: And what did you see during that 10-year period that made you feel–other than your own models–that this was something highly abnormal, that this couldn’t last?

Jeremy Grantham: Well, first of all, the magnitude of the overrun in 2000 was legendary. As historians, you know we’ve massaged the past until it begs for mercy. And we saw that it was 21 times earnings in 1929, 21 times earnings in 1965 and 35 times current earnings in 2000. And 35 is bigger than 21 by enough that you’d expect everyone would see it. Indeed, it looks like a Himalayan peak coming out of the plain.
And it begs the question, “Why didn’t everybody see it?” And I think the answer to that is, “Everybody did see it.” But agency risk or career risk is so profound, that even if you think the market is gloriously overpriced, you still have to get up and dance. Because if you sit down too quickly–

Steve Forbes: Famous words of Mr. Prince.

Click here for the transcript of the interview.

Source: Forbes, January 23, 2009.

Download the Forbes: Jeremy Grantham Briefing Book here.

Tags: Blue Chip, Boston, Bragging Rights, China, Dysfunctional, Emerging Markets, Few Days, Flight Path, Geniuses, Gmo, Half Years, Interview Source, Investment World, Japan, Jeremy Grantham, Paragraphs, Price Earnings Ratios, Profit Margins, Quarterly Newsletter, Rivetting, Rocket Science, S Market, Seven Years, Skeptic, Steve Forbes, Steven Forbes, Stimulus, Stocks, Topical Headings, Video Clip
Posted in Emerging Markets, Markets | Comments Off

David Swensen on Charlie Rose

Thursday, January 29th, 2009

David Swensen, legendary portfolio manager and CIO of the Yale Endowment speaks to Charlie Rose in a rare 15-minute interview. The first interview features Sen. Chuck Schumer. David Swensen follows. To get to David Swensen, advance the video using the arrow indicator to 38:40 mins.

Tags: Arrow, Charlie Rose, Chuck Schumer, Cio, David Rose, David Swensen, Minute Interview, Portfolio Manager, Rose David, Yale Endowment
Posted in Markets | Comments Off

Baltic Dry Index Up 7 Straight Days Bullish Sign

Wednesday, January 28th, 2009

The Baltic Dry Index, the indicator of global shipping activity is now sitting at 1014, having hit its low of 663 December 5, 2008. This is a valuable measure of global trade activity, and it is indicating a resumption of trade. It is still a long way off its all-time high of 11,793 of last spring, down 91.4% from the top, but up over 50% off its bottom.

We’ll keep watching this. This is bullish for both finished exports and commodities. Its still early, and this is a promising sign. The loss experienced in the index includes the value differential owing to the crash in commodity prices experienced during the last 6 months. The BDI Index fell off a cliff in September which coincided with the collapse of Lehman Brothers, which happened to be a large underwriter of trade related financing. With other banks unwilling to take Lehman’s place, trade fell into the crater left behind.

Global trade credit froze along with the credit market as it became very difficult, if not impossible to trade, with banks unwilling to issue letters of credit.

This is a sign that the trade finance market is thawing and that shipping can resume. A continuation of this trend should be considered bullish, particularly for China exports, global trade, and for commodities producing companies and countries.

The Baltic Dry Index does not measure the price of oil, although it does include the price of fuel as a component of the shipping cost.

Chart: Bespoke Investment Group

Tags: Baltic Dry Index, Banks, Bdi, Bdi Index, China Exports, Collapse, Commodities, Commodity Index, Commodity Prices, Commodity Producers, Crash, Differential, Failure, Finance Market, Global Shipping, Global Trade, Investment Group, Last Spring, Lehman Brothers, Letters Of Credit, Price Of Oil, Promising Sign, Resumption, Shipping Activity, Shipping Cost, Straight Days, Trade Finance, Underwriter
Posted in Commodities, Credit Markets, Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Where Credit’s Due

Wednesday, January 28th, 2009

Michael Gregory, Senior Economist, BMO Financial Group, posits in the latest issue of Focus that recovery in credit formation has and will be key to economic recovery.

The typically rapid transition from decelerating to accelerating credit growth results in a v-shaped credit cycle, a critical characteristic that effectively fuels economic recovery (Chart 1).

However, the global credit crisis has impaired credit creation processes around the world, particularly in the U.S. and the U.K. The cost of credit to consumers and businesses was initially hoisted higher than it otherwise would have been because of bank funding costs.

Note: Canadian money market spreads have been very healthy, indicating their strong financial position.

Just as the global financial crisis unfolded in four waves (Chart 2), with the latest surge the most damaging, the policy responses by central banks and governments have had four distinct themes, all designed to repair and prime their local credit markets, with the latest tactics targeting the asset root of the problem.

First, policy rates have been cut to historic lows (Chart 3). In cases where rates are already effectively zero (e.g., U.S., Japan), central banks are providing much more liquidity than required to prod banks into loaning out the excess-the essence of “quantitative easing”.

Second, some central banks (Fed, BoJ, BoE) are participating directly in local commercial paper markets-which were among the first casualties of the global credit crisis-and purchasing mortgage-backed and other securities.

Despite the “credit easing” measures, banks have not eased up on lending requirements. (Chart 4)

The third policy theme has been to ensure banks have adequate access to capital and other funding at reasonable rates. Governments are guaranteeing bank liabilities and, in some cases, directly injecting capital.

While government is able to use moral suasion to twist banker’s arms to lend, it is not able to assuage concerns that the deepening recession could lead to more losses, which is keeping lending tight.

Household deleveraging (Chart 5) means that consumers are starting to save more and spend less, reducing consumption in the economy. Non-financial businesses are doing the same. This reversal in credit formation means deflating assets, and lower capital expenditure.

Thus, the fourth policy theme is to bolster the asset side of balance sheets. This week, the U.K. government introduced an “Asset Protection Scheme” designed to partially protect financial institutions against future credit losses.

In the U.S., there’s growing talk of establishing an “aggregator” bank that would purchase troubled assets from banks, as the new Obama Administration is promising action on a “dramatic scale” to strengthen banks and revive credit markets.

The longer the economy stays starved of credit, the greater the risk of a deflationary outcome, with Japan’s “lost decade” quickly coming to mind (Chart 6).

You can read the entire report here.

Tags: Array, BMO, Canadian Market, Canadian Money Market, Casualties, Central Banks, Creation Processes, Credit Creation, Credit Crisis, Credit Markets, Distinct Themes, Economic Recovery, Economic Research, Economist, Financial Group, Financial Position, Global Credit, Global Financial Crisis, liquidity, Lows, Michael Gregory, Monetary And Fiscal Policy, Moral Suasion, Paper Markets, Policy Actions, Policy Responses, Rapid Transition, Recessions, Waves
Posted in Credit Markets, Economy, Markets | Comments Off

Albert Edwards: Back in the bear camp

Wednesday, January 28th, 2009

Albert Edwards, London-based strategist of Société Générale, has always been a firm favourite among Investment Postcards’ readers. His latest research report appeared a few days ago and saw him firmly back in the bear camp after turning short-term bullish at the end of October. (See the previous posts “Albert Edwards: Turning More Bullish” [October 24] and “Market Fundamentals are Appalling” [July 5]).

Edwards’s “Global Strategy” report is sub-titled “Technicals say it is time to bail out. Cut exposure and prepare for rout. US depression looking likely. China’s 2009 implosion could get ugly.” The executive summary below provides the gist of his thinking.

“After increasing our equity exposure at the end of October we believe that the market is set to quickly slide sharply towards our 500 target for the S&P. While economic data in developed economies increasingly reflects depression rather than a deep recession, the real surprise in 2009 may lie elsewhere. It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the Yuan. A subsequent trade war could see a re-run of the Great Depression.

• Economic data has been truly dreadful through the fourth quarter. Over a year ago we forecast deep US recession. As it had not suffered one since the early 1980s, we thought this outturn would shock. Yet recent data has been consistent with something far worse than deep recession. There is no agreed definition of a “depression” as opposed to a deep recession. But The Economist magazine is probably more qualified than many to take a view. They consider a peak-to-trough decline in GDP in excess of 10% a reasonable definition. We had been thinking of deep GDP declines of the order of 5% peak to trough but we are now thinking that this view might be too optimistic.

• But, until yesterday, equity markets had been paddling quite happily sideways for most of the last few months. They have been broadly flat since we increased our equity weighting sharply on 23 October. Within that time the intra-day peak-to-trough rally in the S&P was a creditable 28% from 740 low of November 21, but we do not claim to have captured that. Nevertheless we feel very comfortable that the technicals at the end of October cried out to close our extreme underweight equity exposure. They now tell us to cut exposure again.

• 2008 was a shock for investors. But 2009 could be an even bigger shock. There is evidence that the Chinese economy is imploding. Investors should consider what would happen if China descends into social chaos. Yuan devaluation could spark a 1930’s style trade war. Do you really trust the politicians to ‘do the right thing’?”

Source: Albert Edwards, Global Strategy Weekly, Société Générale, January 15, 2009 (hat tip: David Fuller, Fullermoney).

Tags: Bear Camp, Chinese Economy, Economic Data, Economist Magazine, Equity Exposure, Gist, Global Strategy, Great Depression, Implosion, Market Fundamentals, October 24, Recession, Regime Change, Rout, Societe Generale, Strategist, Strategy Report, Target, Trade War, Trough
Posted in Credit Markets, Economy, Markets | Comments Off

Nouriel Roubini: “The worst is yet to come.”

Tuesday, January 27th, 2009

Nouriel Roubini, or RGE Monitor and NYU Stern School of Business, appeared on CNBC, January 15, 2009, to discuss his outlook for 2009. Roubini’s best-case call is a U-shaped recovery from this now synchronized global recession we’re in, if the authorities can turn around the situation in the financial sector, which is by his account, “effectively insolvent.” If not, we could enter into a period of economic stagnation combined with deflation, similar to Japan. He is joined by 2001 Nobel Laureate, Michael Spence.

Roubini clings to the notion that “the worst is yet to come.”

To watch the video, click play:

Tags: Authorities, Cnbc, Deflation, Economic Stagnation, Financial Sector, Global Recession, Japan, Michael Spence, Nobel Laureate, Notion, Nouriel Roubini, Nyu Stern School, Nyu Stern School Of Business, Outlook, RGE Monitor, School Of Business, Stag, Stern School Of Business, Turnaround
Posted in Markets, Outlook | Comments Off

Hugh Hendry: Outlook for 2009

Tuesday, January 27th, 2009

Hugh Hendry visited CNBC on January 12, 2009, and the entirety of the available footage of his commentary is worthy of your attention. In previous articles we partially covered this. As usual, Hendry’s command and perspective is stark, and sensible, and to date, canny and accurate. We have found the complete video excerpts from January 12, 2009, and share it with you below. Its fresh and compelling for 2009; don’t miss out on viewing this.

Hugh Hendry, January 12, 2009, Part 1 of 6

Hugh Hendry, January 12, 2009, Part 2 of 6

Hugh Hendry, January 12, 2009, Part 3 of 6

Hugh Hendry, January 12, 2009, Part 4 of 6

Hugh Hendry, January 12, 2009, Part 5 of 6

Hugh Hendry, January 12, 2009, Part 6 of 6

Tags: Cnbc, Hugh Hendry, Outlook, Perspective, Video Excerpts
Posted in Markets, Outlook | Comments Off

Cast Your Vote: Recession or Depression?

Tuesday, January 27th, 2009

This post is a guest contribution by Bennet Sedacca*, President of Atlantic Advisors Asset Management.

As unpopular as it may have been over the past several years, I have been writing about the impending Recession in the United States and in other nations. I am rather used to criticism as a “perma-bear”, as it relates to our asset-based, over-leveraged mess that we call our economy. It has been no fun whatsoever to be the one to “call ‘em as you see ‘em”, but to be perfectly frank, an outlier view has been a necessary evil, and one that I have been proud to have had the guts to provide.

And so now I will say what the biggest risk of all is in my view. There is no doubt, whether it is in retrospect as most economists suggest or not, that (shhhhhhh …) we are in a Recession … Oh my Goodness, what an unpopular view – that the economy can actually shrink. And shrink it has, it is, and likely will continue to do. The question on my mind, as it has been over the past several months, is if we are going through a traditional Recession or a once-in-a -lifetime Depression? I have actually HOPED that Recession as the result of the unprecedented credit unwind would end up as just a nasty Recession at best. Sadly however, I feel that a Depression is either upon us, or soon will be upon us.

To be truthful or daring is important in markets and other parts of life. To be truthful, you must suck it up. To be daring is to avoid the bad news that is so obvious, but not at all too fun or exciting to focus on. There is no thought clearer in my mind, as I have stated many times over the past year, that we are in a Recession, or quite likely much worse. I hate to say this, as unpopular as it may seem (so what’s new with what I write?), WELCOME TO THE DEPRESSION. For my reasoning, please read on.

Click here for Bennet’s full report.

* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. In 1997 he formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions.

Tags: Asset Management, Bad News, Depression, Economists, Economy, Focus, Fun, Guts, Impending Recession, Lifetime, Nasty Recession, Necessary Evil, No Doubt, Oh My Goodness, Retrospect, risk, United States, Unpopular View, Vote
Posted in Credit Markets, Economy, Markets | Comments Off

Teresa Lo’s Rules of Market Survival

Monday, January 26th, 2009

Teresa Lo, founder of InvivoAnalytics, retired from the securities industry in 1998 after a twelve-year career.  Since then, she has helped thousands of individual investors, traders and investment advisors achieve their goals and secure their financial futures. She is currently the portfolio manager for a private investment fund. You can find out more by visiting invivoanalytics.com.

We found this particular reference piece written by Ms. Lo to be an excellent set of rules for investing.

I’ve [Teresa Lo] been working on this post for a long time, and might come back to edit the rules on this page from time to time.

1. TEMPERAMENT TRUMPS INTELLIGENCE
You don’t have to be a rocket scientist to succeed. It’s a certain combination of intelligence and personal qualities.

Success in investing doesn’t correlate with IQ once you’re above the level of 25. Once you have ordinary intelligent, what you need is the temperment to control the urges that get other people in trouble investing. – Warren Buffett, The Real Warren Buffett

Staying the course requires a certain stoicism and balance:

From Maximus I learned self-government, and not to be led aside by anything; and cheerfulness in all circumstances, as well as in illness; and a just admixture in the moral character of sweetness and dignity, and to do what was set before me without complaining. I observed that everybody believed that he thought as he spoke, and that in all that he did he never had any bad intention; and he never showed amazement and surprise, and was never in a hurry, and never put off doing a thing, nor was perplexed nor dejected, nor did he ever laugh to disguise his vexation, nor, on the other hand, was he ever passionate or suspicious. He was accustomed to do acts of beneficence, and was ready to forgive, and was free from all falsehood; and he presented the appearance of a man who could not be diverted from right rather than of a man who had been improved. I observed, too, that no man could ever think that he was despised by Maximus, or ever venture to think himself a better man. He had also the art of being humorous in an agreeable way. – Marcus Aurelius, The Meditations of Marcus Aurelius, Book One

2. NEVER LOSE MONEY
This one is simple enough:

Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1 – Warren Buffett, The Real Warren Buffett

3. WHERE THERE’S SMOKE, THERE’S FIRE
Another obvious one:

I follow the old dictum: There’s never just one cockroach in the kitchen. – Warren Buffett

4. DIVERSIFY, DIVERSIFY, DIVERSIFY
They all say they do, but no one ever does. Then they are sorry:

You have to diversify against the collective ignorance. I think nobody is in a position to react to these big macro-issues. Where is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person on one side of the question, there is another smart person on the other side.” – David F. Swensen

5. PERCEPTION IS EVERYTHING
Refuse to become intellectually bankrupt. Avoid dogma:

Facts per se can neither prove nor refute anything. Everything is decided by the interpretation and explanation of the facts, by the ideas and the theories. – Ludwig von Mises

Have the courage to see the world as it is:

The glass is not half-full or half-empty. It’s just a half glass. – Teresa Lo

6. THE PARTY ALWAYS ENDS SOONER THAN YOU THINK
Dance close to a working fire exit at the end of the night:

The one eternal aspect of every market top is that it occurs before we’re ready for it. – Justin Mamis, The Philosophy of Tops

7. FOLLOW THE LEMMINGS
When the lead lemming disappears from view, assume he’s fallen over the cliff:

[I]t may often pay ‘smart money’ to follow ‘dumb money’ rather than to lean against it. – Mullainathan & Thaler

8. THE MARKET IS A BEAUTY CONTEST (or Why High School Never Ends)
John Maynard Keynes had opinions on issues other than deficit spending:

[P]rofessional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees. – John Maynard Keynes, The General Theory of Employment, Interest and Money, Chapter 12

9. IT’S NEVER DIFFERENT THIS TIME
No matter what they say, don’t believe ‘em:

Stock prices have reached what looks like a permanently high plateau. – Irving Fisher, 1929

It’s always the same shit, different day:

What is badness? It is that which thou hast often seen. And on the occasion of everything which happens keep this in mind, that it is that which thou hast often seen. Everywhere up and down thou wilt find the same things, with which the old histories are filled, those of the middle ages and those of our own day; with which cities and houses are filled now. There is nothing new: all things are both familiar and short-lived. – Marcus Aurelius, The Meditations of Marcus Aurelius, Book Seven

10. HOPE IS A FOUR-LETTER WORD
How many accounts have gone to zero because the investor was too stubborn to do the right thing?

The market can stay irrational longer than you can remain solvent.” – attributed to John Maynard Keynes

11. INVESTING IS ANOTHER TERM FOR TRADING
It’s just a different time frame:

Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. . . . The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow. – John Maynard Keynes, The General Theory of Employment, Interest and Money, Chapter 12

10. LEVERAGE IS A BLACK HOLE
Not even light can escape it:

We’ve got to think harder about all the embedded leverage. I mean, it’s a little shocking that not more people understood that if you take a 30:1 levered, structured product and you put it on a 30:1 levered balance sheet, you’re not talking about 30:1 leverage. You’re talking about 900:1 leverage and you can magnify gains and losses pretty dramatically when you do that. So the risk management system, the capital rules just haven’t kept up with the instrument innovations-another decade has gone by. – Peter Fisher

Ten Rules for Trader Longevity

This list is for traders but also applies to investors.

1. Recognize mental blocks. If you believe that the financial markets are rigged, stay away. Bias is blinding. If your ego requires constant feeding and vindication, do not trade. If being right is more important than making money, steer clear of the stock market. If you must be dogmatic, direct your energy into following these rules.

