Words from the (Investment) Wise for the Week That Was (Dec 29, 2008 - Jan 4, 2009): Part II

By: Prieur du Plessis | Sun, Jan 4, 2009
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Bespoke: Economists' interest rate projections
"Below we highlight average estimates for the 10-Year Treasury Yield and the Fed Funds Rate going out to Q1 '10 based on Bloomberg's survey of more than 50 economists. As shown, economists are expecting the 10-Year Yield to increase steadily in 2009, while they don't expect the Fed Funds Rate to move back up to 50 bps until the third quarter. By the first quarter of 2010, economists expect the Fed Funds Rate to be back up to 1.00%. It's hard to find an economist or analyst on the street that doesn't think Treasuries will fall after the gains they've had in recent months. However, just like oil's rally from $110 to $120 to $140, asset classes can move in one direction a lot more than most people expect."

Source: Bespoke, December 31, 2008.

Forbes: Big Brother investing
"William Gross has buying power few can match. The founder of money manager Pimco in Newport Beach, Calif. oversees $790 billion, most of it invested in fixed income. But now there's a new bully on the block: Uncle Sam. The government is on a buying spree the likes of which has never been seen, its purchases of corporate debt held back only by the speed of the dollar printing presses.

"Many of the targets of Washington's largesse are shaky financial outfits that Gross normally wouldn't touch, like AIG. Its bonds trade now at 12% yield to maturity - junk level last summer. Investors may be fleeing, but Gross knows when he's been outmuscled. In the past year the 64-year-old King of Bonds has bought $100 billion of preferred shares and senior debt of financial companies receiving taxpayer loans. His bet is that the government will throw good money after bad rather than let them fail.

"Gross may be buying what others are anxious to sell, but don't interpret this as meaning he thinks the economy is soon recovering. In fact, he's quite bearish. With stocks down 40% this year, he predicts Americans will shift from risk to thrift for at least a generation. He says higher savings, plus a move away from leverage by businesses and money managers, means the US economy will grow no more than 2% annually for years, a third slower than its 20-year average. Profit margins will narrow, stock gains will slow to a crawl and the government will find itself lending to the private sector for a long time.

"Gross' theory is that the government will arrange to get itself paid back and that his investors can safely travel on the government's coattails. Gross figures Washington is getting a return on its preferred securities, including the value of its equity warrants, of 6% annually. With investors fleeing banks, though, his yield is much higher for essentially the same securities: 10% to 13%. He says these issues are like $20 bills on the street that no one picks up because they can't believe it's true. 'It's the most incredible value I've ever seen,' he says."

Click here for the full article.

Source: Bernard Condon, Forbes, January 12, 2009.

Bespoke: High yield spreads contract 10% from December highs
"While it may be cold outside, the thaw we have been seeing in the credit markets reached a notable milestone on Friday. Based on data from Merrill Lynch indices, high yield spreads tightened from 1,979 to 1,955 basis points. From their peak reading of 2,182 basis points on December 15, high yield spreads have now contracted by 10.4%.

"While these levels are still extremely high, they are moving in the right direction. The hope now for the bulls is that this move is sustainable in the new year, when trading desks are back at fully staffed levels."

Source: Bespoke, December 29, 2008.

BBC News: China to allow freer yuan trades
"China has said it is to allow some trade with its neighbours to be settled with its currency, the yuan. The pilot scheme was announced in a package of measures designed to help exporters hit by the global downturn.

"It means if the two parties to a trade have yuan available, they need not enter world exchange markets to pay. Most of China's foreign trade is settled in US dollars or the euro, leaving exporters vulnerable to exchange rate fluctuations.

"The yuan is not yet a freely convertible currency.

"Officials did not say when the trial scheme would start. When it does, the yuan could be used to settle trade between parts of eastern China (Guangdong and the Yangtze River delta) and the territories of Hong Kong and Macau, and between south-west China (Guangxi and Yunnan) and the Asean group of countries (Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam)."

Source: BBC News, December 25, 2008.

Gulfnews: Single currency to increase clout
"A single currency backed by a common economic agenda and a unified monetary policy could make the Gulf a strong regional economic bloc, say economists and financial experts.

"'The single currency is a huge opportunity for the Gulf region to make its economic clout felt in the international arena. Creation of a strong currency supported by nearly 50% of world's oil wealth will prove to be a major stabilising factor for the regional economies,' said Dr Nasser Saidi, Chief Economist of Dubai International Financial Centre.

"Besides attracting foreign investments, analysts say, a strong currency could become a key factor in preserving the region's financial wealth and help recycle oil wealth within the region.

"Analysts believe the current global economic environment presents an ideal opportunity for the creation of a strong common currency that could emerge stronger than many international currencies such as the dollar, euro, yen and sterling.

"'The Gulf common currency supported by the region's resource wealth could become a major reserve currency attracting global reserves into the region. It could also help regional financial centres emerge as global financial centres competing with others such as New York and London,' said Dr Saidi.

"Economists and currency experts believe the pegged currency regimes in the region and the direct link to the US monetary policy was one of the main reasons for the recent economic volatility in the region. Once the currency union is launched, the immediate priority of the Gulf Central Bank will be to launch a flexible monetary policy that ensures exchange rate stability."

