Words from the (Investment) Wise for the Week That Was (August 25 - 31, 2008): Part II
Bespoke: NYSE short interest declines again
"For the second consecutive two-week period, short interest on the New York Stock exchange declined. During the first two weeks of August, short positions in NYSE listed stocks fell by 2.8% to 17.8 billion shares. While the late July figures showing a mere 1.5% decline in short interest seemed to show that the SEC's crackdown partial enforcement of existing laws on short selling had little impact, the larger decline in the most recent figures suggest that the SEC's actions might be affecting investors.
"So what has the SEC done to continue enforcement of short selling rules? They let the temporary order expire, and said a new set of rules would be coming in the 'next few weeks'."
Source: Bespoke, August 27, 2008.
David Fuller (Fullermoney): The upside is for the bulls to prove
"The oversold rally commencing in mid-July has certainly stalled. Here is what it would take to revive it:
"Sustained breaks above the August rally highs to date for major indices, preferably with financials participating.
"This is a big ask without a catalyst such as a change in the emphasis of monetary policy from fighting inflation to boosting economic growth. Whether this Rubicon is crossed in the next few weeks or sometime next year remains to be seen and probably depends on events.
"Meanwhile, valuations are much improved, albeit still well above record attractive levels. The west's credit crisis has not gone away but some other concerns have diminished. For instance, most people no longer expect another spike in the price of crude oil anytime soon, and rightly so give demand destruction. A commodity related spike in long-dated government bond yields has not only been avoided for the time being, but yields are actually falling in line with recession fears. Concern over an additional collapse of the US dollar has been replaced by a reassuring rebound.
"In other words, some of the year-long concerns are either abating or at least priced into markets to a not insignificant degree. As practically every financial journalist has talked about the worst financial crisis since the USA's Great Depression, this is not a new story, right or wrong. The only new worry of consequence is some unnecessary and hopefully temporary Cold War style provocation between the Russian Federation and the USA. Potentially more significant for stock markets is the mountain of cash sitting in money market mutual funds.
"Nevertheless investors are understandably cautious given all the financial concerns, whether largely discounted or not, and everyone knows that most stock markets are still in overall downtrends. Therefore the upside is, as we say, for the bulls to prove. Judging from the sluggish chart action, the fear of further losses is still greater than the fear of being of being left behind in the next good rally."
Source: David Fuller, Fullermoney, August 27, 2008.
Bespoke: Stock market seasonality - September could present rough sledding
"As the unofficial end of Summer draws near, market activity is likely to pick up in the coming weeks as traders set themselves up for the end of the year. If history is any indication, the last four months should provide some improvement to this year's double-digit percentage losses. History shows, however, that September could present some rough sledding before any rally occurs.
"In the chart below, we show the average historical trading pattern of the S&P 500 during the last four months of the year. The blue line shows the S&P 500's trading pattern from 1960 - 2007, while the red line shows the average of the last ten years. As shown, over both time frames, the S&P 500 typically declines during most of September before staging a year-end rally beginning in late September/early October."
Source: Bespoke, August 26, 2008.
Bespoke: High earnings growth expectations?
"Year over year earnings for the S&P 500 declined by a little more than 23% in Q2 '08 versus Q2 '07. Expectations at the start of earnings season based on cumulative analyst estimates were -11%, so actual numbers were more than twice as bad. This brings us to earnings expectations for the next few quarters. Currently, bottoms up estimates are looking for S&P 500 earnings to decline by 0.2% from Q3 '07 to Q3 '08. Q4 '08 estimates are looking for growth of 43.6%, and Q1 '09 estimates are at 28.1%. These high numbers are due to the extremely weak readings we got in Q4 '07 and Q1 of this year. Only time will tell if these estimates are too lofty, but based on the last few quarters, they most likely are."
Source: Bespoke, August 26, 2008.
Bespoke: Strategist price targets down the home stretch
"Below we have updated S&P 500 year-end price targets for strategists surveyed by Bloomberg. For each strategist, we provide their 2008 price target at the start of the year as well. As shown, for various reasons, four strategists are no longer giving price targets. Currently, Deutsche Bank is the only firm that has not lowered its price target this year, and it is also the highest at 1,650. For their target to be on the mark, the S&P 500 will need to rise 30% from now to the end of the year. Credit Suisse currently has the lowest price target at 1,300, which is down from their 1,650 target to start the year. Even with the lowest target of 1,300, Credit Suisse is still forecasting the S&P 500 to be up from current levels by the end of 2008. The average price target of all strategists is currently 1,451, which is 13.89% above the S&P 500's current price. At the start of the year, analysts were expecting a gain of 11%."
Source: Bespoke, August 26, 2008.