2. There is no needle in the haystack. There’s no reliable way of picking a single winner from the thousands of stocks listed on the exchanges. Resist betting it all on the longshot because the outcome is based purely on luck. Dr. Ziemba explains the mathematics of horse racing. The point is that the bettor is better off with horses that finish the race “in the money”. They don’t have to come in first.

3. Diversify. Spread your bets around. It’s the only way to be on board the winner.

4. Trade small. Bet only a small fraction of your equity on each position. You must take risk to get reward, but ruin is certain if you take insane risk. It’s defined in Fortune’s Formula. Think Adventures in Conditional Probability.

5. Press the winners. You must compound a winning streak.

6. Never throw in good money after bad. Never double down. Ever.

7. Do not rationalize. Down is NOT up. Red is NOT the new black. If the account equity is shrinking, your bets are in the wrong direction.

8. Establish a stop loss. Place it in the appropriate location (except just above the swing high or under the swing low where everyone else put theirs), a place where you can be statistically confident that the move in the present direction is over. Don’t use a tight stop for lack of equity. The market doesn’t care about how much is in your account, so trade a smaller position size and put the stop in the proper place.

9. Use the stop loss. Just do it. Immediately. No excuses. Having a “mental” stop loss is the same as lying. There’s no point, because the longer you let it slide, the deeper the doo-doo.

10. Observe Rule Nine. Always. Don’t go to the bathroom without it.

The Role of Luck

Legendary hedge fund manager Jim Simons was interviewed by Hal Lux for the November 2000 issue of Institutional Investor:

When he does open up, Simons can seem exasperatingly coy in describing his success. “Luck,” he told a gathering of potential investors last spring in Greenwich, Connecticut, “is largely responsible for my reputation for genius. I don’t walk into the office in the morning and say, ‘Am I smart today?’ I walk in and wonder, ‘Am I lucky today?’”

In fact, Simons is being straightforward. Luck may be the residue of design to baseball minds, but to a mathematician it’s the twin of probability, which can be approached through statistical studies.

Last, but not least, my hero, the Roman emperor Marcus Aurelius thanked the gods, “that, when I had an inclination to philosophy, I did not fall into the hands of any sophist, and that I did not waste my time on writers of histories, or in the resolution of syllogisms, or occupy myself about the investigation of appearances in the heavens; for all these things require the help of the gods and fortune.”

While he was certainly not referring to the stock market but he might as well have for he summed it up well. Very well.

Tags: Amazement, Bad Intention, Beneficence, Cheerfulness, Falsehood, Financial Futures, Individual Investors, Investment Advisors, Maximus, Moral Character, Personal Qualities, Portfolio Manager, Private Investment Fund, Rocket Scientist, Securities Industry, Self Government, Stoicism, Temperment, Vexation, Warren Buffett
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World Markets Performance 2009 YTD

Monday, January 26th, 2009

Year-to-date equity market performance has been bleak, considering that out of 84 countries, 19 are up and the remainder are down. 17 countries are down more than -10%. China is the second best performing equity market so far, up 9.3%, and Brazil is the only other of the BRIC that is up, with a smaller gain of 2.49%.

Canada is the best performing G7 country with a smaller than the rest YTD loss of -3.50%.

Chart: Bespoke Investment Group

Tags: Brazil, BRIC, Canadian Market, China, Equity Market, G7 Country, Investment Group, Market Performance, Remainder, World Markets, Year To Date, Ytd
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Meredith Whitney: Banks Not Facing the Music

Monday, January 26th, 2009

Meredith Whitney, Managing Director, CIBC Oppenheimer has submitted an op-ed to FT.com, America’s Banks Need to Hold a Yard Sale, in which she opines that America’s banks are not acting quickly enough to liquidate assets in an orderly fashion in order to raise cash for Tier 1 reserves.

Here are a few excerpts:

… it appears as if US banks are setting out to make some of the same mistakes of the past 18 months all over again.

When the we find ourselves in duress, we have to sell stuff. Why should we support the behaviour? Where is our bailout? The banks have had nothing but time, but they do not seem to be facing the music.

Now, when the average taxpayer finds him or herself overextended, he or she is forced to backtrack and, in situations of duress, sell stuff (otherwise known as a yard sale). In these cases, selling a set of snow skis for $15 or a prized record collection for $10 is not desirable but is necessary. Why should the US taxpayer be forced to fund behaviour that he or she would never have the luxury of indulging in?

Whitney posits that what she is indeed writing about is the need for the banks to get on with the obvious need of selling assets, their “crown jewels,” in order to get back on side, and provide relief back to the taxpayer.

The fact is that there is money on the sidelines looking for opportunities to invest. One constant question I get from investors, who need somewhere to put their money, is: if I had to own something, what would it be? I am not very helpful to them at the moment as my answer is that I would own nothing. I do tell them that I believe that later in the year there will be fabulous opportunities to invest in new combinations of businesses that are currently “off the menu” to individuals. What I mean by this is that the system will eventually force disposals of assets: here I am just arguing that we need to get to it sooner rather than later.

Whitney recently shared her views last week on CNBC, that the banks would be needing more funding which would take us into 2010. To watch the video, click the image.

“Banks may need another round of fresh capital this year, says Meredith Whitney, Oppenheimer & Co. director of research.”

So far, Whitney has yet to be proven wrong about the systemic problems, and the banks are dragging their feet about what needs to be done in order to restore stability to the financial system. The longer they take, the harder it gets to reverse the damage.

Tags: Backtrack, Bailout, CIBC, Cnbc, Combinations, Crown Jewels, Disposals, Duress, Excerpts, Fabulous Opportunities, Facing The Music, Invest One, Managing Director, Meredith Whitney, Nothing But Time, Oppenheimer, Orderly Fashion, Sidelines, Snow Skis, Tier 1, Yard Sale
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Words from the (investment) wise for the week that was (January 19 – 25, 2009)

Sunday, January 25th, 2009

Fears about the intensity of the global recession and renewed skepticism regarding the beleaguered financial sector fueled a flight to safety during the past holiday-shortened trading week. President Obama’s inauguration offered only a brief respite from the dreadful economic and earnings data and pounding of the stock markets.

Commentators were in agreement that Mr O commenced his tenure against the worst economic background in living memory and had his work cut out to resurrect America from its economic morass. I wish him well with this daunting task.

As investors piled into the perceived safety of gold (+6.9%), the US dollar (+1.8% in the case of the US Dollar Index) and the Japanese yen (+2.1% against the US dollar), global stock markets recorded a third straight week of losses. West Texas Intermediate Crude (+9.2%) also ended higher, joining a broader rally in commodities (+2.1% in the case of the Reuters/Jeffries CRB Index).

The MSCI World Index and the MSCI Emerging Markets Index declined by 4.7% (YTD -10.3%) and 5.7% (YTD -10.5%) respectively. Bucking the downtrend, the Shanghai Composite Index rose by 1.9% over the week and, with a gain of 9.3%, is also the best-performing global stock market since the start of 2009.

Elsewhere, the yields of long-dated government bonds in the US, UK and Eurozone rose sharply as large issuances of sovereign debt looms. For example, the yield of the US ten-year Treasury Note jumped by 28 basis points to 2.62% and that of the 30-year Treasury Bond by 40 basis points to 3.32% – the highest weekly points rise since April 1987. On the other hand, short-dated yields in a number of European countries declined as a result of expectations of further rate cuts.

The UK was a case in point with the two-year Gilt declining by 12 basis points to 1.0% on doubts about the government’s new rescue plan for the banking system and a deterioration in the country’s public finances. The pound crumbled to a 23-year low against the greenback and an all-time low against the yen.

The financial turmoil and the various actions by central banks reminded me of a quote from 1867 by Karl Marx: “Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.”

“TARP has been an abject failure,” said Thomas Barrack Jr, billionaire and founder of Colony Capital, in BusinessWeek. “I compare the situation to a fire on a Savannah plain: Let it rip and burn, and the market will rejuvenate so much faster – try to control or impede it, and there will be more and longer suffering before renewal. Japan experienced two decades of economic paralysis by experimenting with fire control of a similar unproductive sort.”

And here is Peter Schiff’s (Euro Pacific Capital) prescription for how the US can dig itself out of the current mess, as reported by Fortune Magazine: “Shrink the government radically, cancel all bailouts immediately, take plenty of tough medicine, and let the free market do its job – however harsh it may be for, say, autoworkers in the meantime.”

According to Sheila Bair of the FDIC, as reported by The Wall Street Journal, there will soon be a new government banking agency, the Aggregator Bank, to buy troubled assets from financial institutions. For a bit of fun, I tried to register this domain last week. Alas, another aspirant banker pipped me to the post. His reselling price? $100,000! Needless to say, I swiftly terminated the negotiations.

Next, a tag cloud of my week’s reading. This is a way of visualizing word frequencies at a glance. Key words such as “bank”, “government”, “economy”, “market”, “financial”, debt” and “crisis” topped the list.

The graph below shows the performance of various S&P sector SPDRs for the year to date. With Financials having declined by 28.2%, the market’s weakness was quite strongly concentrated in one sector. In addition to Financials, only Industrials (-11.9%) and Consumer Discretionary (-8.8%) have underperformed the S&P 500 Index (-7.9%) since the beginning of the year.

“During prior declines during this bear, losses were broad based and once they become more concentrated (as they are now), it’s a sign that the market is beginning to separate the eventual winners from the losers,” said Bespoke.

Considering the outlook for the stock market, Richard Russell, 84-year-old author of the Dow Theory Letters, said: “Recently, the Transports broke below their November 20 bear market low. The Industrials have refused (so far) to confirm the Transports. Will the Industrials break down and confirm?

“No one can possibly know. But the longer the time elapses that the Industrials refuse to confirm, the more hopeful the situation. As a rule, the closer in time the two Averages, Transports and Industrials, break through preceding levels, the more authoritative the signal. The Transports broke to new lows on January 20. The longer Industrials hold above their November 20 low of 7,552, the better the odds that they will not confirm.”

Key resistance and support levels for the major US indices are shown in the table below. The immediate upside target is the 50-day moving average, followed by the early January highs. On the downside, the December 1 and all-important November 20 lows must hold in order to prevent considerable technical damage.

A number of global stock markets – Germany, France, Belgium, Finland, Ireland and Venezuela – have actually already broken below their November 20 lows. Although a retest of the lows is often a feature of base formation development, it can also be a harbinger of the resumption of a downtrend.

Donning his customary bearish outfit, Albert Edwards of Société Générale, a favorite market strategist among Investment Postcards’ readers, said: “After increasing our equity exposure at the end of October we believe that the market is set to quickly slide sharply towards our 500 target for the S&P 500.

“While economic data in developed economies increasingly reflect depression rather than a deep recession, the real surprise in 2009 may lie elsewhere. It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the yuan. A subsequent trade war could see a re-run of the Great Depression.”

According to Jeffrey Hirsch (Stock Trader’s Almanac), the December Low Indicator says that should the Dow Jones Industrial Index close below its December low anytime during the first quarter, it is frequently an excellent warning sign. This came to pass on Tuesday when the Dow closed below its December low of 8,149 (recorded on December 1).

Also of concern to Hirsch is the January Barometer, stating “As January goes, so goes the year”. Every down January since 1950 has been followed by a new or continuing bear market or a flat year. On Friday the S&P 500 closed at 832, 7.9% lower than the December 31 close.

From across the pond David Fuller (Fullermoney) commented that one could not rule out an overcorrection by the S&P 500 to 600 (as suggested by Jeremy Grantham in his latest quarterly newsletter), “although the downside move to date is still quite overstretched relative to the 200-day moving average. Fundamentals will not determine the actual low, in my opinion, whether already seen or pending. That will be determined by sentiment and liquidity, as always. Currently, sentiment is diabolical but liquidity is increasingly abundant.

“From an investment perspective, my preferred strategy would be to nibble on high-quality equities with decent and well-covered yields.”

On the back of the bullion price increasing by 6.9%, the Gold Bugs Index (+10.6%) was one of the top-performing industry groups for the week. The venerable Richard Russell said: “The [gold] market always does what it’s supposed to, but never when. Is it ‘when time’ for gold? It looks like the long erratic correction in gold is over.

“Gold is pushing up consistently now – the first upside target is to better the 900 level which will take gold above the two preceding peaks. If gold can move above the 900 level (we’re close), I think there is a good chance it will test the highs. Up until now, gold’s progress has been halted, every advance corrected. Gold appears to advance more easily now and the gold stocks are going along with the bullion.”

According to US Global Investors – Weekly Investor Alert, David Rosenberg of Merrill Lynch on Friday sent out a research note titled “The case for gold”, explaining that gold’s value is enhanced by declining bullion supply and increasing money supply.

James Montier of Société Générale added: “Gold kind of scares me because very often the people involved with it seem to be slightly insane. My other problem is I don’t know how to value it. That said, I can certainly see why gold could be considered somewhat of an insurance policy, if not an investment in its own right. Any kind of systemic economic turmoil is likely to drive gold prices higher.”

For more discussion about the direction of stock markets, also see my post “Video-o-rama: Wishing you well, Mr O“.

Economy
“Global businesses remain darkly pessimistic. Sentiment was at its worst in mid-December, but has improved only marginally since then,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “European and South American businesses are most worried, followed by North America; Asian companies are negative but less so. Pricing power has collapsed, suggesting that deflation is increasingly likely.”

The latest US economic reports also indicate that the intensity of the economic downturn shows no sign of letting up. Homebuilding descended to an unprecedented post-war low, the National Association of Home Builders (NAHB) housing market index again reached a new low, and the ABC/Washington Post Consumer Confidence Index remained near its all-time lows. Interestingly, no president has entered office with such a poor level of consumer confidence since the beginning of the Survey in 1985.

Regarding the meeting of the Federal Open Market Committee (FOMC) on January 27 and 28, Asha Bangalore (Northern Trust) said: “The policy statement will be the first following the zero interest rate policy adopted at the last meeting. The explicit hint about the Fed’s future course of action in the December 16, 2008 policy statement read as follows:

‘The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.’

“We will be paying close attention to whether the Fed will retain or rephrase this part of the policy statement. With regard to the Fed’s views about economic growth and inflation … we do not expect radical modifications of the entire policy statement.”

Elsewhere in the world, evidence mounted that the recession was spreading and deepening.

• The UK’s real GDP contracted by 1.5% in the fourth quarter, following a 0.6% decline in the third quarter. The data confirmed the first UK recession since 1991.

• China’s real GDP declined by 6.8% year on year in the fourth quarter. However, when recalculating China’s growth rate on a quarter-on-quarter annualized basis, like most other countries do, commentators are of the opinion that the Chinese economy might already be contracting.

• Japan recorded a fifth consecutive monthly trade deficit in December, marking the worst year for exports on record. Exports contracted by 35% year on year, compared with a 16% expansion as recently as July.

Summarizing the economic situation, Nouriel Roubini (RGE Monitor) said: “The US economy is, at best, halfway through a recession that began in December 2007 and will prove the longest and most severe of the post-war period. Credit losses of close to $3 trillion are leaving the US banking and financial system insolvent. And the credit crunch will persist as households, financial firms and corporations with high debt ratios and solvency problems undergo a sharp deleveraging process.

“Worse, all of the world’s advanced economies are in recession. Many emerging markets, including China, face the threat of a hard landing. Some fear that these conditions will produce a dangerous spike in inflation, but the greater risk is for a kind of global ‘stag-deflation’. We’re likely to see vulnerable European markets (Hungary, Romania and Bulgaria), key Latin American markets (Argentina, Venezuela, Ecuador and Mexico), Asian countries (Pakistan, Indonesia and South Korea), and countries like Russia, Ukraine and the Baltic states facing severe financial pressure.

“The world’s first global recession is just getting started.”

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, January 23, 2009.

In addition to the interest rate announcement by the FOMC (Wednesday, January 28), the US economic highlights for the week, courtesy of Northern Trust, include the following:

1. Leading Indicators (January 26): Consensus: -0.3% versus -0.4% in November.

2. Existing Sales (January 26): Consensus: 4.40 million versus 4.49 million in November.

3. New Home Sales (January 29): Consensus: 400,000 versus 407,000 in November.

4. Durable Goods Orders (January 29): Consensus: -2.0% versus -1.5% in November.

5. Real GDP (January 30): Northern Trust: -4.5% Consensus: -5.4% versus -0.5 in Q3.

6. Other reports: Consumer Confidence (January 27); Consumer Sentiment Index and Employment Cost Index (January 30).

Click here for a summary of Wachovia’s weekly economic and financial commentary.

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

Source: Wall Street Journal Online, January 23, 2009.

Bernard Baruch said: “If you get all the facts, your judgment can be right; if you don’t get all the facts, it can’t be right.” Hopefully the “Words from the Wise” reviews offer assistance to Investment Postcards‘ readers in compiling the facts.

That’s the way it looks from Cape Town.

Bespoke: Interesting prediction market contracts
“Prediction market website Intrade has some interesting finance-related contracts trading at the moment, and below we highlight charts of them. The first contract is whether Apple CEO Steve Jobs will depart as CEO by the end of 2009. As shown, the contract peaked when the company announced Mr. Jobs’ leave of absence earlier this month, but it has since declined a bit to its current level of 60% (traders are putting the odds at 60%).

“The second contract is whether the unemployment rate in the US will be higher than 8.5% by December 2009. The unemployment rate is currently at 7.2%, and the odds for it to be higher than 8.5% by year end are at 55%.

“Intrade also has a contract on whether the US will default on its debt on or before 12/31/09. Traders are currently putting the odds of this occurring at 3.5% on Intrade, which seems low, but is actually pretty high considering what the implications would be if this happened.

“And back in early December, Intrade traders were putting the odds of a GM bankruptcy before the end of Q1 ‘09 at greater than 60%. After government intervention for the automakers happened a few weeks later, those odds dropped sharply and now stand at just 10%.

“Liquidity in these markets is low, so making big bets is hard to do, but analyzing these contracts gives some unique insight into what some people think will or will not happen in the near future.”

Source: Bespoke, January 22, 2009.

CNBC: Barack Obama will help the economy, but don’t expect miracles

Click here for the article.

Source: CNBC, January 18, 2009.

Reuters: Soros – US stimulus not enough, TARP bailout misused
“The stimulus plan the US government is currently considering is necessary to help American citizens, but it will likely not reverse the country’s economic decline, hedge fund manager and billionaire philanthropist George Soros said on Monday.