Source: Babu Das Augustine, Gulfnews, December 29, 2008.

Financial Times: Steel output set for historic drop
"The steel business faces a fall in production in 2009 of at least 10%, analysts say. This would be the biggest year-on-year fall for more than 60 years.

"According to the gloomiest projections, it could be at least four years before output returns to the levels of 2007.

"This would make the period of the expected downturn only the fifth occasion in the past century, leaving aside times of world war, when a slump in the steel industry has lasted four years or longer.

"The sector has been among those worst hit by this year's financial storms, with share prices in many steel groups having fallen by more than two-thirds since the middle of 2008.

"Hit by a sudden reduction in orders in September and October from businesses such as construction, cars and white goods, many producers including Lakshmi Mittal's ArcelorMittal, Severstal of Russia and Corus, owned by India's Tata Steel, have sharply cut production."

Source: Peter Marsh, Financial Times, December 28, 2008.

Asha Bangalore (Northern Trust): Global factory activity mired in a slump
"In Europe, Germany, France, and the UK all reported declines in indexes of purchasing managers in December.

"The overall Markit Eurozone Purchasing Managers' Index (PMI) for the manufacturing sector declined to 33.9 in December, a record low in the 11-year history of the survey.

"The German Markit Purchasing Managers' Index fell to 32.7, the lowest since the survey began in 1996, and the December decline marks the fifth monthly contraction in factory activity.

"The French Markit/CDAF purchasing managers' index for manufacturing dropped to 34.9 in December versus 37.3 in November. This reading is the lowest since record keeping for this series began in April 1998.

"Britain's manufacturing sector contracted for an eighth straight month running in December.

"China's, factory sector has contracted for the fifth month running according to the CLSA China Purchasing Managers' Index.

"Although the Australian Industry Group-PricewaterhouseCoopers Australian Performance of Manufacturing Index rose one point in December from November to 33.7 index points, this index has recorded readings below 50.0 for seven consecutive months, indicating an extended period of contraction in factory activity.

"In sum, weak economic conditions across the world is a challenge for policy makers in the months ahead."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, January 2, 2009.

International Herald Tribune: Germany resists calls to spend its way out of trouble
"With battle lines sharpening, the German government appears determined to resist calls to spend an additional €40 billion to fight its way out of the recession, according to officials attending a meeting in the Chancellery in the past week.

"Chancellor Angela Merkel is being pulled in all directions as she plans a January 5 follow-up to a meeting of German government officials, business executives and union leaders she called two weeks ago to discuss ways to counter the recession.

"The business community, leaders of German states and other European Union nations are calling for the additional spending, which would amount to $56 billion. Industry chiefs, meanwhile, are calling for tax cuts.

"Merkel, facing federal elections in September, has said the focus of any spending measures must be preserving jobs. At the meeting two weeks ago, industry lobbyists promised to go along on that point, but now they have backed away even as they exert more pressure on her.

"The European Union, while weakening its criticism of Merkel's cautious approach to dealing with the economic crisis, still wants the German government to do more because of its size: It has the largest economy in Europe.

"Merkel, so far, has kept the lobbyists, the state leaders and the EU guessing about her final package."

Source: Judy Dempsey, International Herald Tribune, December 26, 2008.

Reuters: Further house price declines in store for UK
"Housing prices in England and Wales fell 8.7% in 2008, bringing the average price of a house to 159,900 pounds, property consultant Hometrack said in its monthly survey on Monday.

"At 0.9%, the pace of monthly decline eased slightly from November's 1.1% drop, although prices have now fallen consistently over the last 15 months and 9.3% since the start of the credit crunch in August 2007.

"British house prices tripled in the 10 years running up to their peak in the middle of last year, but have since fallen as much as 15% in other surveys as the global financial crisis has caused the supply of mortgages to dry up.

"'The onset of recession and the prospect of rising unemployment over 2009 will continue to dampen confidence and in turn demand, which will inevitably lead to further house price falls over the next 12 months,' said Richard Donnell, director of research at Hometrack.

"Two other key indicators - time taken to sell a property and proportion of the asking price achieved - demonstrate the current weak housing market.

"Hometrack found the average time to sell a property in December was 12 weeks, up from 8.3 weeks a year ago and a low of six weeks in April 2007. The proportion of the asking price being achieved reached 88.6%, down from 93.5% a year ago, and well down on the high of 95.7% seen in April 2007."

Source: Maureen Bavdek, Reuters, December 29, 2008.

US Global Investors: China's manufacturing PMI remains in contraction
"According to CLSA, China's manufacturing activity, responsible for 43% of the country's GDP, contracted for a fifth month in December though the figures were an improvement from November. A sustained de-stocking cycle in the industrial sector has pushed the employment situation to a 56-month low, a tangible menace for consumer confidence and social stability."

Source: US Global Investors - Weekly Investor Alert, January 2, 2009.

CNBC: Expect a V-shaped recovery in China
"Sun Mingchun, senior China economist at Nomura, sees a V-shaped recovery in China, with GDP growth starting to rise in the second-quarter of 2009. He explains his optimistic outlook to CNBC's Martin Soong."