Charles Kirk (The Kirk Report): ETF leaders and laggards
"With Jim Cramer having proclaimed that we've hit bottom and we will not take out the July 15th low, I'm curious to see which ETFs have been the raw performance leaders and laggards since that specific point. The top ten for both are below."
Source: Charles Kirk, The Kirk Report, August 26, 2008.
Bespoke: Energy's loss is the financials' gain
"Just as the stocks in the financial sector have stabilized while energy stocks have been weak, analyst sentiment on the sectors seem to be following a similar trend. In the charts below, we track the percentage of stocks in each sector that have seen positive or negative estimate revisions over a rolling one-month period.
"As shown in the shaded areas, estimate revisions for both the energy and financial sectors have had sharp reversals. In mid-July, nearly 55% of stocks in the financial sector had seen their numbers cut in the prior month. Today, the percentage has decreased to only 25%. In the energy sector, in mid-July analysts had raised estimates on nearly 75% of the stocks in the index over the prior four weeks. Currently, nearly 25% of the stocks in the sector have seen their numbers cut over the last four weeks."
Source: Bespoke, August 29, 2008.
GaveKal: Japanese stocks set to outperform bonds
Source: GaveKal - Checking the Boxes, August 29, 2008.
US Global Investors: Plenty of sidelined liquidity in China
"Growth in China's household savings has accelerated with the stock market meltdown, and cash now represents about 45% of household assets in China versus 10% in the US. Should the market reverse, plenty of sidelined liquidity may participate given limited investment channels in domestic China."
Source: US Global Investors - Weekly Investor Alert, August 29, 2008.
David Fuller (Fullermoney): Russia offers medium-term value
"The Russian stock market is arguably cheap with a trailing PER of 8, although the Russia RTS $ Index yields only 2.2%. However, a considerable amount of technical damage has occurred since the May high, most notably a plunge down through the long progression of higher reaction lows which marked the previous uptrend. This is a Type-2 top (extreme reaction against the prevailing trend).
"Most of this break occurred as capitulation selling hit resources stocks everywhere, making it the last sector to fall. The invasion of Georgia just gave the Index an extra push on the downside. Even after allowing for global tensions, the decline is becoming quite overextended. However this pattern cannot support more than a technical rally at present and the May high is very unlikely to be retested anytime soon.
"Taking a longer-term view, Fullermoney continues to favour a policy of acquiring resources shares with substantial assets in the ground, in politically stable regions. I would describe Russia as a politically stable region, albeit authoritarian. There are also governance issues, not least concerning the rights of minority shareholders. Nevertheless, resources-rich Russia is also likely to remain one of the world's faster growing economies.
"Could Russia's stock market index fall further before it next experiences a sustained advance? Easily, not least as there is no conclusive evidence that any stock market has bottomed. Is Russia's market likely to be higher in a year or two? I think so."
Source: David Fuller, Fullermoney, August 26, 2008.
Bloomberg: Vietnam's stock market attractive for investors, says Mobius
"Vietnam's stock market offers investment opportunities after a 45% slump this year, said Mark Mobius, executive chairman of Templeton Asset Management.
"'Vietnam's stock market now is down, so there are more opportunities,' Mobius said in an interview in Ho Chi Minh City, where Templeton opened its Vietnam representative office today. 'The market will go up and will be much more valuable in about three years.'
"Mobius, who oversees about $40 billion in emerging-market equities, is increasing Templeton's investments in Vietnam after it bought a 49% stake in the fund management unit of Joint-Stock Commercial Bank for Foreign Trade of Vietnam, known as Vietcombank Fund Management, earlier this year.
"Templeton is turning to emerging markets as it said earlier this month stocks tumbled more than justified because demand for raw materials continues to boost economic growth in those nations. The MSCI Emerging Markets Index has plunged 29% since reaching a record in October.
"Vietnam's central bank has raised interest rates three times this year to ease inflation.
"'Inflation is high, but we are happy to see the government is acting rapidly and very strongly to beat inflation,' Mobius said. 'But that's also why the stock market looks attractive.'"
Source: Van Nguyen, Bloomberg, August 22, 2008.
David Fuller (Fullermoney): US dollar - waiting for clearer evidence
"The USD's impressive rally has lost some momentum, but that was inevitable following its upside breakout. If we ask: what was the last really important chart development? USD strength is the only answer. Therefore we may only be seeing a consolidation prior to renewed gains.
"However, that is what most people are predicting and hoping for, because they are long. Sentiment is so often a contrary indicator, as you know. For this reason, I maintain that the USD has to sustain its breakout from prior trading ranges, during this pause, if we are to see renewed strength in the weeks and months ahead. Meanwhile, if the USD continues to move sideways, interest rate differentials will erode more of leveraged traders' recent gains, increasing the possibility of declines back into the prior ranges.