“‘It is not enough to turn the situation around,’ Soros told the US Conference of Mayors about the $850 billion proposal to increase spending and cut taxes.

“The plan, which was introduced in the US House of Representatives last week and will likely be passed by next month, will help state and local governments balance their budgets and preserve important social services, Soros said.

“At the same time, the $700 billion financial bailout known as TARP for Troubled Assets Relief Program had been carried out in a ‘haphazard and capricious way’ and ‘without proper planning’, he said.

“‘Unfortunately it was misused and the way it was done has poisoned the well. It has created tremendous ill will toward putting up more money,’ Soros said.”

Source: Lisa Lambert, Reuters, January 19, 2009.

Casey’s Charts: What the banks did with the latest bailout
“The red line in the graph below shows that, since August, banks have built their cash position in the form of Treasuries, agencies and deposits at the Fed by $865 billion, while their loans and leases have increased by only $325 billion.

“In other words, rather than lending the billions of dollars received from the Treasury’s Troubled Asset Relief Program (TARP), as was originally intended, the recipient banks have squirreled away the bailout funds in order to shore up their balance sheets.

“Concurrently, the Federal Reserve is exchanging its excess reserves for toxic waste from the financial institutions.

“The combined affect is a ‘circular bailout’ with the Treasury borrowing … in order to lend money to banks … that then lend it back by purchasing more Treasuries. Of course, the expense of this entire bailout scheme ultimately falls onto the back of the tax-paying public.”

Source: Casey’s Charts, January 20, 2009.

Reuters: US and UK on brink of debt disaster
“The United States and the United Kingdom stand on the brink of the largest debt crisis in history. While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt.

“To understand the scale of the problem, and why it leaves so few options for policymakers, take a look at the chart below which shows the growth in the real economy (measured by nominal GDP) and the financial sector (measured by total credit market instruments outstanding) since 1952.

“The solution must be some combination of policies to reduce the level of debt or raise nominal GDP. The simplest way to reduce debt is through bankruptcy, in which some or all of debts are deemed unrecoverable and are simply extinguished, ceasing to exist.

“But widespread bankruptcies are probably socially and politically unacceptable. The alternative is some mechanism for refinancing debt on terms which are more favorable to borrowers (replacing short term debt at higher rates with longer-dated paper at lower ones).

“The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalization, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population.”

Source: John Kemp, Reuters, January 21, 2009.

Financial Times: Winter bites in EU but with some bright spots
“Wintry conditions are gripping Europe’s economies as the biting winds caused by financial market storms lead to deep and protracted recessions, but regional variations are still distinguishable.

“The latest Financial Times economic weather map for Europe shows a further substantial deterioration since it was last published in October, when the devastating impact on the global economy of the collapse of Lehman Brothers, the investment bank, was only just becoming apparent.

“European industrial production collapsed in November, data this month have shown, and business confidence surveys suggest the bottom of the recession – set to be among the worst since the second world war – has not yet been reached.”

Source: Ralph Atkins and Ben Hall, Financial Times, January 19, 2009.

CNBC: Buffett & Brokaw
“Insight on the financial and economic turmoil, with Warren Buffett, Tom Brokaw, NBC News special correspondent, and CNBC’s Erin Burnett and Mark Haines.”

Source: CNBC, January 19, 2009.

RGE Monitor: Estimated $3.6 trillion loan and securities losses in US
“Nouriel Roubini and Elisa Parisi-Capone of RGE Monitor released new estimates for expected loan losses and writedowns on US originated securitizations.

“Loan losses on a total of $12.37 trillion unsecuritized loans are expected to reach $1.6 trillion. Of these, US banks and brokers are expected to incur $1.1 trillion.

“Mark-to-market writedowns based on derivatives prices and cash bond indices on a further $10.84 trillion in securities reached about $2 trillion. About 40% of these securities (and losses) are held abroad according to flow-of-funds data. US banks and broker dealers are assumed to incur a share of 30-35%, or $600-700 billion in securities writedowns.

“Total loan losses and securities writedowns on US originated assets are expected to reach about $3.6 trillion. The US banking sector is exposed to half of this figure, or $1.8 trillion (i.e. $1.1 trillion loan losses + $700 billion writedowns.)

“FDIC-insured banks’ capitalization is $1.3 trillion as of Q3 2008; investment banks had $110 billion in equity capital as of Q3 2008. Past recapitalization via TARP 1 funds of $230 billion and private capital of $200 billion still leaves the US banking system borderline insolvent if our loss estimates materialize.

“In order to restore safe lending, additional private and/or public capital in the order of $1 – 1.4 trillion is needed. This magnitude calls for a comprehensive solution along the lines of a ‘bad bank’ as proposed by policy makers or an outright restructuring through a new RTC.

“Back in September, Nouriel Roubini proposed a solution for the banking crisis that also addresses the root causes of the financial turmoil in the housing and the household sectors. The HOME (Home Owners’ Mortgage Enterprise) program combines a RTC to deal with toxic assets, a HOLC to reduce homeowers’ debt, and a RFC to recapitalize viable banks.”

Source: RGE Monitor, January 22, 2009.

Asha Bangalore (Northern Trust): Home building activity posts new low
“Starts of new homes fell 15.5% in December to an annual rate of 550,000. The annual average of new homes started in 2008 is 902,000, the lowest on record. Starts of new single-family homes dropped 13.5% to an annual rate of 398,000, the lowest on record.

“The peak-to-trough decline in housing starts, both total and single-family, is the largest on record since record keeping began for these series in 1959 (see table 1). The duration of the weakness in home construction (peak was in January 2006) is also the longest on record.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 22, 2009.

Asha Bangalore (Northern Trust): Housing Market Index spells more gloom
“The Housing Market Index (HMI) of the National Association of Home Builders fell to 8.0 in January 2009 from 9.0 in December 2008. Before the onset of the current recession, the record low for the HMI was 20.0 during the 1990-91 recession. The question now is: What is the low for the HMI? The answer is unknown, but we can say that the severity of the housing market situation grows in leaps and bounds everyday.

“The HMI is strongly correlated with sales of new single-family homes. Based on this historical relationship, it appears that a pickup in new sales in the near term is unlikely.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 21, 2009.

Shadowstats: Decline in retail sales worst since World War II
“Annual real retail sales fell by 9.09% in December, versus a 9.11% contraction in November, the steepest annual declines since 1952. On a three-month moving-average basis the December and November declines were 8.88% and 7.87%, respectively. The December annual moving-average decline was the deepest in the history of the two most recent retail series, making the results the worst of the post-World War II era. The annualized real contraction for fourth-quarter 2008 retail sales was 17.1%.”

Source: Shadowstats, January 2009.

BCA Research: US deflation – this time it’s for real
“Annual US headline CPI dipped to zero in December. Core CPI is still positive (1.7% annual growth), albeit is falling steadily.

“The decline in headline inflation is due largely to sharply falling energy (and food) prices. Underlying inflation moves with the business cycle, though it lags economic growth by several quarters. The economy decelerated steadily last year before imploding in the autumn. Thus, core CPI is on track to fall further as economic slack builds. Already, retail prices are falling.

“The current deflationary threat is much more serious than the previous episode in 2002, given the speed and magnitude of the credit and economic crunch. Thus, policymakers will need to work hard to anchor inflation expectations in positive territory, and ensure that a deflationary mindset among consumers and businesses does not set in.”

Source: BCA Research, January 19, 2009.

Paul Kedrosky (Infectious Greed): Banks are just a circle of their former selves
“Nice graphic of how the major banks are just a fraction of their former selves, at least as measured by market value.”

Click on the image below for a larger graph.

Source: Paul Kedrosky, Infectious Greed, January 21, 2009

Bespoke: Long-term charts of the financial sector
“A look at long-term charts of the S&P 500 Financial sector is downright depressing. The first chart below dates back to 1990, and as shown, the sector closed at its lowest level since March 1995 yesterday. The sector is now down 79% from its highs in 2007. A chart of the sector all the way back to 1940 shows just how much the sector has fallen in such a short period of time.”

Source: Bespoke, January 21, 2009.

Eoin Treacy (Fullermoney): Will bank indices be leading indicators?
“The downward breaks experienced by a number of Western banking indices over the last week are significant and suggest we can expect further moves by the respective governments to shore up their financial sectors. This relative weakness poses a headwind for their wider markets.

“When bank indices began to underperform in 2007, they had an incredibly large weighting in most country indices. The performance of bank shares was important both in terms of their high relative weightings and because of their status as lead indicators. However, bank sectors are now a considerably smaller weighting in most indices. This lessens the intrinsic importance of the banks sector to the performance of the wider market, but the psychological impact is undiminished.

“The performance of bank sectors is a major drag on sentiment. Dividends are being eliminated and a process of nationalisation is underway in a number of Western countries. However, one should not forget that many other companies will not need government support, will not eliminate their dividend and as such are likely to be relative performers in this environment.

“In addition, an interesting dichotomy exists between markets where banks are underperforming and where they are outperforming. Bank indices in the USA (S&P500 Banks, Philadelphia Banks, Regional Banks), Europe (DJ Euro Stoxx Banks), the UK, France, Germany, Norway, Finland, Sweden, Italy and Ireland all made new lows in the last week. Internationally, the Chinese bank index is closest to the upper side of its range. No other bank index, I know of, is showing such relative strength. All Asian bank indices remain within their ranges. The marked underperformance of the USA and much of Europe is a clear indication that this is where the bulk of financial risk is focused.”

Source: Eoin Treacy, Fullermoney, January 20, 2009.

Brian Belski (Banc of America Securities-Merrill Lynch): Liquidity is key
“US equity investors should concentrate on companies, industries and sectors that have the means to fund themselves, says Brian Belski, strategist at Banc of America Securities-Merrill Lynch.

“He notes that areas in the market exhibiting strength recently have been dominated by low-quality companies with higher debt levels. But he says fundamental conditions do not support a move to low quality. ‘If 2008 taught us anything, attempts to get ahead of an eventual stock market and economic recovery were premature and misguided.’

“He acknowledges that credit market conditions have improved but is not convinced the worst is over. ‘Remember, even though credit spreads have narrowed, they still remain considerably above the peaks exhibited during prior credit cycles which we believe is a consequence of the loss of confidence both from investors and lenders.

“‘This is particularly troubling to us because we expect US corporate bond issuance to decline in 2009, yet a significant amount of bonds are expected to mature for S&P 500 companies. As a result, areas within the market that rely on leverage to fund operations are likely to struggle in the coming year and the trajectory of corporate bankruptcy filings over the past several years certainly appears to support this notion. Therefore, investors should continue to focus on areas demonstrating strong liquidity in the form of high cash balances and free cash flow.’”

Source: Brian Belski, Banc of America Securities-Merrill Lynch (via Financial Times), January 20, 2009.

Bespoke: Volatility Index shows more complacency
“Below we highlight a chart of the VIX volatility index along with the S&P 500. One difference between the current decline and the declines in October and November is that the VIX has not spiked nearly as much. Many think of the VIX as an indication of fear in the market, and whether it’s good or bad, there seems to be more complacency during the most recent downturn.”

Source: Bespoke, January 23, 2008.

Bloomberg: Roubini, Edwards predict slump in S&P 500 on China
“Stocks will retreat around the world because of shrinking demand from China as growth in the third- biggest economy slows, said Nouriel Roubini, the New York University professor who predicted last year’s financial crisis.

“Global equities will fall 20% this year from current levels as China, which contributed 19.5% to total growth in 2007, contends with its slowest expansion in seven years, he said. Wall Street strategists predict the Standard & Poor’s 500 Index, down 8.4% so far, will rise 17% in 2009.

“Roubini, an economics professor at NYU’s Stern School of Business, said China already is in a ‘recession’ despite government data showing a 6.8% fourth-quarter growth rate, as power output declines and manufacturing shrinks.

“‘Demand is falling in China, they’re over-invested in capacity and there’s a global supply glut,’ Roubini said in a telephone interview. ‘It has very, very important implications.’

“Roubini’s view is shared by Societe Generale global strategist Albert Edwards, who was correct in forecasting in March that a US contraction would spur a bear market in equities. Edwards says the China slowdown will reduce earnings at industrial, energy and raw-materials companies, sparking a selloff in emerging and developed-market stocks that may send the S&P 500 down 40% to 500.

“‘People should be thinking really hard about this rather than sticking their heads in the sand,’ said Edwards, a London-based strategist and member of the top-ranked global investment strategy team in Thomson Extel’s surveys the past three years. ‘We’re just pointing out when the emperor doesn’t have any clothes on.’”

Source: Michael Patterson and Adam Haigh, Bloomberg, January 23 2009.

Bloomberg: Mobius to invest more in China, emerging markets
“Mark Mobius, who oversees about $26 billion in emerging-market stocks at Templeton Asset Management, said he plans to buy more shares of consumer and commodities companies in emerging markets.

“‘Valuations are attractive,’ Mobius, Templeton’s executive chairman, said at a briefing in Kuala Lumpur today. ‘We feel that this year would be a year of recovery of the stock markets in the emerging markets.’

“Mobius said rising income in China, India and other parts of Asia will spur spending on consumer goods, while commodity prices are now ‘too low’. The two nations, Brazil, South Africa and Turkey offer best investment opportunities, he said.

“‘There is an incredible build-up of foreign reserves in the emerging markets, and the increase in money supply is quite dramatic,’ the executive chairman said. ‘We’ve seen a very big increase of money coming into markets.’

“The emerging-markets gauge trades at 8.2 times its companies’ reported earnings, 36% cheaper than its average valuation last year, according to data compiled by Bloomberg. The developed measure trades for 10.8 times profit.

“The US economy and other economies will rebound in 2010, said Mobius, whose biggest holdings are in Asia.”

Source: Soraya Permatasari, Bloomberg, January 17, 2009.

Bespoke: S&P 500 Q4 ‘08 earnings now expected to fall 28.2%
“At the start of the fourth quarter, analysts were expecting S&P 500 earnings to grow by 30% versus Q4 ‘07. While this seems outlandish now, remember that growth in Q4 ‘07 was extremely poor as well, and analysts thought many companies would begin to turn the corner by Q4 ‘08. As we all know, the economy pretty much came to a halt last October. As a result, analysts quickly began to cut growth estimates for the fourth quarter after it became apparent that things weren’t going to get better anytime soon.

“Fast forward a few months, and now analysts are expecting those same Q4 ‘08 earnings to be 28% weaker than the fourth quarter of 2007. With the direction that these estimates have been heading, when all is said and done, it’s likely that this number will get even worse.”

Source: Bespoke, January 21 2009.

Bespoke: Pick your poison – stocks or bonds
“While we all know that investing in stocks has been painful, some readers may be surprised to learn that Treasuries haven’t provided a much better alternative. While the S&P 500 is down 8% so far this year, long-term Treasuries (as measured by the US Long Bond future) are down almost 6%. With the recent break below their 50-day moving average, bonds are hardly looking like a ‘safe’ alternative in the current environment.”

Source: Bespoke, January 22, 2009.

Financial Times: Barclays Capital’s Larry Kantor says keep assets liquid
“The situation in many markets and economies is so tenuous now because we don’t know what the policies are going to be. The next month or two are critical. Investors should keep an ‘arsenal of liquid assets to deploy’, at some point it is possible that there could be a very big upswing in the economy and in equities, which investors should be ready for.

“In the meantime, debt of strong companies appears to be a good investment, especially as the Federal Reserve is considering buying corporate debt, together with other assets it is already buying, such as commercial real-estate backed bonds.”

Source: Financial Times, January 18, 2009.

Bloomberg: “Time to sell” Treasuries, biggest Korean fund says
“A rally that sent US Treasuries to their best year since 1995 is coming to an end, South Korea’s National Pension Service, the country’s biggest investor, said.

“US government efforts to combat the recession will prompt the Federal Reserve to raise interest rates this year, said Kim Heeseok, who oversees $160 billion as head of global investments for the service in Seoul. The decline would snap a surge that sent the securities up 14% last year, according to Merrill Lynch & Co.’s US Treasury Master index, as investors sought the relative safety of debt.

“‘It’s time to sell US Treasuries,’ said Kim, who took over as head of investments at the start of the year. ‘The stimulus plan may cause inflation. The US will raise the benchmark interest rate.’”

Source: Wes Goodman, Bloomberg, January 19, 2009.

John Hussman (Hussman Funds): The case for TIPS
“The way to think about the relationship between TIPS yields and straight Treasury yields is that the nominal yield on a security is equal to the ‘real’ yield plus expected inflation. At present, we have extraordinarily depressed nominal yields, but relatively high real yields, which means that the inflation rate implied in TIPS is extraordinarily low. Indeed, in order for TIPS to achieve the same total return as straight Treasuries over the next decade, we would need to observe a slight but sustained deflation over that period.

“My impression is that we are not near the point where there is any real risk of inflation, and we may very well observe negative near-term inflation rates (which is why it is important to be careful with TIPS that trade at a substantial premium to par, since the apparently high ‘real’ yields on near-term TIPS can be eroded by deflation). TIPS can’t mature at less than par, but if there is a deflation, the accrued inflation adjustment on these securities can be whittled down.

“Suffice it to say that we are holding TIPS not because we anticipate a near-term resurgence of inflation, but because the real, inflation-adjusted yields available over the next decade are quite high on a historical basis, and will adequately provide for the maintenance and growth of purchasing power over time, regardless of the near-term course of consumer prices.”

Source: John Hussman, Hussman Funds, January 19, 2009.

Steve Barrow (Standard Bank): Dollar honeymoon won’t last
“The arrival of a new US president often sees an initial rise in the dollar – although the honeymoon does not always last long and it is doubtful whether this time will be different, says Steve Barrow, currency strategist at Standard Bank.

“He says it is possible that the market might buy into new hope offered by an incoming president.

“‘There’s little doubt that Barack Obama campaigned on a pledge to bring new hope to the American people. It is also possible that the Democrats’ strong position in Congress will give Mr Obama more scope to impose his will than President Bush did.’

“But Mr Barrow doubts any early dollar strength in Mr Obama’s presidency will last. He says the US budget deficit is set to balloon due to the recession and likely $775 billion stimulus plan and notes that the last president to oversee such huge deficit expansion was Ronald Reagan in 1980-1988.

“‘Dollar strength at the start of Mr Reagan’s term gave way to a downtrend that lasted until 1995. The Reagan camp initiated this weakness with dollar sales in 1985. We doubt Mr Obama will do the same, but in one respect, the new president will be seeking a weaker dollar.

