Words from the (Investment) Wise for the Week That Was (Jan 26 - Feb 1, 2009): Part II

By: Prieur du Plessis | Sun, Feb 1, 2009
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Bespoke: 10-year Treasury yield reaches key juncture
"Even with the Fed's reiteration that they were considering outright purchases of US Treasuries, the yield on the 10-year has been climbing steadily higher from its lows in December. At 2.77%, the 10-Year is approaching yields that it traded at before the bottom dropped out in early December. How we trade in the next few days will go a long way in determining whether the current sell-off is simply profit-taking after a massive rally, or the beginning of the end of the latest bubble in asset classes (stocks, real estate, commodities, etc.)."

Source: Bespoke, January 29, 2008.

David Fuller (Fullermoney): Treasuries - a dangerous game
"The promise (threat?) by the Fed to purchase US long-dated securities has deterred me from shorting them to date, despite some very good sell signals ...

"However I have also described the Fed's frequent hints of its apparent willingness to buy US debt as akin to a con artist's shell game. However in the Fed's version, instead of trying to guess under which of three rapidly moving cups the pea lurks, we are guessing how and when we might see their bond purchases.

"I do not question the Fed's word that it would be prepared to buy Treasuries to keep long-term rates low, if necessary. Instead, my point is that they may hope to avoid purchases if they persuade the market to do their work for them. In other words, I wonder how many people, from hedge fund managers to foreign governments, have bought or at least retained their Treasuries, despite historically low yields and rapidly increasing supply.

"This is a dangerous game. Financial history is full of instances where investors have been persuaded to pay record high valuations for assets, usually because: 'It is different this time.' Perhaps ... for a while, but the bubble always bursts in a mean reversion process which usually ends in an overshoot of its own.

"The only way I can envisage significantly lower long-term yields for US Treasury bonds, would be if the economy slid into a lengthy deflation, as we saw with Japan in the late 1990s and earlier this decade, causing real interest rates to rise. This is a risk, but one that the Bernanke Fed has vowed to avoid. It has the means to do so.

"At Fullermoney, we think gold is replacing US Treasuries as the safe haven investment."

Source: David Fuller, Fullermoney, January 30, 2009.

Bespoke: Credit default risk down but still high
"Below we highlight a chart of an index that measures the default risk of investment grade credit in the US. Throughout the credit crisis, default risk has risen sharply, although it has ticked lower since peaking in December. Any decline in default risk is a good sign, but it needs to fall much more before anyone can make the claim that things are 'settling down'. As shown, the index has still not broken below the bottom of its uptrend line that formed back in April 2008."

Source: Bespoke, January 27, 2009.

Bloomberg: Soros stopped betting against pound
"Billionaire investor George Soros, who made $1 billion selling the pound in 1992, said he is no longer betting against the UK currency after it reached $1.40.

"'I did actually foresee the fall in sterling and that was one of the positions we carried,' he told reporters at the World Economic Forum in Davos, Switzerland. Below $1.40 'it seemed to me the risk-reward was no longer clear'.

"Soros said today that he has made money from the financial crisis. The British government's efforts to protect the banking system from the turmoil last week led to a drop in the pound to the lowest level against the dollar since 1985.

"'We did have a short position in sterling, but it doesn't mean I'm bearish on sterling today or bullish,' Soros said. 'It will continue to fluctuate.'

"Soros's comments contrast with those of Jim Rogers, who co-founded the Quantum Fund with him and is now chairman of Singapore-based Rogers Holdings. Rogers said on January 20 that the pound was 'finished' because of turmoil in the banking system and a decline in North Sea oil output."

Source: Simon Kennedy, Bloomberg, January 28, 2009.

Bespoke: Russian troubles
"Russia's currency made news today for having its biggest two-day decline versus the dollar in a decade. For those interested, below we provide a long-term chart of the Russian ruble versus the US dollar. As shown, the amount of rubles that one dollar will get you has spiked significantly in recent months, going from about 23 rubles per dollar last May to its current level of 34.84 rubles per dollar."