Source: CNBC, December 29, 2008.

Bloomberg: Japanese economy may shrink 12.1%"Japan's economy will probably shrink at an annual 12.1% pace this quarter, the sharpest drop since 1974, as exports collapse, Barclays Capital said.

"Gross domestic product in the three months ending tomorrow will fall at almost three times the 4.1% rate previously predicted, said Kyohei Morita, chief Japan economist at Barclays in Tokyo, after reports last week showed industrial production and exports posted the biggest declines on record in November.

"'Given the speed and the length of the contraction, this recession could be the most severe in the postwar era,' Morita said. 'We expect negative growth will continue for a fifth straight quarter to the April-June period of 2009.'

"A 12.1% annualized contraction would be the steepest since the first quarter of 1974, when the oil shock caused the economy to shrink 13.1%, according to Barclays."

Source: Keiko Ujikane and Tatsuo Ito, Bloomberg, December 30, 2008.

CEP News: Singapore GDP contracts more than expected
"Singapore's preliminary gross domestic product (GDP) contracted 12.5% in the fourth quarter, against expectations for a 3.4% quarter-over-quarter contraction and the upwardly revised 5.4% decrease seen in the third quarter, originally reported as -6.3%.

"GDP was down 2.6% year over year, against a 0.3% annual decline in the third quarter.

"The report, released by Singapore's Ministry of Trade and Industry Friday morning said the sharpest annual declines were in the manufacturing sector, down 9.0% from one year ago. The construction sector was up 13.3% annually and the services and producing component was up 1.1%."

Source: CEP News, January 2, 2009.

US Global Investors: Brazil's manufacturing confidence plunges
"The Brazilian Manufacturing Industry Survey compiled by the Getúlio Vargas Foundation in Brazil revealed a significant decline in the seasonally-adjusted Industry Confidence Index, from 83.9 in November to 74.7 in December. This was the fourth consecutive decline in this leading indicator of economic activity. In December, the index fell to its second-lowest level since the data series was created in April 1995."

Source: US Global Investors - Weekly Investor Alert, January 2, 2009.

Financial Times: Russia braced for unrest
"Russia is bracing for further unrest as the rouble on Friday slid to a new low against the euro after a succession of moves to devalue its currency.

"A cut on Friday extended six weeks of devaluations by Russia's central bank designed to offset the impact of the global economic crisis and falling oil prices as the country's main export commodity approached its lowest level since 2004.

"Mikhail Gorbachev, the former Soviet leader, warned Russia faced 'unprecedentedly difficult and dangerous circumstances' and could be 'heading into a black hole'. 'It is not clear what the fate of our rouble will be or if society has sufficient financial and moral resources,' he said.

"After the depreciation, which was the eighth so far this month, the rouble declined as much as 1.2% to Rbs29.06 versus the dollar on Friday, a four year low. The rouble has now lost nearly 20% of its value against the US currency since August.

"Analysts at Barclays Capital said the best case scenario would see Russian policymakers, facing the mounting evidence of a recession, allowing a one-off depreciation of 10% or more.

"The rouble's slide comes as the government faces scrutiny over its policies. A demonstration earlier this month in the far eastern city of Vladivostok marked the first major challenge to the Kremlin since the onset of the global financial crisis.

"Mikhail Sukhodolsky, a deputy interior minister, warned on Christmas Eve that there could be further protests. 'The situation may be exacerbated by a growth in frustration of workers over the non-payment of wages or those threatened with dismissal,' he said.

Source: Isabel Gorst and Anuj Gangahar, Financial Times, December 26, 2008.

The New York Times: Russia cuts off gas deliveries to Ukraine
"In the face of mounting economic troubles, Russia cut off deliveries of natural gas to Ukraine on Thursday after Ukraine rejected the Kremlin's demands for a sharp increase in gas prices.

"A similar reduction in supplies to Ukraine in 2006 caused a drop in pressure throughout Europe's integrated natural gas pipeline system and led to shortages in countries as far away as Italy and France.

"But with a recessionary drop in demand, ample supplies and assurances from both countries that gas would flow westward without interruption, there were few signs of the near hysteria in Europe that accompanied the 2006 cutoff.

"Even Ukraine, which says it has enough gas in reserve to last through the winter, took Russia's action in stride, underscoring how the political potency of the Kremlin's energy card has plunged along with the price of oil and gas.

"Gazprom, the Russian natural gas monopoly, likened its actions to a utility cutting off service to a deadbeat customer. "The message is very simple," Ilya Y. Kochevrin, the executive director of Gazprom's export arm, Gazexport, said in a telephone interview. 'If you receive a product, you have to pay for it. If you don't pay, you don't receive it.'

"But energy experts said that the Kremlin's decision to employ the gambit again in a pricing dispute with Ukraine was an indication as well of Russia's deepening economic woes."

Source: Andrew Kramer, The New York Times, January 2, 2009.

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Back to Part I



Prieur du Plessis

Author: Prieur du Plessis

Dr Prieur du Plessis

Dr Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.

He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).

Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.

Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.

Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).

Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.

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