“‘The Chinese renminbi remains a thorn in the side of the US trade balance. Mr Obama has vowed to continue the fight for flexibility – and hence strength – in the renminbi as initiated by President Bush. In order to see the dollar weaken against the renminbi, the dollar may have to fall elsewhere.’”

Source: Steve Barrow, Standard Bank (via Financial Times), January 19, 2009.

Jim Rogers: Sterling in peril
“The pound is a currency with no underpinning and should fall against the dollar and the euro, says Jim Rogers, chairman of Rogers Holdings and co-founder of the Quantum Fund with George Soros.

“He says his view reflects the UK’s dire economic situation: ‘It’s simple, the UK has nothing to sell.’

“Mr Rogers says the two main pillars of support for sterling have been North Sea oil and the strength of the UK financial services sector, in particular, the City of London’s role.

“But Mr Rogers says just as North Sea oil is running out, so London’s standing as a major financial centre is set to suffer.

“‘I don’t think there is a sound UK bank now, at least, if there is one I don’t know about it,’ he says.

“‘The City of London is finished, the financial centre of the world is moving east. All the money is in Asia. Why would it go back to the West? You don’t need London,’ says Mr Rogers.

“Mr Rogers thinks the pound is more vulnerable than the dollar or the euro. He says the UK housing market is arguably in a worse state than that of the US, given pockets of strength in the US and prices that are sliding across the board in the UK.

“Meanwhile, he says, the UK is in worse shape economically than the eurozone, where most countries are not big debtors and do not run huge trade deficits. ‘If the UK discovers more North Sea oil, I might change this view,’ he says. ‘But I don’t see that happening.’”

Source: Jim Rogers (via Financial Times), January 21, 2009.

Bespoke: British pound crumbles
“The US dollar is clearly back in rally mode after suffering a setback in December. As shown in the first chart below, the Dollar Index has now broken well above its 50-day moving average and appears to be heading back to its November highs. Unfortunately, rallies in the dollar have recently coincided with declines in riskier assets like equities.

“But the bigger news in currencies is the dramatic fall that the British pound has recently experienced. Today the pound is suffering another big drop, and as shown in the first chart below, the currency broke below recent support levels as well as the $1.40 mark. And the bottom chart shows just how much the pound has fallen in such a short period of time. In late 2007, the pound was trading at record highs versus the US dollar. Now it is trading very close to its lowest level since 1991. Anyone in the US that has the money to go to England can stay there on the cheapest tab in decades.”

Source: Bespoke, January 20, 2009.

Eoin Treacy (Fullermoney): Testing times for euro
“All countries in the Eurozone are now seeing their government bond spreads widen relative to German yields. This is an indication that all countries took part in the access to abundant credit made possible by the launch of the Euro and are now suffering the consequences.

“Some are being more affected than others. Spreads for Spain, Greece, Italy and Ireland have expanded most. These were some of the countries where borrowing costs had fallen most in order to join the Euro and where most use was made of the ability to access cheap credit. Without the single currency they would never have been able to borrow at such low rates, but they are now constricted by being unable to devalue their currencies in order to help them through the crisis.

“This is the first real test for the single currency. If it can survive the credit / solvency crisis without seeing some countries dropping out or its efficacy being called into question; then it stands a good chance of surviving for the longer-term as a viable entity. This may well depend on how long the crisis drags on.

“Spreads of more than 250 basis points over Bunds, for Greek government bonds are not encouraging for its long-term participation. Investors will no doubt remember there were significant questions about the Greek government’s financial probity in the figures submitted to the European Commission prior to its entry into the single currency. Time will tell, but it will be a worthwhile exercise to monitor these spreads going forward.

“It is also interesting to see that in the UK, where control of interest rates is maintained by the BOE, that the brunt of the country’s risk reassessment has been borne by the pound rather than government bonds. The spread over Bunds has been in a volatile downtrend since late 2005 and tested parity recently. The government bond spread has been contracting in line with the pound’s decline against the Euro; both appear to have turned around the same time.”

Source: Eoin Treacy, Fullermoney, January 19, 2009.

CEP News: Treasury Secretary Geithner takes hardline stance on China
“In tune with the ‘change’ mantra heard throughout the US Presidential campaign, the Obama administration signalled a new stance on China. But given the economic climate, analysts question the strategy of adopting a hardline position with the biggest purchaser of US debt.

“In comments to the Senate Finance Committee released Thursday, newly-confirmed Treasury Secretary Timothy Geithner said, ‘President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency.’ He added later that Obama will aggressively push the Asian country to change its policies on foreign exchange.

“‘The comments from the new administration suggest a more robust position on China than the former administration,’ said Shaun Osborne, chief currency strategist at TD Securities. ‘It remains to be seen what China’s response will be, but the US is in a very delicate position at the moment.’

“In September, China overtook Japan as the largest foreign holder of US debt, but that appetite may shrink as China’s growth has slowed dramatically in the global recession.”

Source: Patrick McGee, CEP News, January 22, 2009.

John Authers (Financial Times): Currency interventions looming
“Unprecendented shifts in forex markets last year is fueling rumors of currency interventions in the coming weeks.”

Click here for the article.

Source: John Authers, Financial Times, January 22, 2009.

US Global Investors: Rosenberg – the case for gold
“Gold was, of course, one of the investment world’s few bright spots in 2008, and after a slow start in 2009, it began a rally that climbed above $900 an ounce on Friday. This is gold’s highest price since early October.

“David Rosenberg at Merrill Lynch sent out a short but useful research note Friday titled ‘The Case for Gold’ that explains that gold’s value is enhanced by declining bullion supply and increasing money supply.

“‘It’s the only currency not going up in supply. Pretty simple. South African gold output declined 14% last year in the steepest decline since 1901. US production was down 2%. The leading producer in terms of growth last year was China at +3% (and global central bank selling activity dropped 42% in 2008 to 279+ tons, the lowest since 1996).

“‘Meanwhile, money supply is up more than 10% YoY in the USA (M2); +16% in Australia (M3); almost 11% in Germany (M2); 18% in the UK (M2); almost 9% in Italy (M2); 13% in Canada (M2); 14% in Korea (M2); 18% in India (M2); 12% in Singapore; and 18% in China (M2).

“‘Outside of gold, the only country where money is not being poured into the financial system as if it was water from the tap is Japan, where trends in the monetary aggregates are flat-to-negative. Be that as it may, and in view of all the problems in the US banking sector, we think the dollar is unlikely to lose its reserve currency status any time soon … Confidence in the ability of European governments to service their sovereign debt is being called into question in the debt markets (‘in the land of the blind …’ ).’”

Source: US Global Investors – Weekly Investor Alert, January 23, 2009.

Richard Russell (Dow Theory Letters): Gold – very bullish action
“During the great gold bull markets of the 1970s to 1980, gold topped out at a price of 850 per ounce. For months now, gold has been ‘testing’ the 850 level, first rallying above 850 and then sliding below 850. Currently, February gold is trading at 891. I consider this to be very bullish action. The current gold action is taking place in the second phase of the new gold bull market. The second phase has seen many hedge funds and a small segments of the public become interested in gold.
“I believe the third speculative phase of the current gold bull market lies ahead. This is the phase where the public jumps wholesale into the market. It’s the phase where I expect to see a much higher, even frenzied, gold price. This final phase of the gold bull market will be accompanied by international doubt regarding the value and viability of fiat currency.
“Fiat money is being created in great quantities by almost every central bank in the world. Imagine, the foolishness of trying to ward off insolvency by creating ever-larger quantities of paper money. The worse off the economies of the world, the more fiat currency will be created.”

Source: Richard Russell, Dow Theory Letters, January 23, 2009.

Financial Times: UK move to boost cash supply
“Britain paved the way towards unconventional monetary policy in Europe on Monday when the government gave the Bank of England authority to create money and buy a variety of private sector assets.

“Although there is no sign the Bank’s monetary policy committee wants to introduce US-style quantitative easing immediately, it now has the power to buy assets ranging from corporate bonds to asset-backed securities with newly created money.

“The policy, if introduced, seeks to ease the flow of finance to companies, driving down company borrowing costs and boosting the supply of cash in the economy. The Federal Reserve prefers the term ‘credit easing’ to describe similar moves.

“The decision comes as part of a package designed to ease pressure on lending in the UK economy and put a brake on deepening recession. On Monday, the European Commission said Britain had one of the most exposed economies in the world to the global recession, predicting its economy would contract by 2.8% this year with stagnation continuing in 2010.

“Other elements of the package were heavily trailed. An insurance scheme stands at its heart, designed to restore some certainty to banks’ finances by providing cover against catastrophic losses. This will be implemented from February on a case-by-case basis.

“From April, the government will provide guarantees to wrap around simple asset-backed securities issued by banks containing high-quality mortgage and corporate assets. Subject to state aid approval from the European Commission, it is also planning to extend its current guarantee of short-term funding for banks to the end of the year.

“For the first time since the crisis began, the Bank of England will also explicitly accept corporate credit risk when it begins a $74 billion programme of asset purchases from the private sector in return for government paper in February.”

Source: Chris Giles, Financial Times, January 19, 2009.

Financial Times: UK tries to break recessionary dynamic
“The government on Monday launched its second bank rescue package, injecting billions of pounds more of the taxpayer’s money into saving Britain’s banks. Chris Giles, FT’s economics editor, tells Daniel Garrahan that the new bank rescue package is designed to rescue the economy as well as the banks.”

Source: Financial Times, January 19, 2009.

BCA Research: Last chance for UK banks
“Measures by UK authorities to shore up the banking system brings the prospect of full scale nationalization one step closer if they fail to re-ignite lending.

“The BoE’s ability to purchase assets outright will effectively help in recapitalizing the banking system and should also provide a valuable fillip to the corporate debt market. For now, the Treasury has stopped short of setting up a ‘bad bank’ to coral all the poor quality assets, probably for fear of what this might mean for the UK’s beleaguered public finances in the event of default. Based on current government estimates the deficit will stay above 3% of GDP until the middle of the next decade.

“Bottom line: At this stage, policymakers are limiting their actions to ‘quality assets’. However, it is probable that the next step is a ‘bad bank’ and full scale nationalization, given that output is forecast to fall this year at the fastest pace since 1946 and lending is likely to stay weak for a prolonged period.”

Source: BCA Research, January 21, 2009.

James Pressler (Northern Trust): Japan – no sale!
“Two items of significance regarding the Japanese market hit the wire this morning – the end-year trade balance and the Bank of Japan (BoJ) policy meeting announcement. With the overnight call rate already down to 0.10%, another rate cut would hardly be a news-maker, but the state of Japan’s exports usually makes the front page. And unfortunately, the news was not good.

“Nobody expected the export market to make a miraculous turnaround, but some hope existed for less erosion in overseas sales or fewer imports, thereby supporting net exports. Neither occurred. December imports contracted by 21.5% on the year and were up by 7.9% for 2008 as a whole, but exports fared much worse, posting respective changes of -35.0% and -3.4%. This dragged the annual trade balance down to $20.4 billion, a level not seen since 1983 and a far cry from the 2007 tally of $92.1 billion.

“We have said it before and we will say it again – our official forecast for Q4 GDP in Japan is ‘abysmal’.”

Source: James Pressler, Northern Trust – Daily Global Commentary, January 22, 2009.

Societe Generale: Japanese exports fall 35%
“Strikingly, Japanese exports to the US were down some 37% yoy. But we cannot highlight strongly enough how truly mindboggling Japan’s collapse in exports to China are. Last July they were expanding at a 16% yoy pace. Now they are contracting at a 35% yoy rate! This is a phenomenon throughout the region. Hence despite the notoriously manipulated Chinese GDP data showing a shocking slowdown in GDP growth to 6.8% yoy. I would eat my hat if the Chinese economy was doing anything other than contracting right now.”

Source: Societe Generale, January 2009.

Nouriel Roubini (RGE Monitor): China – why 0% growth is the new size 6.8%
“The Chinese came out today with their 6.8% estimate of Q4 2008 growth. China publishes its quarterly GDP figure on a year over year basis, differently from the US and most other countries that publish their GDP growth figure on a quarter on quarter annualized seasonally adjusted (SAAR) basis.

“When growth is slowing down sharply the Chinese way to measure GDP is highly misleading as quarter on quarter growth may be negative while the year over year figure is positive and high because of the momentum of the previous quarters’ positive growth.

“Indeed if one were to convert the 6.8% y-o-y figure in the more standard quarter over quarter annualized figure Chinese growth in Q4 would be close to zero if not negative.

“Other data confirm that China was in a borderline recession in Q4 and that it may be in an outright recession in Q1: production of electricity plunged 7.9% in y-o-y basis; the Chinese PMI has been below 50 and close to 40 for five months now.

“And with manufacturing being about 40% of GDP , manufacturing is certainly in a sharp recession (negative growth) and the overall economy may be close to a recession

“So the 6.8% growth was actually a 0% growth – or possibly negative growth – in Q4; and the Q1 figures look even worse. So China is in a recession regardless of what the highly massaged official numbers claim.”

Source: Nouriel Roubini, RGE Monitor, January 22, 2009.

Bryan Crowe (Northern Trust): Brazil – 100 is the new 75
“In a surprise to the majority of forecasters, Brazil’s central bank lowered its benchmark rate by a larger-than-expected 100bps on Wednesday after an official vote of 5-3 (the three voted for a 75 bp cut), bringing the overnight Selic rate down to 12.75%. This move was justified after a subdued inflation reading for December, but the committee’s main reason for the move was a significant deterioration in domestic conditions.”

Source: Bryan Crowe, Northern Trust – Daily Global Commentary, January 22, 2009.

Tags: 30 Year Treasury, 30 Year Treasury Bond, Basis Points, Brazil, BRIC, BRICs, Canadian Market, Crb Index, David Rosenberg, Earnings Data, Economic Background, Economic Morass, Emerging Markets, ETF, Global Recession, Global Stock Market, Global Stock Markets, Gold, Gold Bullion, Government Bonds, India, Japanese Yen, Living Memory, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, oil, Shanghai Composite Index, Sovereign Debt, Us Dollar Index, West Texas Intermediate
Posted in Bonds, Commodities, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, ETFs, Gold, India, Markets, Oil and Gas, Outlook, US Stocks | Comments Off

Jeremy Grantham: Obama and the Teflon Men, and other Short Stories

Friday, January 23rd, 2009

In October last year perennial bear Jeremy Grantham, chairman of Boston-based GMO, said: “We are reconciled to buying too soon, but we recognize that our fair value estimate of 975 on the S&P 500 is, from historical precedent, likely to overrun on the downside by 20% to 40%, giving a range of 585 to 780 on the S&P as a probable low.

“The world faces unavoidable declines in economic activity and profit margins, so this overrun is unlikely to be much less painful than average, although you never know your luck.”

Given Grantham’s forecast, it was with keen interest that I have been awaiting his latest quarterly newsletter entitled “Obama and the Teflon Men, and Other Short Stories. Part 1“. The following paragraphs are a summary of his investment recommendations from this report:

“The current disaster would have been easy to avoid by making a move against asset bubbles early in their lifecycle. It will, in contrast, be devilishly hard to get out of. But, we are deep in the pickle jar, and it seems likely that, in terms of economic pain, 2009 will be the worst year in the lives of the majority of Americans, Brits, and others. So break a leg, everyone!

“Slowly and carefully invest your cash reserves into global equities, preferring high quality US blue chips and emerging market equities. Imputed 7-year returns are moderately above normal and much above the average of the last 15 years. But be prepared for a decline to new lows this year or next, for that would be the most likely historical pattern, as markets love to overcorrect on the downside after major bubbles. 600 or below on the S&P 500 would be a more typical low than the 750 we reached for one day.

“In fixed income, risk finally seems to be attractively priced, in that most risk spreads seem attractively wide. Long government bond rates, though, seem much too low. They reflect the short-term fears of economic weakness and the need for low short-term rates. We would be short long government bonds in appropriate accounts.

“As for commodities, who knows? There were a few months where they looked like a high-confidence short, but now they are half-price or less, and are much lower confidence bets.

“In currencies, we know even less. It is easy to find currencies to dislike, and hard to find ones to like. There are no high-confidence bets, in our opinion.

“For the long term, research should be directed into portfolios that would resist both inflationary problems and potential dollar weakness. These are the two serious problems that we may have to face as a consequence of flooding the global financial system with government bailouts and government debt.”

Click here for the full report on Grantham’s views.

Tags: Blue Chips, Bond Rates, Cash Reserves, Economic Activity, Economic Pain, Economic Weakness, Emerging Market, Global Equities, Government Bond, Income Risk, Investment Recommendations, Jeremy Grantham, Keen Interest, Lows, Obama, Overrun, Pickle Jar, Profit Margins, Quarterly Newsletter, Value Estimate
Posted in Bonds, Commodities, Emerging Markets, Markets | Comments Off

Interview: Marc Faber Downbeat on Bailouts

Thursday, January 22nd, 2009

Marc Faber, the publisher of the Gloom, Doom and Boom Report, told CNBC that the new bank bailouts are not likely to work because they are run by the same people who prolonged the economic agony by throwing money at weak companies rather than allowing them to fail and encouraging the strong ones.

Faber expresses his opinions on the financial crisis, the danger of government bonds being downgraded in the wake of massive bailout plans, as well as the outlook for stock markets, currencies and commodities.

Click here or on the image below to view the first part of the interview.

Click here for the second part of the interview.

Click here for the article.

Source: CNBC, January 19, 2009.

Tags: Agony, Article Source, Bailout, Cnbc, Commodities, Currencies, Downbeat, Financial Crisis, Gloom Doom And Boom, Government Bonds, Image, January 19, Marc Faber, Money, Publisher, Stock Markets
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Obama’s Honeymoon Faces Daunting Tasks

Wednesday, January 21st, 2009

The following paragraphs from Nouriel Roubini’s RGE Monitor provide an insightful look at the daunting economic and geo-political challenges facing President Obama.

Now that Barack Obama has taken the oath and become the 44th President of the United States, he faces great expectations at home and abroad to steer the U.S. and global economy out of the greatest post-war recession and financial crisis, to re-align the U.S. foreign policy stance and global standing on issues like financial sector regulation, climate change, trade talks and nuclear proliferation. He – and his team – enters with large amounts of political capital.

Obama’s public acknowledgment that the country’s economic woes will remain challenging in the near-term and will involve great adjustments, and his choice of a strong economic team are signs of optimism that the administration will be quick with policy measures. While the domestic economy (especially passing a fiscal stimulus package) will take most of his time in the short-term, the Israel-Gaza offensive indicates foreign policy concerns – especially in the Middle East and South Asia will also demand attention from the beginning of the Obama presidency.