"I remain sceptical of the USD's alleged medium to longer-term recovery scope, for reasons previously discussed at length. However, psychology and technical action are the key short-term drivers, so I am waiting for clearer evidence of the next significant move, either way."
Source: David Fuller, Fullermoney, August 29, 2008.
Richard Russell (Dow Theory Letters): Dash for cash is good for gold
"The world is now going through the deleveraging of the greatest credit mountain in human history (the credit build-up started right after World War II). What are the implications?
"The first - there's a dash for cash throughout the world. Big, sophisticated money sees what's going on, and they want cash, all the cash they can accumulate.
"Second - Today, all cash is fiat junk currency. When this realization hits, the next big move will be into the only reliable cash outside the central bank system. That move will be to - gold. There will be a rush for gold somewhere ahead. Even now, I suspect gold is in a bottoming process (but not the gold shares)."
Source: Richard Russell, Dow Theory Letters, August 26, 2008.
Guardian: Gold reserves more important than before, says Bundesbank
"Germany's Bundesbank on Friday rejected calls that it should sell some of its gold reserves to help boost the slowing German economy, telling Reuters financial and political uncertainty make the reserves even more important than before.
"'Gold sales are not a suitable way to sustainably consolidate the public accounts,' the Bundesbank said after a query about trade union proposals that it sell gold to fund some of a $37 billion economic stimulus package.
"'National gold reserves have a confidence and stability-building function for the single currency in a monetary union. This function has become even more important given the geopolitical situation and the risks present in financial market developments.'
"The Bundesbank is the world's second-largest holder of gold after the US Federal Reserve, and has sold just 20 tonnes out of total reserves of over 3,000 tonnes in the past five years.
"These sales were to allow the German finance ministry to mint gold coins, unlike the much more active sales programmes of other central banks which wanted to shift their portfolios from gold to a more diverse array of assets."
Source: Guardian, August 22, 2008.
Victoria Marklew (Northern Trust): German data suggest Euro-zone is headed
"So much for hope that Euro-zone growth will improve in Q3. Data releases from Germany today underline the fact that the 'zone's powerhouse economy is flirting with a technical recession, and the details of those releases point to negative developments for the Euro-zone as a whole.
"So, the bad news is that the Euro-zone will almost certainly see a second quarter of contraction in Q3, with Germany, France, and Italy headed that way and Spain almost certain to drop into negative territory too. The good news is that, for now at least, it looks as if the 'zone will stall rather than fall right off a cliff, implying signs of recovery could crop up by the end of this year. But watch those leading indicators."
Source: Victoria Marklew, Northern Trust - Daily Global Commentaryy, August 26, 2008.
Financial Times: Moscow's plan is to redraw the map of Europe
"Any doubts about why Russia invaded Georgia have now been erased. By illegally recognising the Georgian territories of Abkhazia and South Ossetia, Dmitry Medvedev, Russia's president, made clear that Moscow's goal is to redraw the map of Europe using force.
"This war was never about South Ossetia or Georgia. Moscow is using its invasion, prepared over years, to rebuild its empire, seize greater control of Europe's energy supplies and punish those who believed democracy could flourish on its borders. Europe has reason to worry. Thankfully, most of the international community has condemned the invasion and confirmed their unwavering support for Georgia's territorial integrity and sovereignty.
"I believe the most potent western response to Russia is to stay united and firm by providing immediate material and political support. If Moscow is trying to overthrow our government using its lethal tools, let us resist with democratic tools that have sustained more than 60 years of Euro-Atlantic peace. Backing Georgia with Europe's political and financial institutions is a powerful response. Regrettably, this story is no longer about my small country, but the west's ability to stand its ground to defend a principled approach to international security and keep the map of Europe intact."
Source: Henny Sender, Financial Times, August 27, 2008.
Bloomberg: Gazprom leads surge in Russian debt risk
"OAO Gazprom led a jump in the cost of protecting Russian companies from default to the highest in almost five months on investor concern the country's military incursion in Georgia will trigger a rise in borrowing costs.
"Credit-default swaps on the world's largest natural-gas producer increased 36 basis points to 260 this month, and Moscow-based oil-pipeline operator OAO Transneft rose 33.5 to 265, according to at CMA Datavision. Contracts on Russia's government debt climbed 32 to 134, the highest since April 2.
"The credit crisis has already prompted a jump in Russian corporate funding costs, with the nation's largest lender, OAO Sberbank, increasing rates on outstanding loans by an average of 2 percentage points last month. International investor concern over the Georgia military action may add at least a further 0.5 percentage points to annual interest payments, according to Mikhail Galkin, a fixed-income analyst at MDM Bank in Moscow.
"'Access to capital for Russian corporations, already severely damaged by the global credit crunch, has further deteriorated on the back of increased political risks,' Galkin said in an interview today."