Fiscal Stimulus
Significant growth contraction in Q4 2008 and Q1 2009 along with mounting job losses, declining asset incomes, corporate bankruptcies and tight credit conditions, mean Obama’s first priority will be to pass the fiscal stimulus package by February 2009. The payroll tax relief, extension of unemployment insurance and food stamps for low-income households included in the package will cushion vulnerable groups from the recession and boost consumer spending. However, these policies may do little to boost growth in the short-term. With only about US$100bn of around US$500bn in planned infrastructure spending expected to kick in within the first three months, the initiative may not be timely in spite of being potentially effective in boosting the economy during late 2009 and 2010.

While tax cuts will be timely, households facing financial pressure will save the proceeds rather than boost spending just as they did during Q2 2008, limiting effectiveness. Similarly, tax credits for businesses to hire workers and invest in new equipment will be ineffective in stimulating investment since firms forecasting a prolonged slump in domestic and export demand and high credit costs will cut capex plans.

However, given that state and local governments support greater spending and jobs than the federal government, grants for the recession- and budget-deficit hit states will be more effective in preventing cut backs in public services, infrastructure projects and jobs, and also partly offset declining tax revenues and slump in debt financing.

But given our estimated contraction in private demand of around US$700bn in just 2009 alone, the US$800bn-plus stimulus package distributed over two years (2009-10) might not be enough to offset the contraction in GDP in 2009. Also, the extent of job creation via the stimulus might be limited as infrastructure projects will, at best, absorb workers from real estate construction and low-end manufacturing while services and manufacturing in general will continue to witness hiring freezes due to low demand. Moreover, investment in infrastructure, renewable energy and R&D will simulate the economy and create jobs only in the medium to long run.

Hence, the prolonged slump and a very sluggish economic recovery might actually necessitate a second stimulus package. More importantly, unless the government addresses problems of bank capitalization and mortgage crisis, any fiscal stimulus will be ineffective in steering the economy out of this crisis.

Continued bank bailouts have signaled to the administration that further bank writedowns are imminent and the banking system as a whole might be insolvent. Capital injection on an ad-hoc basis, or even after banks write down bad debt to establish asset values, might only delay a broader solution for toxic assets while making inefficient use of the TARP funds. One possible solution would be the creation of a ‘bad bank’ that can buy toxic assets from banks to ease pressure on their balance sheets and help stimulate lending to the private sector.

An alternative might be to use the remaining TARP funds to extend government insurance to banks’ toxic assets. Obama’s economic team also has voiced concerns that the TARP funds have been inefficiently used by banks so far in order to absorb losses on their balance sheets, fund acquisitions and pay for compensation rather than fuel credit growth in the economy. The new administration will likely direct the remaining funds towards unclogging credit markets and renewing lending to households and firms by targeting consumers and municipalities – credit cards, mortgages, auto loans, students loans and muni bonds. Total loan losses are expected to hit US$1.6 trillion and additional negative feedbacks on MBSs and other ABSs are imminent, especially as the recession raises default by households and corporates.

Tight credit conditions and financial headwinds for households will continue to raise foreclosures and mortgage defaults. Increase in the excess home supply now poses the risk of over-correction in home prices thus leading to further bank losses and contraction in consumer spending. As a result, Congressional Democrats and the Obama administration will have to work on modifying the troubled mortgages and refinancing them into longer term low interest loans. But given the limited effectiveness of past government programs, the new government needs to reduce the mortgage principal to fix the problem of homeowners’ insolvency rather than just extending the maturity period or reducing the interest rate.

To encourage greater lender participation, the government will have to share the cost of modifying the loans and offer lenders a share in future home appreciation and share any losses from default on the modified loans. While Democrats favor using some of the remaining TARP funds for this purpose, estimates suggest that the cost of such a program might be as much as US$600bn to US$1 trillion, especially as home prices overcorrect downward, more homes fall into negative equity and defaults on the refinanced mortgages continue. To contain fiscal costs, the government should be the senior debt holder in the modified mortgages to benefit from future home appreciation.

Continued bank bailouts, fiscal stimulus packages and refinancing at-risk mortgages will likely push up the fiscal deficit to over US$1.3 trillion in FY2009. While these counter-cyclical spending measures are warranted to address the crisis and Obama might also delay his plan to raise taxes, the U.S. will have to consider fiscal consolidation during the recovery phase. Unless the government reforms the tax system, reduces health care costs and finances Social Security and defense needs, a structural budget deficit will continue to pose risks to the U.S. debt financing needs and the dollar for many years to come.

Trade
Global trade talks might take a backseat in 2009 as the U.S. and other economies remain occupied with domestic counter-cyclical fiscal and monetary policies. However amid slumping exports, more and more governments might impose import restrictions, offer trade distorting fiscal stimulus to domestic firms, prevent stimulus leakages via imports, bail out national champions and favor undervalued currencies. Escalating trade protectionism during the Great Depression actually worsened the global economic crisis. In such a scenario, the U.S. would need to take the lead to renew global trade talks and establish WTO guidelines to prevent countries from pursuing protectionist measures. However, this will be a longer term objective.

Meanwhile the discussion on NAFTA is likely to re-emerge in light of the President’s visit to Canada, reportedly his first foreign trip. While policy on trade agreements, the Chinese reminbi and inward-investment by foreign governments might take a backseat in the initial days of the new administration, China’s bias for an undervalued currency to support exports and the need for investments from foreign governments in the face of U.S. bank and corporate bankruptcies might rekindle these issues. Moreover, as imports and exports shrink for deficit and surplus countries respectively, U.S. will lead the world in the painful unwinding of global imbalances.

Energy and Climate Change
Although climate change is a major priority and the new members of Obama’s energy team are focused on increasing energy efficiency and the share of alternative fuels in the U.S. energy mix, coming to consensus on these issues may be difficult – and comprehensive climate change legislation might not come to the fore until 2010. In the short-term, the most significant policies to support alternative fuels may come through other economic packages – the fiscal stimulus, the terms of the support to the auto sector are some examples.

President Obama has emphasized that the fiscal stimulus will include support for ‘green jobs’ – jobs that support alternative energy and help to wean the U.S. from fossil fuels that are increasingly sourced abroad from unstable countries, but these will take time to have effect. However, political momentum globally may build as the next climate change conference approaches at the end of 2009. Steven Chu and other members of Obama’s energy team are expected to push for significant energy policy changes towards renewable and federal climate change legislation, including an economy-wide cap-and-trade program however the severity of the economic recession may make a gas tax unpalatable even if it is matched by offsetting payroll tax cuts.

Despite the fall in demand as global output contracts, there are obstacles in diversifying both the source of energy supplies and the type will be difficult, particularly in the short-term. Not only do the costs of alternative energy remain high, particularly as technologies are still being developed. Government policies might offset this gap.

The reduction in oil prices may deter some of the demand for drilling off the U.S. coastline even as it deters investment in alternative technologies. Similarly, environmentally costly fuel from Canada’s oil sands may find U.S. markets less welcoming, even if it spurs investment in carbon sequestration in the long-term. Already the fall in gasoline prices has deterred the purchases of hybrid vehicles, possibly reversing some of the behavioral changes that led to lower petroleum consumption in mid-2008.

Foreign Policy
Despite the administration’s focus on passing a fiscal stimulus and domestic policy issues, President Obama has inherited a complex set of foreign policy issues from President Bush that will occupy him, his Secretary of State Hilary Clinton and their teams. Political and security issues in the Middle East and South Asia are particularly urgent. Obama comes to power with significant political capital and a set of experienced officials determined to increase diplomatic efforts to counter global threats given the limitations of hard power to solve global issues.

The Gaza crisis pushed the Middle East and especially the Israeli-Palestinian conflict to the top of the President Barack Obama’s agenda. In particular the focus will be on trying to prevent a precarious ceasefire from contributing to regional instability. The cease-fire in Gaza could present a fresh opportunity for mediating a peace process, but Obama will be faced with a set of challenges nevertheless that may absorb a lot of U.S. political capital in the region.

The conflict had deepened a rift between the Palestinian rival political factions – Hamas and Fatah – and the lack of national unity may continue to impede the serious advancement of the Israeli-Palestinian peace process, as will divisions between Arab states. Furthermore, Israel holds parliamentary elections on Feb 10 and the commitment of the Israeli government to the peace process will vary. Finally, brokering a successful Middle East peace process involves a broad regional approach and an effort to address regional players, such as Syria and Iran and involving both tradition power brokers like Egypt, Jordan and Saudi Arabia and newer entrants like Qatar.

A set of elections in the Middle East, especially in Israel, Iraq and Iran in the first half of 2009 may provide testing times. The reduction of U.S. troops in Iraq and transfer of power to Iraqi authorities is already well under way but more details are yet to emerge regarding the exit of U.S. troops. While Obama pledged to withdraw troops from Iraq with 16 months of taking office, they might remain for some time. The President has emphasized a new approach to deal with Iran including the possibility of lower-level diplomatic engagement, but the country’s emphasis on nuclear proliferation may be difficult to shake. With the fall in the price of oil, Iran’s abilities to fund its proxies in Iraq, Lebanon and Palestine may be reduced as maintaining domestic support becomes paramount.

Regional security continues to deteriorate in South Asia with the resurgence of the Taliban in Afghanistan, growing hostilities between India and Pakistan, and a weakening alliance with Pakistan against the war on terror. Obama has regularly echoed the need for more troops to be deployed and the Senate has agreed to send additional troops almost doubling American troops on the ground. However, the daunting task of constructing a comprehensive new strategy for a region defined by endemic corruption and the lack of basic amenities remains – and the economic crisis might make it more difficult to convince fellow NATO members to also increase their military presence. By contrast, despite the persistence of North Korea’s nuclear program, East Asia is unlikely to grab as much attention. Economics will likely continue to dominate the U.S. China relationship particularly now that China’s exports are contracting and China, like the U.S. faces a hard landing.

President Obama will seek to strengthen transatlantic ties that have weakened following the Iraq war. Washington will work together with EU closely together to respond to the financial and economic crises, peace and security issues, and to stop and reverse climate change. But convincing NATO allies to increase military presence in Afghanistan may be difficult. U.S.-Russia relations have been strained by NATO’s eastward expansion, war in Georgia, gas politics, Kosovo’s independence to name a few. Despite a warning that Russia might deploy short-range missiles in the Baltic region if Washington proceeded with its missile defense shield in Eastern Europe, Moscow has signaled its willingness to reexamine relations with the U.S. under the new administration.

The U.S. and Russia may be able to make common cause regarding the nuclear threat from Iran, helped perhaps by Obama’s ambivalence about the missile defense and ruling out of a speedy NATO membership track for Ukraine and Georgia. Yet neither country will be willing to compromise on its core interests, and a divided Europe may make responding to a poorer, but still determined, Russia more difficult.

Source: RGE Monitor, January 21, 2009.

Tags: 44th President, Barack Obama, Canadian Market, Corporate Bankruptcies, Domestic Economy, Economic Team, Economic Woes, Emerging Markets, First Three Months, Fiscal Stimulus, Food Stamps, Income Households, India, Nouriel Roubini, Nuclear Proliferation, Oil Sands, Payroll Tax, Policy Measures, Policy Stance, Political Challenges, Public Acknowledgment, Sector Regulation, Stimulus Package, Tight Credit
Posted in Bonds, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, India, Infrastructure, Markets, Oil and Gas | Comments Off

Is Wall Street Responsible for 2008′s Oil Bubble?

Tuesday, January 20th, 2009

Back in late June, we [GreenLightAdvisor.com] interviewed Stephen Briese, a seasoned commodities trader, who, based on CoT (Commitments of Traders) reports, published regularly by the CFTC, posited that there was an estimated 200-days of paper oil held by investors/speculators, among them some of the large endowments and pension funds, as well as sovereign wealth funds re-investing their oil profits back into none other than the paper stuff. Briese is the author of The Commitments of Traders Bible.

Is Wall Street to blame for 2008′s oil bubble? Steve Kroft, from CBS’ 60 Minutes investigates:
Click play to watch the CBS 60 Minutes story aired on January 8, 2009. This is a must see story.

Dan Gilligan of the Petroleum Marketers Association says it is naked futures investors via indexes that are more interested in investing in paper oil for profit.

As the president of the Petroleum Marketers Association, [Dan Gilligan] represents more than 8,000 retail and wholesale suppliers, everyone from home heating oil companies to gas station owners.

When 60 Minutes talked to him last summer, his members were getting blamed for gouging the public, even though their costs had also gone through the roof. He told Kroft the problem was in the commodities markets, which had been invaded by a new breed of investor.

“Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors that are looking to make money from their speculative positions,” Gilligan explained.

Gilligan said these investors don’t actually take delivery of the oil. “All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery.”

“They’re trying to make money on the market for oil?” Kroft asked.

“Absolutely,” Gilligan replied. “On the volatility that exists in the market. They make it going up and down.”

Hedge fund manager, Michael Masters says that for every barrel of oil actually consumed in the US, there were 27 barrels traded every day, and interest in commodities indexes grew from $13-billion to $300-billion in 5 years.

About the same time, hedge fund manager Michael Masters reached the same conclusion. Masters’ expertise is in tracking the flow of investments into and out of financial markets and he noticed huge amounts of money leaving stocks for commodities and oil futures, most of it going into index funds, betting the price of oil was going to go up.

Asked who was buying this “paper oil,” Masters told Kroft, “The California pension fund. Harvard Endowment. Lots of large institutional investors. And, by the way, other investors, hedge funds, Wall Street trading desks were following right behind them, putting money – sovereign wealth funds were putting money in the futures markets as well. So you had all these investors putting money in the futures markets. And that was driving the price up.”

In a five year period, Masters said the amount of money institutional investors, hedge funds, and the big Wall Street banks had placed in the commodities markets went from $13 billion to $300 billion. Last year, 27 barrels of crude were being traded every day on the New York Mercantile Exchange for every one barrel of oil that was actually being consumed in the United States.

There were no disruptions to supply, and India and China did not suddenly increase their consumption overnight. In fact, supply was rising and demand falling.

Michael Greenberger, a former director of trading for the U.S. Commodity Futures Trading Commission, the federal agency that oversees oil futures, says there were no supply disruptions that could have justified such a big increase.

“Did China and India suddenly have gigantic needs for new oil products in a single day? No. Everybody agrees supply-demand could not drive the price up $25, which was a record increase in the price of oil. The price of oil went from somewhere in the 60s to $147 in less than a year. And we were being told, on that run-up, ‘It’s supply-demand, supply-demand, supply-demand,’” Greenberger said.

A recent report out of MIT, analyzing world oil production and consumption, also concluded that the basic fundamentals of supply and demand could not have been responsible for last year’s run-up in oil prices. And Michael Masters says the U.S. Department of Energy’s own statistics show that if the markets had been working properly, the price of oil should have been going down, not up.

“From quarter four of ’07 until the second quarter of ’08 the EIA, the Energy Information Administration, said that supply went up, worldwide supply went up. And worldwide demand went down. So you have supply going up and demand going down, which generally means the price is going down,” Masters told Kroft.

Investment banks fuelled the energy market.

Masters believes the investor demand for commodities, and oil futures in particular, was created on Wall Street by hedge funds and the big Wall Street investment banks like Morgan Stanley, Goldman Sachs, Barclays, and J.P. Morgan, who made billions investing hundreds of billions of dollars of their clients’ money.

“The investment banks facilitated it,” Masters said. “You know, they found folks to write papers espousing the benefits of investing in commodities. And then they promoted commodities as a, quote/unquote, ‘asset class.’ Like, you could invest in commodities just like you could in stocks or bonds or anything else, like they were suitable for long-term investment.”

Its an important informative piece of journalism. Make sure you watch it, in case you missed it.

Tags: Briese, Cbs 60 Minutes, Cftc, Commitments Of Traders, Commodities Trader, Emerging Markets, Endowments, Futures Markets, Gas Station Owners, Gilligan, Home Heating Oil, India, New Breed, oil, Oil Companies, Oil Contracts, Oil Profits, Pension Funds, Petroleum Marketers Association, Speculators, Steve Kroft, Volatility, Wholesale Suppliers
Posted in Bonds, Commodities, Emerging Markets, Energy & Natural Resources, Gold, India, Markets, Oil and Gas | Comments Off

Warren Buffett Interview (01/19/2009)

Tuesday, January 20th, 2009

Warren Buffett is interviewed by Tom Brokaw, January 18, 2009, on Dateline NBC.

Click play to watch:

Here is an excerpt from the transript:

For the complete transcript, click here.

TOM BROKAW, NBC NEWS:

Last fall, Warren a pollster told me that the election was between hope and fear. When it comes to the economy, who’s winning, hope or fear?

WARREN BUFFETT:

Well, right now fear is. I mean, you’re seeing it everyplace. You saw it at– in the sales of almost every item at– at Christmas. There’s a lot of fear throughout the country. Even– even with people whose jobs are fine, and who have money in the bank. But they– they’re worried.

BROKAW:

I’ve been describing this as the domestic equivalent of war. Is that an overstatement?

BUFFETT:

Well, actually, in September I said– this is an economic Pearl Harbor. I– that was the time congress had made it in. It really is an economic Pearl Harbor. It– the– the country is facing something it hasn’t faced since World War II.

And they’re fearful about it. And they don’t know quite what to do about it. And the point is– and– and it– and temporarily it looks like we’re losing. It has that– that same aspect. Interestingly enough, we were losing for a while after Pearl Harbor. But the American people never doubted that we’d win. I mean, we had that attitude then. I think, right now, that they’re sort of paralyzed.

BROKAW:

Is Barack Obama the right commander in chief for the economy?

BUFFETT:

He’s the absolute right commander in chief. That– you know, that’s another thing the American people seem to do, occasionally, is that we elect people that are right for the times. You know, whether it was Lincoln, Roosevelt. And– and I would say Obama– you– you couldn’t have– anybody better in charge.

BROKAW:

But why is he right for the times?

BUFFETT:

Well, he’s– he– he’s smart, he’s got the right values, but he also– he understands economics very well. He’s cool. He’s– he’s– he’s analytical. But then, when he gets it all thought through, and he’s fast– he can convey to American– the American people what needs to be done. Not to expect miracles. That it’s gonna take time. But that we’re gonna get to the other end. And– and I– I– I don’t think there’s anybody better for the job than– than– the president-elect.

BROKAW:

He often cites you as an advisor. And I know that you’ve been in touch with his economic team. But what often happens to somebody who gets elected to that office, particularly, they’re more to you to tell you what they know than they are to listen. Does he listen?

BUFFETT:

He’s a listener. I– I first met him, maybe, four years ago, or something like that. He was a listener then, he’s a listener now. But, on the other hand, he makes up his own mind. He will– he will not be– his team won’t run him. He’ll use his team, he’ll use them very effectively. He’ll synthesize, he’ll– he’ll– he’ll analyze. But, in the end, it’ll be his decision.

Tags: Attitude, Barack Obama, Commander In Chief, Dateline Nbc, Economics, Economy, Excerpt From, Hope And Fear, Lincoln, Money In The Bank, Nbc, Nbc News, Overstatement, Pearl Harbor, Pollster, Roosevelt, Time Congress, Tom Brokaw, Warren Buffett, World War Ii
Posted in Economy, Markets | Comments Off

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

Sunday, January 18th, 2009

Investor sentiment around the globe was negatively impacted during 2009’s second full week of trading as a barrage of bleak economic and corporate news offered more confirmation of a deepening recession, bringing risk aversion to center stage.

The US dollar and government bonds (excluding emerging markets and countries on the periphery of the Eurozone) gained, but global equities and commodities were on the defensive as nervous investors tried to gauge the likely damage of the economic malaise.

Global bourses concluded a whipsaw week with hefty losses, but stemmed some of the downside as a relief rally came to the rescue towards the end of the week. The MSCI World Index and the MSCI Emerging Markets Index declined by 6.2% and 5.8% respectively.

The US indices all dropped over the week as shown by the major index movements: Dow Jones Industrial Index -3.7% (YTD -5.6%), S&P 500 Index -4.5% (YTD -5.9%), Nasdaq Composite Index -2.7% (YTD -3.0%) and Russell 2000 Index -3.1% (YTD -6.6%). As a matter of interest, the year-to-date returns at the same point last year (i.e. after 11 trading days) were -6.0% for the Dow and -6.5% for the S&P 500.

Adding a spark of hope on Thursday, the US Senate voted to release the second and final $350 billion tranche of the TARP funds, whereas the House Democrats unveiled a much-awaited $825 billion stimulus package aimed at halting the economic rot. Meanwhile, in a speech at the London School of Economics, Fed Chairman Ben Bernanke said Barack Obama’s economic package could provide a “significant boost” to the US economy.

Source: Daryl Cagle

But back to the stock market. The bar chart below shows the US sector performance for the past week, and specifically how defensive sectors such as consumer staples, healthcare and utilities outperformed other sectors on a relative basis.

The financial sector plummeted by 16.3% as several US banking shares fell to multi-year lows amid growing concerns that they will battle to cope with increasing credit losses as the global recession intensifies.

Source: StockCharts.com

The nascent earnings season saw a glut of fourth-quarter losses. These included larger-than-expected losses from Bank of America (BAC) and Citigroup (C), resulting in their respective share prices plunging by 44.7% and 48.2% over the week.

Citi announced plans to break up the bank into two businesses, following the decision to sell a controlling interest in the valuable Smith Barney brokerage to Morgan Stanley (MS). On the other hand, Bank of America will receive an additional $20 billion of TARP funds to bed down its troublesome acquisition of Merrill Lynch, as well as a guarantee on $118 billion of potential losses on distressed assets. Elsewhere, the Irish government nationalized Anglo Irish Bank, and HSBC was rumored to be seeking fresh capital of $30 billion.

As far as the US housing situation is concerned, I am keeping a close eye on the mortgage situation. According to Freddie Mac’s Primary Mortgage Market Survey, the national average rates for a US 30-year fixed mortgage last week declined to 4.96% from 5.33% two weeks ago and 6.46% in October last year. However, the rate is still 378 basis points higher than the three-month dollar LIBOR rate. This spread averaged 97 basis points during the 12 months preceding the crisis, indicating that lower rates are not being passed on to consumers.

Despite the interbank lending rates having declined from their peaks, banks have significantly curtailed the amount of money they are actually lending. The US Depository Institutions Aggregate Excess Reserves continue their ascent at levels far in excess of the amount that banks need to keep on deposit to meet their reserve requirements (see chart below). This measure indicates that the balance sheets of banks remain under pressure, especially in view of the fact that the value of some assets is not known. A peak in the Excess Reserves graph should coincide with a turning point in the recovery of banks. (Also see my post “Credit Market Watch“.)

Source: Fullermoney

Next, a quick textual analysis of my week’s reading. No surprises here with keywords such as “economy”, “market”, “bank”, “China”, financial” and “prices” featuring prominently.

On the issue of corporate bonds, I received a number of questions after referring to the iBoxx Investment Grade Corporate Bond Fund (LQD) and High Yield Corporate Bond Fund (HYG) in last week’s “Words from the Wise” review. In the short term, a further correction of both investment-grade and high-yield corporate bonds looks likely, but the sector is worth watching for opportunities arising at lower levels. Also, the high-yield instruments – under intense pressure because of an avalanche of defaults predicted by the ultra-wide spreads – could see spreads contracting markedly if the defaults are not as bad as priced in.

Turning to the outlook for the stock market, Bennet Sedacca (Atlantic Advisors Asset Management) issued a short-term buy signal on Thursday: “We are once again increasing exposure to equities from 0% to a near fully invested posture. I fully recognize the bad news that is out in the marketplace, but given Treasuries at 0-2.25% and Mortgage Backed Securities at 3-4%, high quality large cap growth stocks (self-financing companies purchased via IVW – the S&P large cap growth ETF) look attractive to me.

“We also like healthcare via PPH (pharma holders ETF), USO (oil ETF), XLV (broader healthcare ETF), but have a negative bias towards bonds and have taken substantial profits in recent days in the Mortgage Backed Securities space, where government intervention has led to artificially high bids. We also added a smallish position in XLF (financials). We believe quality is king and that ‘a’ low , but not THE low has been reached in stocks.”

Key resistance and support levels for the major US indices are shown in the table below. The immediate upside target is the 50-day moving average, followed by the November 4 highs about 16% to 18% from current levels (not shown on table). On the downside, the December 1 and all-important November 20 lows must hold in order to prevent considerable technical damage.

An analysis of the number of stocks trading above their 50-day moving averages makes for interesting reading. “With the S&P 500 back into oversold territory and even approaching its November lows, it’s actually surprising to see this breadth measure at 40%,” said Bespoke. “At the prior lows, the number got down to zero! The fact that the overall declines have been limited to a smaller area of the market is a positive for those hoping that the lows will hold.”

“As January goes, so goes the year”, is one of the most frequently quoted seasonal trends of the stock market. With the S&P 500 down by 5.9% after two weeks of the month, January is not off to a promising start. According to Jeffrey Hirsch (Stock Trader’s Almanac), every down January since 1950 has been followed by a new or continuing bear market or a flat year. Further research is provided by Jay Kaeppel of Optionetics.
The last word goes to Charles Kirk (The Kirk Report): “With the market closed Monday to observe Martin Luther King Jr., we are set to have another four-day work week and, in my experience, they tend to be some of the toughest. Not only will we have Obama’s inauguration, but lots of earnings reports to sort through.

“While the market managed to end the week above S&P 850, we still have a lot of work to do to confirm that we can manage at least a decent counter-trend rally during earnings season. We are still oversold, but we need to see the buyers return in force and with confidence. Both have been missing so far in 2009.”

For more discussion about the direction of stock markets, also see my post “Video-o-rama: Gloomy news batters investor sentiment“.

Economy
“Global business confidence remains very negative, but has improved a bit since hitting bottom at the very end of 2008. It is still too early to conclude that sentiment is improving in any measurable way,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Businesses are nearly equally pessimistic across the globe and across all industries. Hiring intentions have turned particularly negative in recent weeks. Pricing power has collapsed, suggesting that deflation is a significant threat.”

As far as the US is concerned, the Fed’s January Beige Book indicated continued and broad-based weakening throughout the nation. The latest round of economic data also confirmed that the recession was intensifying.

• Industrial production declined by 2% in December, with output falling in all three major categories – utilities, mining and manufacturing – for the first time since October. For the fourth quarter as a whole, industrial production fell at an annual rate of 11.5%, more than twice as fast as at any time during the 2001 recession. All indications are that manufacturers will further reduce production in order to bring inventories in line with free-falling final sales.

• Retail sales in December were significantly worse than expected, plunging by 2.7% – the sixth consecutive month of falling sales.

• The US trade deficit narrowed substantially to $40.4 billion (consensus $51.5 billion) in November, marking the fourth straight month of declining gross exports and gross imports.

News on the US inflation front was relatively good with both the PPI and CPI continuing to retreat in December, falling by 1.9% and 0.7% respectively. Core prices barely managed to stay in positive territory, with core CPI rising by 0.1% for 2008 – the lowest increase since 1954.

Jamie Dimon, chief executive of JPMorgan Chase, predicted in an interview with the Financial Times that the US financial and economic crisis would worsen this year as hard-hit consumers default on credit cards and other loans. “The worst of the economic situation is not yet behind us. It looks as if it will continue to deteriorate for most of 2009,” said Mr Dimon.

Source: Daryl Cagle

Elsewhere in the world, evidence mounted that the recession was widespread and deepening.

• In a sign that the decline in economic activity in Japan was worsening, core machinery orders by Japanese businesses slumped by 16.2% in November – the sharpest monthly contraction since records began in 1987.

• Germany’s coalition parties agreed on a second economic stimulus package totaling €50 billion (including €36 billion in infrastructure investment and tax cuts), to be put into place in an effort to pull the economy out of its worst recession since the end of the Second World War, according to CEP News. The package also includes a €100 billion “Germany fund” that would guarantee the debt raised by cash-starved businesses.

• The European Central Bank on Thursday cut its main policy interest rate by 50 basis points to 2% – the lowest level ever. The total reduction since mid-October amounts to 225 basis points and highlights the Eurozone slipping deeper into recession and inflation dropping sharply.

• Eurozone manufacturing continued to fell for the seventh straight month in November, amounting to a decline of 7.7% in year-ago terms.

Source: Moody’s Economy.com

The International Monetary Fund’s managing director, Dominique Strauss-Kahn, “chided European leaders for failing to grasp the depth of the coming slump in their region, creating the risk of social upheaval,” said Bloomberg.

RGE Monitor reported that China had revised its 2007 GDP growth up to 13% from the 11.9% it previously reported. “With Chinese exports, industrial production and other economic indicators slowing sharply, there is speculation that Chinese officials might smooth growth statistics. Uncertainty about Chinese economic statistics has led many analysts to use proxies for economic output which are more difficult to doctor. These proxies include electricity demand, construction, etc. However, there is a consensus that Chinese economic statistics have improved,” said Nouriel Roubini’s research team.

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, January 16, 2009.

In addition to the Bank of Japan’s interest rate announcement (Thursday, January 22), the US economic highlights for the week, courtesy of Northern Trust, include the following:

1. Housing starts (January 22): Permit extensions for new homes fell 15.8% in November, inclusive of a 11.9% drop in permits issued for single-family homes. The weakness in permits is indicative of fewer housing starts in December (595,000 versus 625,000 in November). Consensus: 615,000.

2. Other reports: NAHB Survey (January 21).

Click the links below for the following reports:

• Wachovia’s Weekly US Economic & Financial Commentary (January 16, 2009)

• Wachovia’s Global Chartbook (January 2009)

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

Source: Wall Street Journal Online, January 16, 2009.

Chinese philosopher Lau-Tzu said: “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” Wise words indeed, but hopefully thorough research and a dose of common sense will cast some light on the lie of the investment land.

On Tuesday a new President will be inaugurated in the US, but the old concerns about financial markets will unfortunately still be around. In the meantime, have a great long weekend in the US!

That’s the way it looks from Cape Town.

Source: Daryl Cagle

Clusterstock: Roubini – you’re all fools for buying into a sucker’s rally
“Yesterday Nouriel Roubini weighed in on the recent rally and said anyone that thought the worst was behind us is ‘delusional’ and as a matter of fact the worst is yet to come, citing the gruesome macro data that’s been released as of late, and the fact that that trend won’t reverse until at least the fourth quarter of 2009.

“RGE: For a few weeks since late November equity markets ignored the onslaught of much worse than expected macro news (and all the news were really worse than awful) and had a nice 25% bear market sucker’s rally. But the drumbeat of terrible – and worse-than-expected – macro news and earnings news and financial news has finally taken a toll on the delusional market belief that the worst was over for financial markets and for equity markets and that the US and global economy would recover in the second half of 2009. So equity prices have already reversed more than half of their most recent bear market rally as the lousy macro news have finally shocked in the last week the wishful thinkers.

“Indeed, the retail sales figures published today confirmed a shopped-out, saving-less and debt-burdened US consumer is now faltering as job losses, income losses, fall in home wealth, fall in equity wealth, high and rising debt and debt servicing ratios and a severe credit crunch take a severe toll on the ability of consumers to spend. And reduction in spending and deleveraging of the US consumer will take years to rebuild the savings rate of a household sector now hit by a severe shock to its net worth (as equity and home values fall while debts have been rising) and shocked in its ability to generate income as job losses mount and the unemployment rate surges.

“Our research at RGE Monitor suggests that the US and global recession will continue at least all the way until Q4 of 2009 (a nasty 24 months U-shaped recession) and that the recovery in 2010-11 will be very weak with growth in the 1% range that is well below a potential of 2.75%. And we cannot rule out that a more severe L-shaped stag-deflation (as in Japan in the 1990s) will take hold.”

Click here for CNBC video.

Source: Jay Yarow, Clusterstock, January 15, 2009.

CNBC: Pimco’s El Erian on the markets
“Discussing the global economic situation, with Mohamed El-Erian, Pimco co-CEO and Michael Spence, Philip H. Knight economics professor/Nobel Laureate.

Source: CNBC, January 15, 2009.

Barron’s: Roundtable – hang on tight
“Our go-to group of investment experts sees tough times for the economy – but good fortune for stockpickers.”

Click here for full article.

Source: Barron’s (via Fullermoney), January 13, 2009.

Grace Cheng (Daily Markets): Exclusive interview with Jim Rogers
Do you think the period of forced liquidation has ended or does it still have a ways to go?

Rogers: I’m sure it has not ended. It certainly has not ended for many asset classes and it probably has not ended for most. It may be over for a few things but it still has a long way to go.

As you’ve said many times, the US government is printing a lot of money right now, when do you think inflation will come around and bite us?

Rogers: Well there is inflation now in many things. There’s temporary deflation in raw material prices and in some property. But throughout history, whenever you’ve had gigantic printing of money and spending of borrowed money, it has always led to higher prices. Unless something is dramatic, it’s going to happen again. When I don’t know. It’s already happening in some things. I don’t know if you’ve bought any sugar recently or some other things, prices are up and that will continue and it will get worse.

You’ve been bullish on commodities for a long time, recently you said you’re buying the Rogers Metal Index. Do you think that the Obama stimulus plan will create more demand for commodities?

Rogers: Well of course, anything that causes a revival of economic activity causes a revival of demand for everything including commodities. I mean if you’re gonna build bridges you’ve got to build them out of something you cannot build virtual bridges you have to build real bridges, etc.

You’ve said that over the long term, the US dollar is doomed. What are your thoughts on the British Pound?

Rogers: More doomed. It will disappear sooner. If it weren’t for the North Sea, the British Pound would have already disappeared. It’s more doomed. The UK has been exporting oil for 26 years; within the decade, the UK will be a net importer of oil again, and they have nothing else to sell to the world once the oil dries up.

Do you think China will scale back on buying US bonds? And if that happens, how will it affect the US economy and the US dollar?

Rogers: Well if I were China, I would scale back. If I were everybody, I would scale back. The US bonds yield virtually nothing, the dollar is a flawed currency, inflation is coming, higher interest rates are coming. I would think everybody would be scaling back including China. We’re going to have higher interest rates down the road because somebody’s gonna scale back. If not China, Japan or Korea, or who knows, somebody.

Source: Grace Cheng, Daily Markets, January 15, 2009 (hat tip: Investorazzi).

Bloomberg: Bernanke urges “strong measures” to stabilize banks
“Federal Reserve Chairman Ben Bernanke speaks about the possible need for more capital injections and guarantees to further stabilize and strengthen the financial system. Bernanke, speaking at the London School of Economics, warns that a fiscal stimulus won’t be enough to spur an economic recovery and that the government may need to buy or guarantee banks’ tainted assets to revive growth. Bernanke also discusses the Fed’s balance sheet, inflation expectations and US unemployment.”

Click here for Financial Times article.

Source: Bloomberg, January 13, 2009.

Asha Bangalore (Northern Trust): Bernanke explains Fed’s options
“In the context of financial market stability, Bernanke calls on history to stress that a ‘modern economy cannot grow if its financial system is not operating effectively’. Bernanke noted that in order to support and mend the fragile financial system ‘more capital injections and guarantees may become necessary to ensure stability and normalization of credit markets’.

“He suggested that purchases of troubled assets, a provision of asset guarantees, and/or purchase of assets from financial institutions in exchange for cash and equity in bad banks are other avenues through which fiscal policy could support the financial system. Also, reducing preventable foreclosures would be useful in reducing mortgage losses and promoting financial stability.

“In sum, the conclusion we draw here is that additional fiscal policy stimulus is necessary to ensure the working of the financial system and revival of economic activity.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 13, 2009.

Financial Times: Democrats unveil $825 billion stimulus package
“Democratic lawmakers on Thursday unveiled a much-awaited $825 billion stimulus package to halt America’s vertiginous economic slide which Nancy Pelosi, the speaker of the House, said was only the ‘first step’ in a process that could take weeks to pass into law.

“The bill, which Barack Obama, the incoming president, wants enacted before mid-February when Congress goes into a short recess, comes in at $50 billion higher than the initial ceiling set by his transition team. But economists said they expected it to climb towards the important psychological threshold of $1,000 billion by the time it becomes law.

“The package was divided between $275 billion in tax cuts, mostly going towards a $1,000 tax credit for middle-class families and $500 for individuals, and $550 billion in public spending, which includes money for ‘shovel-ready’ infrastructure projects, aid to state governments and investments in information technology upgrades for healthcare and a drive to make federal buildings energy-efficient.