Source: Abigail Moses and Denis Maternovsky, Bloomberg, August 27, 2008.
BCA Research: UK economy - look out below!
"The fallout in the UK housing market is gaining momentum and will deliver dramatic knock-on effects for the aggregate economy. The BoE will be forced to respond aggressively.
"Our UK housing model has been predicting double-digit price declines for some time. Alarmingly, the housing market appears to be slipping even faster than the model predicted. Yesterday's release showed that nationwide house prices plunged in August to -10.5% YoY (from -8.1% in July). Still, UK housing remains extremely overvalued and none of the leading real estate indicators suggest that the market is likely to find support in the coming months.
"In turn, the negative wealth effects will continue to mount, keeping the consumer depressed and hesitant to spend. The poor consumer outlook is highlighted by the dismal CBI retail survey for September. The financial sector will also remain under pressure as banks face a second bust in the commercial real estate market.
"Bottom line: The BoE will need to respond by aggressively lowering interest rates (beginning before yearend) in order to limit the fallout in the overall economy. Stay bearish the pound and overweight gilts within a global hedged fixed income portfolio."
Source: BCA Research, August 29, 2008.
Bloomberg: UK economic growth stagnated in second quarter
"The UK economy stagnated unexpectedly in the second quarter, ending the nation's longest stretch of economic growth in more than a century.
"Gross domestic product was unchanged from the previous quarter, the Office for National Statistics said, compared with a previous estimate for growth of 0.2%. Economists had expected a 0.1% expansion, according to the median estimate of 34 economists. Growth was 1.4% from a year earlier, the weakest since 1992.
"The report, which showed the biggest drop in investment in 23 years, adds pressure on the Bank of England to set aside inflation concerns and cut interest rates. It also worsens Prime Minister Gordon Brown's struggle to salvage his reputation for economic competence.
"'There is still worse to come,' Ross Walker, an economist at Royal Bank of Scotland, said in a Bloomberg Television interview. 'We may have to wait until early 2009 before we get the first rate cut because the inflation situation still looks pretty forbidding.'
"Industrial production, which includes manufacturing as well as utilities and oil and gas extraction, has now contracted for two consecutive quarters. Construction also shrank. Service industries, which range from banks to airlines, grew at the slowest rate since 1995."
Source: Jennifer Ryan, Bloomberg, August 22, 2008.
James Pressler (Northern Trust): Japan - response to upcoming recession
"Today, the government announced an ¥11.7 trillion ($107 billion) set of fiscal measures in response to the weakening economy (and likely to the ruling party's low approval ratings).
"Even though GDP has not contracted for the two consecutive quarters required, the world's second-largest economy is showing every sign of recession. A prolonged contraction in industrial production has been the main sign of recent recessions, and that seems to be the case as of today's release. The monthly figure for July production was surprisingly up on the month, but it is very likely that it will show another contraction for Q3 as a whole, and GDP will follow suit. Given this grim scenario, it is no surprise that the government took action. However, it would be hasty to call Tokyo's announced measures a 'stimulus' package.
After years of stable or declining prices, July inflation rose to a decade-high 2.3% according to today's release. Real interest rates are now decidedly negative, and consumer sentiment has taken a significant hit."
Source: James Pressler, Northern Trust - Daily Global Commentary, August 29, 2008.
Financial Times: Jing Ulrich and Qing Wang on Chinese reforms
Jing Ulrich, JPMorgan chairman of China equities and Qing Wang, Morgan Stanley chief economist for greater China, discuss the likely policy priorities Beijing will pursue to cope with China's economic downturn and weak stock market.
Source: Financial Times, August 26, 2008.
MarketWatch: Saudi Arabia takes big step toward opening market
"Saudi Arabia's recent decision to allow foreign investors to buy local shares indirectly is a dramatic step toward opening up the biggest stock market in the Middle East.
"The Capital Market Authority (CMA), the Saudi market regulator, announced last Wednesday that it will let foreigners gain exposure to the local market through so-called swap agreements.
"The CMA will allow authorized persons to enter into swap agreements with non-resident foreign investors, whether institutions or individuals, to transfer profits from shares listed on the Saudi Stock Exchange, the Tadawul. The so-called authorized persons will retain legal ownership of the shares.
"'Up until now, Tadawul has been the least open to foreign investment among the GCC bourses,' said analysts at Kuwait-based Global Investment House in a recent report.
"'This step is considered a leap in the regulators efforts to diversify the market's investor base and develop the kingdom's financial market,' the analysts said.
"In the past, foreign investors didn't have access to the Saudi stock market, except through mutual funds. Only residents of the GCC countries have been allowed to invest directly in Saudi companies."
Source: Polya Lesova, MarketWatch, August 28, 2008.
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