“Thursday’s bill coincided with Mr Obama’s announcement that he would hold a ‘fiscal responsibility’ summit next month that would address entitlement reform – an issue that has long been avoided by leaders from both sides of the aisle. ‘We’ve kicked this can down the road and now we are at the end of the road,’ he told an editorial board meeting of the Washington Post. ‘We need to send a signal that we are serious.’

“He said he did not know how long it would take for the proposed fiscal stimulus to take effect. ‘We are in uncharted waters here. I don’t have a crystal ball,’ he said.”

Source: Edward Luce, Financial Times, January 15, 2009.

Economix (The New York Times): Stimulus pie chart

Source: Catherine Rampell, The New York Times – Economix, January 15, 2009.

The New York Times: Senate releases second portion of bailout fund
“President-elect Barack Obama’s economic agenda advanced rapidly in Congress on Thursday as the Senate voted to release the second half of the financial industry bailout fund and House Democrats unveiled an $825 billion fiscal recovery plan aimed at putting millions of unemployed Americans back to work.

“The Senate action, by a vote of 52 to 42, spares Mr. Obama a messy legislative fight just as he takes office and gives him a $350 billion war chest to further stabilize the financial sector. The vote came amid renewed distress in the banking industry, including further deterioration of Citigroup and a pitch for more government aid by the Bank of America.

“Mr. Obama had personally lobbied reluctant senators to release the money. His top economic adviser, Lawrence H. Summers, made three visits to the Capitol and sent two letters to reassure lawmakers that the program would be better managed.

“In a statement, the president-elect applauded the outcome.

“‘I know this wasn’t an easy vote because of the frustration so many of us share about how the first half of this plan was implemented,’ Mr. Obama said. ‘Now my pledge is to change the way this plan is implemented and keep faith with the American taxpayer.’”

Source: David M. Herszenhorn, Financial Times, January, 2009.

Bloomberg: Seattle FHLB short of capital on mortgage ebt
“The Federal Home Loan Bank of Seattle said it will suspend dividends and ‘excess’ stock repurchases, becoming the second of the government-chartered lending cooperatives to say its capital may be running low.

“The likely capital shortfall as of December 31 was caused by ‘unrealized market value losses’ on residential mortgage bonds without government backing, the bank said in a US Securities and Exchange Commission filing today. Washington Mutual and Merrill Lynch had been the biggest stakeholders and borrowers in the Seattle Federal Home Loan Bank, or FHLB.

“Seattle joins the San Francisco FHLB in taking steps to guard its reserves after the US housing market collapse sent mortgage-backed bonds tumbling. The declines may leave as many as eight of the 12 FHLBs below capital requirements, Moody’s Investors Service has said, eroding a below-market rate source of about $1 trillion in financing for Citigroup, JPMorgan Chase and other companies that participate in the cooperatives.”

Source: Jody Shenn, Bloomberg, January 13, 2009.

BCA Research: It’s called credit easing, not quantitative easing
“Fed Chairman Bernanke argued in a key speech recently that the Fed’s current policy will not lead to an inflation problem.

“Bernanke explained how the Fed’s current policy, which he dubbed ‘Credit Easing’, differs from ‘Quantitative Easing’ (QE), as pursued by the Bank of Japan (BoJ) earlier this decade. Under QE, the BoJ set targets for excess bank reserves in the hope that the banks would increase lending. In contrast, the Fed is targeting an improvement in the functioning of the credit markets, an increase in the flow of credit, and lower private sector borrowing costs. There is no target for the size of the Fed’s balance sheet or the monetary base; both will fluctuate with the liquidity needs of borrowers who are using the Fed’s facilities.

“To the extent that banks keep excess liquidity on deposit at the Fed, Bernanke argued that there is little inflation risk in the near term. In terms of the exit strategy from the current policy, the Chairman explained that excess reserves and the monetary base will naturally decline when credit market conditions improve and recourse to the Fed’s liquidity facilities wanes.

“The Fed also plans to eventually sell the private sector assets it is purchasing, which will also soak up excess liquidity.

“Bottom line: The Fed’s ‘Credit Easing’ policy will not necessarily be inflationary, as long as the excess reserves are re-absorbed in a timely manner once the economy resumes growing.”

Source: BCA Research, January 14, 2009.

Paul Kedrosky (Infectious Greed): Dramatic changes in credit quality
“A fairly remarkable sea-change in Fitch Ratings’ view of rated companies/countries/sectors over the last two years. The stresses in Europe, in particular, caught my eye.”

Source: Paul Kedrosky, Infectious Greed, January 16, 2009.

BBC News: US banking giants in tie-up deal
“Struggling US banking giant Citigroup and its rival Morgan Stanley have agreed a deal which sees the tie-up of their brokerage operations. Morgan Stanley is paying Citigroup $2.7 billion for a 51% stake in the joint venture while Citigroup will have a 49% stake.

“Observers say the deal showed how much Citigroup wanted to slim down its operations and build up cash reserves. It received the largest government bail-out of any US bank last year.

“Citigroup’s retail brokerage, Smith Barney, was formerly a key part of its wealth management business.

“The new unit – to be called Morgan Stanley Smith Barney – will have more than 20,000 advisors, $1.7 trillion in client assets, and serve 6.8 million households around the world, the firms said.

“The Financial Times reports Citigroup will separate its higher risk US consumer finance and securities businesses from its global commercial banking operations.

“Analysts suggest that the government will end up buying some struggling parts of the business with the next tranche of its financial rescue programme. ‘I think within 12 months, Citigroup no longer exists. The new CEO of this company is the government,’ said William Smith of Smith Asset Management.”

Source: BBC News, January 13, 2009.

Barry Ritholtz (The Big Picture): The 45 billion dollar club
“The United States of Wall Street just added another major holding to its portfolio of financial garbage: Bank of America.

“Like Citi, B of A has now received MORE IN BAILOUT MONEY than its actually worth (BAC = $53B; C = $21B). How this can ever be a profitable investment, as some mathematically challenged Congress-critters have suggested, is all but impossible to imagine.

“Blaming ‘previously undisclosed losses from its Merrill Lynch’, B of A threatened to kill their purchase of Mother Merrill. Treasury made an emergency capital injection of $20 billion, on top of the $15B and $10B already received by B of A and MER respectively. The taxpayers will also backstop $118 billion of assets, setting up what is likely to be a jumbo money losing trade.

“What should have happened in both instances was an orderly liquidation, selling off the pieces to competent managers who understand risk, and can manage smaller portions of the firm. Instead, the same idiots who helped destroy all of companies involved are still running the show.

“The amazingly bad Bank of America plan mirrors an even worse bad deal made by the Feds with Citigroup in November. There, the taxpayers explicitly insured the bank against losses on 90% of $306 billion of toxic assets – Citigroup’s real-estate loans and securities.

“Like Citi, the B of A monies are a terrible deal for the taxpayer – not a lot of bang for the buck, and leaving the same people who created the mess in charge.

“Organ transplant medicine understands certain truths: You do not give a healthy liver to a raging alcoholic, as they will only destroy the organ via their disease/bad judgment/lifestyle.

“Why do we give billions of taxpayer dollars to incompetent managers who failed to protect their assets, who destroyed shareholder value? These people have demonstrated a marked INABILITY to run these firms. Why reward them with 10s of billions of dollars?

“Its nothing short of madness …”

Source: Barry Ritholtz, The Big Picture, January 16, 2009.

CNBC: Bair – banks in crisis
“Discussing big problems for big banks including Citi and Bank of America, with Sheila Bair, FDIC chairman.”

Source: CNBC, January 16, 2009.

Bloomberg: Shilling says banks may need “a lot more” government help
“Gary Shilling, president of A. Gary Shilling & Co., talks with Bloomberg’s Betty Liu about the potential for additional government aid for US banks. Shilling also discusses the future of Citigroup Inc. and Bank of America Corp., the state of the US economy, and the outlook for stocks.”

Source: Bloomberg, January 16, 2009.

CEP News: Trichet – central bankers see global economic recovery in 2010
“Central bankers expect the global economy to recover in 2010 according to European Central Bank President Jean-Claude Trichet speaking as head of the Bank for International Settlements on Monday morning.

“While the central banker declined to comment on the European Central Bank’s monetary policy ahead of the rate decision this Thursday, Trichet said that the global economic slowdown was due to a lack of confidence and pledged that the group would ‘do whatever is appropriate to reinforce [it].’

“He also said that attending members had not discussed exchange rates at the meeting, but agreed that emerging market growth continues to play an important role for the global economy.

“Earlier on Monday, in an interview with Bloomberg, IMF Managing Director Dominique Strauss-Kahn said that Europe is ‘behind the curve’ regarding stimulus packages, and that governments are underestimating how such measures are needed to help economies recover.”

Source: CEP News, January 12, 2009.

Financial Times: Larry Fink on what could derail recovery
“Larry Fink chief executive and chairman of BlackRock, talks to Henny Sender, FT’s international financial correspondent, about monetary policy, securities and risk management. He also discusses corporate governance, oversight and stabilizing troubled assets.”

Source: Financial Times, January 8, 2009.

Financial Times: JPMorgan chief says 2009 will be bleak
“The US financial and economic crisis will worsen this year as hard-hit consumers default on credit cards and other loans, Jamie Dimon, chief executive of JPMorgan Chase, has predicted in an interview with the Financial Times.

“Mr Dimon, whose bank will report fourth-quarter results on Thursday, gave his bleak assessment as shares on both sides of the Atlantic tumbled on rising fears that banks would need more capital and a larger-than-expected fall in US retail sales.

“‘The worst of the economic situation is not yet behind us. It looks as if it will continue to deteriorate for most of 2009,’ said Mr Dimon. ‘In terms of our sector, we expect consumer loans and credit cards to continue to get worse.’

“Mr Dimon told the FT that JPMorgan was prepared for an expected deterioration in consumer-oriented businesses but added that if things were to get worse than expected it would have to cut costs again.

“Mr Dimon said the bursting of the credit bubble would force the banking industry to refocus on its traditional businesses of advising on deals and lending to companies and individuals.

“‘When we look back at industry excesses in areas such as highly leveraged lending and securitisation, it is clear that some of these markets will never come back,’ he said. ‘In the next few years, the industry will go back to basics: serving individual and corporate customers as best as we can.’”

Source: Francesco Guerrera, Financial Times, January 14, 2009.

Charlie Rose: A conversation with Lee Scott, CEO of Wal-Mart

Source: Charlie Rose, January 14, 2009.

CNBC: Nobel debate on the economy
“Weighing in on the economy with Edmund Phelps, 2006 Nobel Prize winner from Columbia University, and Michael Spence, 2001 Nobel Laureate from Stanford University.”

Source: CNBC, January 15, 2009.

Times Online: Leading economist fears decade of weakness in US
“One of the world’s leading economists has given warning that the United States is facing a decade of financial misery, with the number of unemployed Americans set to continue to rise for years.

“Robert Shiller, Professor of Economics at Yale University, who predicted the end of the internet bubble seven years ago, said: ‘We could have many years of a very weak economy. Big recessions are followed by years of weakness and typically unemployment keeps rising.

“‘To say that this will last years is not a dramatic statement. What is happening now is much worse than 1990. We could be facing a decade of real weakness. This is no ordinary recession. There are signs that people see this as a different story. People are talking about a depression, something that we haven’t seen previously.’

“Some economists, such as Kenneth Rogoff, the former chief economist at the International Monetary Fund and now a Professor of Economics at Harvard University, believe that America will be lucky if unemployment peaks at 9% of the workforce and that there is a high chance that it will reach at least 10%.

“Professor Shiller, who said that he has talked to the incoming Obama Administration about possible solutions to the housing crisis in the US, took a swipe at the Federal Reserve.

“He said: ‘This recession is by no means mechanical. People have lost a sense of confidence, a sense of trust in institutions and in each other. It is very hard for a central bank to address that by just cutting interest rates.’”

Source: Suzy Jagger, Times Online, January 12, 2009.

PRNewswire: Foreclosure activity increases 81% in 2008
“RealtyTrac today [Wednesday] released its 2008 US Foreclosure Market Report, which shows a total of 3,157,806 foreclosure filings – default notices, auction sale notices and bank repossessions – were reported on 2,330,483 US properties during the year, an 81% increase in total properties from 2007 and a 225% increase in total properties from 2006. The report also shows that 1.84% of all US housing units (one in 54) received at least one foreclosure filing during the year, up from 1.03% in 2007.

“Foreclosure filings were reported on 303,410 US properties in December, up 17% from the previous month and up nearly 41% from December 2007. Despite the spike in December, foreclosure activity for the fourth quarter was down nearly 4% from the previous quarter but still up nearly 40% from the fourth quarter of 2007.

“‘State legislation that slowed down the onset of new foreclosure activity clearly had an effect on fourth quarter numbers overall, but that effect appears to have worn off by December,’ said James J. Saccacio, chief executive officer of RealtyTrac. ‘The big jump in December foreclosure activity was somewhat surprising given the moratoria enacted by both Freddie Mac and Fannie Mae, along with programs from some of the major lenders and loan servicers aimed at delaying foreclosure actions against distressed homeowners.

“‘Clearly the foreclosure prevention programs implemented to-date have not had any real success in slowing down this foreclosure tsunami. And the recent California law, much like its predecessors in Massachusetts and Maryland, appears to have done little more than delay the inevitable foreclosure proceedings for thousands of homeowners.’”

Source: PRNewswire, January 14, 2009.

Richard Russell (Dow Theory Letters): Campbell – housing to trough in 2012
“I read a great deal about real estate, and I follow real estate trends closely. By far the best real estate guidance that I’ve come across is Robert Campbell’s ‘The Campbell Real Estate Letter’. Nothing I’ve read compares with Campbell’s great record.

“Robert uses an unusual and unique combination of fundamental and historical material along with his own specialty of technical analysis in real estate timing. Bob Campbell called the exact top of the real estate cycle in his report of August, 2005.

“What does Bob Campbell say now? He notes that historically, housing prices fall by an average of 35% after a financial crisis. He further states that he believes housing across the land will fall by another 8% from here to the final low of the housing cycle. And when will the low come? Campbell states that using five years as the average length of a housing downturn, ‘we can expect the US housing market to trough in the year 2012. Robert expects housing to fall to the prices that existed back in 2001.

“Writes Campbell, ‘And as I’ve stated in previous letters, this is where the problem arose: borrowers took on far more mortgage debt than they could ever pay back, and that’s why the real estate prices are crashing, and we are witnessing the destruction of the biggest credit bubble in history. And in the absence of dramatic increases in household incomes that are needed to service this massive amount of mortgage debt – all the bailouts in the world are unlikely to stop housing prices from eventually reverting back to the 2001 pre-bubble years – or close to it.’”

Source: Richard Russell, Dow Theory Letters, January 15, 2009.

Bespoke: Expected change in home prices
“The CME housing futures that track the S&P/Case-Shiller median home price indices of 10 major cities offer a clue into how much more investors think home prices have to fall.

“In the chart below, we highlight the percentage difference between the October ‘08 actual Case-Shiller numbers (the most recent set of numbers) and the current price of the November ‘09 futures contracts. The composite 10-city November ‘09 contract is currently trading 12% below its October ‘08 level. San Francisco is expected to fall the most in 2009 at -18%, followed by Los Angeles (-16.6%), and Las Vegas (-13%). The rest of the cities are expected to fall less than the composite, with Boston home prices expected to fall the least at -6%. Miami, Denver, DC, and San Diego are all expected to see home prices fall by less than 10% from 10/08 to 11/09.”

Source: Bespoke, January 12, 2009.

MarketWatch: 30-year mortgage under 5%
“The benchmark 30-year mortgage fell below 5% for the first time ever in Freddie Mac’s weekly rate survey as economic weakness continued to push interest rates lower, the mortgage agency said Thursday.

“The national average rate on the 30-year loan fell to 4.96% in the week ending January 15, down from 5.01% a week ago. That is the lowest on record. Freddie Mac began its rate survey in 1971. A year ago the loan averaged 5.69%.

“The 15-year fixed-rate mortgage, a popular refinancing choice, edged up to 4.65% from 4.62% a week ago. Last year at this time the loan averaged 5.21%. Refinancing activity has been strong as mortgage rates have plumbed historic lows.

“The two fixed-rate loans required the payment of an average 0.7 point to achieve the interest rate. A point is one percent of the loan amount, charged as prepaid interest.”

Source: Steve Kerch & Amy Hoak, MarketWatch, January 15, 2009.

Asha Bangalore (Northern Trust): Dreadful retail sales in December
“Retail sales in December were abysmal on every front. Total retail sales during December plunged 2.7% from 2.1% in November. Nearly all sub-components posted significant declines in sales.

“Retail sales have dropped at an annual rate of 24.6% in the fourth quarter versus a 5.1% drop in the previous quarter, a large part of it is due to the drop in gasoline prices. The weakness in retail sales supports expectations of a weak headline GDP number for the fourth quarter and also arithmetically consumer spending and GDP of the first quarter of 2009 are at a disadvantage.”

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

Asha Bangalore (Northern Trust): Lower prices and weak non-oil imports translate to smaller trade gap
“The trade balance of the US economy narrowed to $40.4 billion in November from $56.7 billion in October. A 12.0% drop in nominal imports of goods and services partly due to lower imported oil prices was the main reason for the reduction in the trade gap. Weak economic conditions in the US have resulted in lower imports, while a similar status abroad has led to a 5.8% drop in nominal exports of goods and services.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 13, 2009.

Asha Bangalore (Northern Trust): Energy and food prices bring down headline wholesale price index
“The Producer Price Index (PPI) of Finished Goods fell 1.9% in December after a 2.2% drop in the prior month, reflecting lower prices for energy (-9.3%) and food (-1.5%). In 2008, the PPI fell 0.9% versus a 6.2% jump in 2007. The 20.3% drop of the energy price index was the main reason for a sharp reversal of the wholesale price index in 2008. The food price index climbed 3.7% in 2008 versus a 7.6% gain in 2007.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 15, 2009.

Asha Bangalore (Northern Trust): Inflation – issue of little importance, for now
“The Consumer Price Index (CPI) dropped 0.7% in December, the third consecutive monthly decline and the fourth drop in the last five months. During the twelve months ended December the CPI moved up only 0.1% (CPI rose 4.1% in all of 2007), which is the smallest gain on record in the post-war period with the exception of a 0.7% drop in the twelve months ended December 1954. The reversal of the energy price index (-21.3% versus +17.4% in 2007) is largely responsible for the significant deceleration of the CPI. The food price index fell 0.1% in December and advanced only at an annual rate of 1.4% during the three months ended December versus a 4.0% annualized increase in the prior three-month period.

“… going forward, given the projections of weak economic conditions, inflation could move below levels that are consistent with price stability for a short period. At the same time, we should bear in mind that the large fiscal and monetary stimulus in place, and more in the pipeline, inflation could once again be problematic but much farther down the road.”

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

Jim Sinclair (MineSet): The unavoidable face of hyperinflation
“It is horrifying what the Fed and Treasury injected in percentage terms. A true measure of comparison can be seen in the three months of 2008 when the Fed accomplished more than in the seven years from 1929 to 1937.

“This is beyond all reason, having its own new and terrible consequences well in excess of the consequences of the 1929 and 1932 breaks.

“Markets have been run now for years by algorithms, manipulators and seeded interests that are like summer thunderstorms. They are loud and scary, but quite short term and in the end quite meaningless and non-productive.

“The dollar cannot and will not remain strong, nor can a planetary Weimar experience now be avoided.”

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

Source: Jim Sinclair, MineSet, January 14, 2009.

Bloomberg: Hedge fund assets fell record 36% in 2008
“Hedge fund assets fell a record 36% to $1.84 trillion in 2008 as tumbling global markets prompted investor withdrawals and fund liquidations, according to industry researcher HedgeFund.net.

“Hedge funds lost $512 billion through withdrawals and fund closures, while performance losses totaled $535 billion, the New York-based unit of Channel Capital Group said in an e-mailed statement. The decline is the biggest since Hedgefund.net began tracking the data in 2003.

“Funds suffered losses and client withdrawals last year, with some selling assets at fire-sale prices as the global credit crisis forced banks to withdraw loans to the industry. While defections and closures reached a record in December, a benchmark of performance rose for the month after declining in previous months, Hedgefund.net said.

“‘Investor asset flows lag performance, and the sharp rise of outflows in the fourth quarter are the result of yearlong aggregate losses,’ Hedgefund.net said in the statement. ‘Positive performance in December may be an indication that the biggest wave of investor outflows has passed.’”

Source: Tomoko Yamazaki, Bloomberg, January 15, 2009.

Bespoke: S&P sector returns year to date
“Below we highlight S&P 500 sector performance year to date through about noon today. As shown, just three sectors are underperforming the market so far this year, and the Financial sector is weighing heavily on the overall index’s declines. Energy, Health Care, Technology, Materials, and Utilities have actually held up pretty well.”

Source: Bespoke, January 16, 2009.

CNBC: Doll’s outlook for 2009
“A look ahead of the possible double-digit equities growth in 2009, with Bob Doll, BlackRock vice chairman/global CIO.”

Source: CNBC, January 12, 2009.

CNBC: Hendry – bonds still best bet
“Government bonds are still the safest bet for investors in these uncertain times, and the euro will face an uphill battle as weak economies will need more flexibility, Hugh Hendry from Eclectica told CNBC.”

Source: CNBC, January 12, 2009.

BCA Research: US employment will cap Treasury back-up
“The US December employment report was grim and included further downward revisions to prior months. Our forecast for the next six months is equally bearish, which implies that Treasury yields will be capped for a long time.

“The contraction in payrolls were roughly in line with expectations, with a broad-based decline in all industries. Our Model forecasts significant weakness in the first half of the year, with no bottom in sight. Labor and income insecurity will continue to keep consumers from spending, and the already deflationary retailing environment will continue to worsen.

“Historically, Treasury yields sustainably rebound only once the annual growth in payrolls turns up significantly. Thus, any back-up in government bond yields over the next few months will prove short lived. Deflation and a contracting economy will be the primary drivers of trends in the Treasury market, underscoring that fears of higher yields driven by mushrooming budget deficits are premature.”

Source: BCA Research, January 12, 2009.

Ambrose Evans-Pritchard (Telegraph): The bond bubble is an accident waiting to happen
“The bond vigilantes slumber. As the greatest sovereign bond bubble of all time rolls into 2009, investors are clinging to an implausible assumption that China and Japan will provide enough capital to keep the happy game going for ever.

“They are betting too that debt deflation will overwhelm the effects of near-zero interest rates across the G10 and nullify a £2,000 billion fiscal blast in the US, China, Japan, Britain, and Europe.

“Above all, they are betting that the Federal Reserve chief Ben Bernanke will fail to print enough banknotes to inflate the US money supply, despite his avowed intent to do so.

“Yields on 10-year US Treasuries have fallen to 2.4% – a level that was unseen even in the Great Depression. This is ‘return-free risk’, said bond guru Jim Grant.

“It is much the same story across the world. Yields are 1.3% in Japan, 3.02% in Germany, 3.13% in Britain, 3.26% in Chile, 3.47% in France, and 5.56% in Brazil.

“‘Get out of Treasuries. They are very, very expensive,’ said Mohamed El-Erian, the investment chief at the Pimco, the world’s top bond fund, in a Barron’s article last week.

“It is lazy to think that China, Japan, the petro-powers and the surplus states of emerging Asia will continue to amass foreign reserves, recycling their treasure into the US and European bond markets.

“These countries are themselves bleeding as exports collapse. Most face capital flight. The whole process that fed the bond boom from 2003 to 2008 is now going into reverse. Woe betide any investor who misjudges the consequences of this strategic shift.”

Click here for the full article.

Source: Ambrose Evans-Pritchard, Telegraph, January 12, 2009.

David Fuller (Fullermoney): Government bond bubble will burst
“Objectively, there is no doubt that government debt yields in the UK, USA and a number of other countries have moved well outside their historic, normal price ranges and values. This indicates a bubble, which some have described as a ‘return-free risk’.

“We need no reminding today that dire economic circumstances have contributed to these ultra-low yields. Indeed, governments have encouraged the move, with rate cuts and talk of quantitative easing, as part of their reflationary efforts. We also know that governments need to issue considerably more debt to finance their programmes, and they want to do this as cheaply as possible.

“My conclusion is that those who are lending to governments at record or at least near-record low yields, are walking into a trap. The government bond bubble has yet to burst, judging from the charts, but it will burst. With bubbles, it seldom pays to delay one’s exit until the downtrend is evident to all.”

Source: David Fuller, Fullermoney, January 14, 2009.

CNBC: Credit – still a good bet if yield curve steepens?
“Investment-grade credit looks very attractive to Richard Urwin, MD & head of asset allocation & economics research team at BlackRock. But what happens if the yield curve steepens by year-end? He gives his take CNBC’s Amanda Drury & Martin Soong.”

Source: CNBC, January 16, 2009.

Eoin Treacy (Fullermoney): 10-year Treasuries show negative real yield
“It is interesting that this is the first time since 1980 that the US 10yr has shown a negative real yield. The fact is that it has not had anything close to the size of the move, relative to CPI, as seen in 1974 or 1980 is also worthy of notice. Of course back then, high inflation expectations were much more of a factor in the movement of the spread, but that is certainly not the case today.”

Source: Eoin Treacy, Fullermoney, January 13, 2009.

Financial Times: Bond issuance by emerging nations surges
“Emerging market sovereign bond issuance has surged this week as governments take advantage of the dramatic drop in yields because of the sharply improving sentiment since the start of the year.

“The Philippines, Turkey, Brazil and Colombia have all issued debt in the past few days, raising a total of $4.5 billion. This compares with just one deal worth $2 billion from Mexico issued in the entire fourth quarter of 2008.

“Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, said: ‘Sentiment has improved a great deal since January 1 in the emerging market space, so these countries see this as a window of opportunity to issue debt.’

“Since January 1, emerging market bond yields have fallen about 40 basis points compared with US Treasuries, the international benchmark for debt, close to eight-week lows, according to JP Morgan’s Embi+ Index. Emerging market bonds are now trading about 650 basis points above US Treasuries. Emerging market governments are also rushing to issue debt as they fear they could be ‘crowded out’ of the primary bond markets because of the record volumes of sovereign debt due from the industrialised nations.

“These emerging market countries need the cash, like their industrialized counterparts, to stimulate their economies.”

Source: David Oakley, Roel Landingin and John Aglionby, Financial Times, January 9, 2009.

Bespoke: US dollar testing resistance
“The US Dollar index has made a nice comeback after its free-fall from late November to mid December. The dollar is up 6.76% from its low on December 17, but as shown in the chart below, it is bumping up against key resistance at its 50-day moving average. If the dollar is able to break above its 50-day, a resumption of its multi-month uptrend will be solidified. If it fails to break through, however, the current level will be one peak of a newly formed downtrend.”

Source: Bespoke, January 14, 2009.

Edmund Conway (Telegraph): Shipping rates hit zero as trade sinks
“Freight rates for containers shipped from Asia to Europe have fallen to zero for the first time since records began, underscoring the dramatic collapse in trade since the world economy buckled in October.

“‘They have already hit zero,’ said Charles de Trenck, a broker at Transport Trackers in Hong Kong. ‘We have seen trade activity fall off a cliff. Asia-Europe is an unmitigated disaster.’

“Shipping journal Lloyd’s List said brokers in Singapore are now waiving fees for containers travelling from South China, charging only for the minimal ‘bunker’ costs. Container fees from North Asia have dropped $200, taking them below operating cost.

“Industry sources said they have never seen rates fall so low. ‘This is a whole new ball game,’ said one trader.

“The Baltic Dry Index (BDI) which measures freight rates for bulk commodities such as iron ore and grains crashed several months ago, falling 96%. The BDI – though a useful early-warning index – is highly volatile and exaggerates apparent ups and downs in trade. However, the latest phase of the shipping crisis is different. It has spread to core trade of finished industrial goods, the lifeblood of the world economy.”

Source: Ambrose Evans-Pritchard, Telegraph, January 12, 2009.

Bloomberg: Frontline says ships storing the most oil in 20 years
“Frontline Ltd, the world’s biggest owner of supertankers, said about 80 million barrels of crude oil are being stored in tankers, the most in 20 years, as traders seek to take advantage of higher prices later in the year.

“Traders are seeking to profit from a market situation called contango where futures prices are higher than the cost of immediate supplies. A purchaser could buy oil now, keep it for months at sea and fetch better prices by selling oil futures that are higher than the spot price.

“‘In this current financial situation I guess it’s one of the more safe bets to do,’ Jens Martin Jensen, Singapore-based interim chief executive officer of the company’s management unit, said by phone today. Thirty to 35 very large crude carriers, each designed to haul 2 million barrels of crude, are storing oil, with the rest on ships half the size called suezmaxes, he said.

“The contango pricing structure has been caused by excess near-term oil supply as demand slows and speculation that output cuts by the Organization of Petroleum Exporting Countries will reduce the glut later this year.”

Source: Alaric Nightingale, Bloomberg, January 14 2009.

Victoria Marklew (Northern Trust): Eurozone – interest rates, inflation, the economy – all fall down
“As widely expected, the European Central Bank (ECB) lopped another 50 bps off its refi rate this morning [Thursday], taking it to 2.0%. Rates have now come down by 225 bps in four successive steps, including a 75 bps cut in December, as the Eurozone economy hits the skids and inflation drops sharply.

“In his subsequent press conference, President Trichet acknowledged that economic data and surveys over the past month point to ‘a further weakening of economic activity around the turn of the year’ and warned that Eurozone demand is likely to be ‘dampened for a protracted period’ with growth risks to the downside. He also acknowledged that the slowing economy has reduced inflation risks, and that the rate of inflation is likely to ‘fall significantly’ in mid-year, in part because of base effects.”

Source: Victoria Marklew, Northern Trust – Daily Global Commentary, January 15, 2009.

Financial Times: German GDP contracts sharply
“Germany’s economy could have contracted by as much as 2% in the final quarter of 2008, the country’s statistical office warned on Wednesday, deepening a recession that looks likely to be the worst since the second world war.

“The sharp contraction in Europe’s largest economy would sound alarm bells across Europe because of Germany’s role as Europe’s economic powerhouse.

“German exports had benefited from strong global growth in recent years ‘but now that process has gone dramatically into reverse’, said Andreas Rees at Unicredit in Munich.

“The latest data came just hours after Berlin unveiled a two-year $66 billion package of growth-boosting measures. Michael Glos, economics minister, argued on Wednesday that the plan would have a ‘noticeable effect’ by later this year.

“Gross domestic product increased by 1 per cent in 2008 as a whole, after a 2.6% rise in the previous year, the federal statistics office reported. But in the final three months of the year, preliminary estimates suggested that GDP fell between about 1.5% and 2%, it said.”

Source: Ralph Atkins, Financial Times, January 14, 2009.

CEP News: Germany’s coalition parties agree on €50 billion stimulus package
“Germany’s coalition parties have agreed on a second economic stimulus package totalling approximately €50 billion, to be put into place over the course of the next two years in an effort to pull the economy out of its worst recession since the end of the Second World War.

“The package of measures will include approximately €36 billion in infrastructure investment and tax cuts. The announcement was made following six hours of talks between the Christian Democratic Union, the Christian Social Union and the Social Democratic Party in Berlin late on Monday.

“The second stimulus package follows a €31 billion plan already in existence.”

Source: CEP News, January 13, 2008.

Financial Times: Spain hit by public finance warning
“The growing dangers for Europe’s sharply slowing economies were highlighted yesterday as Spain became the third eurozone country to be warned over its deteriorating public finances in the space of three days.

“Standard & Poor’s, the rating agency, said Spain’s top-notch triple A credit ratings could be downgraded because of pressure on its public finances after it entered what is likely to be a deep recession in the fourth quarter. On Friday, Greece and Ireland were also warned by the agency that their ratings could be downgraded as economic conditions worsen. The warning is likely to help drive up borrowing costs for those countries.

“The euro weakened against the dollar and the yen after the announcement, which underlined the challenges facing European countries seeking to stimulate their battered economies and pay for bank bail-outs. Analysts say other European countries could face warnings in the coming days or weeks as governments take on record debt levels, which could jeopardise the sustainability of their public finances.”

Source: David Oakley and Victor Mallet, Financial Times, January 12, 2009.

Financial Times: China sees “success” in offsetting crisis
“Wen Jiabao declared China’s efforts to offset the effect of the global economic slowdown an ‘initial success’ on Sunday as the economy performed ‘better than expected’ last month.

“The premier’s hints that the country’s economy might not be locked in a downward spiral will be seen as good news in the rest of the world, where Chinese growth is viewed as a potential palliative for the global recession.

“Speaking during a three-day visit to industrial regions in eastern China, Mr Wen said sales at some companies had begun to rebound, stockpiles were falling and electricity consumption was rising.

“‘We have achieved initial success from the policies we adopted to counter the financial crisis,’ the premier said, according to China National Radio.

“Beijing announced an economic stimulus package of Rmb4,000 billion ($585 billion) in November, heavily weighted towards construction and heavy industry. It was not expected to improve economic growth until the middle of this year but some industries, such as steel, have already shown more confidence since the stimulus package was announced. Scores of Chinese steelmakers have resumed production in the hope that it will lead to a sustained recovery in steel prices.

“Mr Wen vowed that the central government would take other measures, including large investments, to combat the crisis before the legislature’s annual meeting in early March, according to a speech published separately.”

Source: Patti Waldmeir, Financial Times, January 11, 2009.

US Global Investors: Rebound in Chinese bank lending
“A significant rebound in money supply growth and bank lending in China during December suggests that the government’s stimulating policies may have achieved some success. However, challenges for the economy are likely to be sustained in the foreseeable future.”

Source: US Global Investors – Weekly Investor Alert, January 16, 2009.

Bloomberg: China passes Germany to become third-biggest economy
“China’s economy overtook Germany’s in 2007 to become the world’s third largest, underscoring the nation’s increasing economic and political clout.

“Gross domestic product expanded 13% from a year earlier, more than a previous estimate of 11.9%, to 25.731 trillion yuan ($3.38 trillion), the statistics bureau said on its website today. That topped Germany’s 2.424 trillion euros ($3.32 trillion), using average exchange rates for 2007.

“China’s economy is 70 times bigger than when leader Deng Xiaoping ditched hard-line Communist policies in favor of free-market reforms in 1978. After overtaking the UK and France in 2005, China became the third nation to complete a spacewalk, hosted the Olympic Games and surpassed Japan as the biggest buyer of US Treasuries.

“The figure was released as China faces the weakest economic expansion since 1990 after exports collapsed because of the global recession.”

Source: Nipa Piboontanasawat and Kevin Hamlin, Bloomberg, January 14 2009.

Financial Times: Jim O’Neill on the Bric economies
“Jim O’Neill, Chief Economist at Goldman Sachs, tells David Oakley about the reasons to be positive on China, finding value in Bric economies, and the problems facing Russia.”

Source: Financial Times, January 9, 2009.

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Posted in Bonds, Commodities, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, ETFs, Gold, Infrastructure, Markets, Oil and Gas, Outlook, US Stocks | Comments Off

Hendry: What to Buy if You’re Bearish on Oil?

Friday, January 16th, 2009

Hugh Hendry, CIO, Eclectica Asset Management, discusses oil with Geoff Cutmore of CNBC. We are big fans of Hendry’s outspoken views, and this is a must-view. Click the image below to watch the segment:

Here is what he said:

It is phenomenally difficult to be bullish on oil owing to the fact the oil curve is in contango. What I mean is that while oil is trading today at $40, if you go out two years, its expected, indeed it trades at $70, and that’s why you have all the surplus oil being hoarded on these vessels at sea.

Now, every day that the oil price doesn’t move closer to $70, is a day of negative carry, its a day where you’re losing money being long oil, which is why I proffer my caution.

I’m a believer in Peak Oil, I’m a believer in this capital destruction we’re not going to be investing or looking for oil in all the hideous places like Russia etc. over the next ten years, and we need to. The world of ten years time the time of our grandchildren needs us to be looking for the blasted stuff now.

We ain’t going to do it, we’ve suspended all that activity. I agree [that there is an opportunity there], but as in all walks of life, it is going to be a matter of timing, and I believe the [Carl Weinberg, see video] timing is way way off.

It’s an enormously difficult task to be bullish on oil today.

Lord John Brown was the most bearish person in the world about oil, and for twenty years the price of oil lost 80% of it value, and the most bearish guy in the world ended up at the top, when the price of oil reached its lowest levels.

BP stock in absolute price terms went down during the ten years the price of oil was going from $10 to $150 per barrel, so if you’re bearish on oil you should own BP; you should own Shell, because they’re contra-cyclical, they’re unleveraged, you get a very high carry. In a market like this one, you want to own assets like this that are unleveraged, and you get a 5% yield.

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Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off