Source: Bespoke, January 29, 2009.

BBC News: Zimbabwe abandons its currency
"Zimbabweans will be allowed to conduct business in other currencies, alongside the Zimbabwe dollar, in an effort to stem the country's runaway inflation."

Source: BBC News, January 29, 2009.

Financial Times: Gold pushes above $900 in buying spree
"Strong investor buying on Monday pushed the price of gold above $900 a troy ounce, hitting a 3½-month high in dollar terms and posting all-time highs in euro and sterling, in a stark sign of money seeking refuge from equities and bond markets.

"Traders said that investors, particularly in continental Europe and the UK, were pouring money into gold exchange-traded funds - a popular way to gain access to the metal - and also noted strong buying of physical gold, from coins to bars.

"Edel Tully at Mitsui & Co Precious Metals in London said gold was the 'obvious shelter' for safe-haven investors.

"The total amount of gold held by the world's gold ETFs last week rose for the first time above the 40 million ounce level. Together, such investment vehicles are now the largest holders of physical gold after the official reserves of the US, Germany, the International Monetary Fund, France and Italy.

"In the short term, traders said gold was likely to consolidate above $900 an ounce this week and could test the $930 an ounce level previously touched in October."

Source: Javier Blas, Financial Times, January 26, 2009.

Bespoke: Will gold break its downtrend?
"After briefly piercing the $1,000 level in March of last year, the price of gold went into a long-term downtrend with a series of lower highs and lower lows. However, since bottoming out at $681 in October, gold has rallied to over $900 per ounce. This has brought the commodity right to the top of its downtrend line from the March 2008 high. While the current rally in gold has been attributed to fears over competitive currency devaluations across the globe, how the commodity acts in the coming days will go a long way in determining how valid those fears are."

Source: Bespoke, January 26, 2009.

Richard Russell (Dow Theory Letters): Gold benefits from devaluations
"The world battle for exports, with the help of cheap currencies is on. They call it competitive devaluations, and the whole picture is not lost on gold. The move is starting - to move to hard assets. The hardest of all assets is gold. Gold, in case you forget, is pure wealth, it's the only money with no debt against it or without a counter-partner. Gold needs no nation or central bank to attest, by fiat - that it's money."

Source: Richard Russell, Dow Theory Letters, January 26, 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.

Bespoke: Baltic Dry Index up seven days in a row
"The Baltic Dry Index gained another 1% today, which makes seven up days in a row. Since bottoming in December, the Index has formed a nice uptrend, gaining over 50%. Longer term, however, the Index's highs from last Spring are still a long way off. While the Index bottomed on December 5 with a 94.4% decline from its all-time high of 11,793, at its current level of 1,014, it is still down 91.4% from its May 20 high. In order to get back to those highs, the index would have to rally an additional 1,063%. Hey, you have to start somewhere."

Source: Bespoke, January 28, 2009.

CNBC: Oil move to $20?
"Crude oil may fall to $20 this year, says Joe Petrowksi, Gulf Oil and Cumberland Farms CEO."

Source: CNBC, January 27, 2009.

Victoria Marklew (Northern Trust): Eurozone - is that light at the end of the tunnel?
"Today's [Tuesday] Ifo and last week's Belgian leading indicator offer the tantalizing hope that the economic downturn across the Eurozone is starting to bottom out - but one month is not enough to call a trend, and the 'zone' in general, and Germany in particular, are still likely in for a rough first quarter of 2009.

"First, the Ifo index in Germany. The headline business climate index edged upward from 82.7 in December to 83.0 in January, the first improvement in eight months. Nevertheless, the difference between the current conditions and expectations indices remains wide, suggesting that the economy will contract again in Q1 2009 and that the government's latest forecast of -2.25% real GDP growth this year is about right.

"Which takes us to our favorite Eurozone leading indicator, the Belgian National Bank's (BNB) business confidence indicator. As we've noted before, thanks to Belgium's strong trade ties with its neighbors (about 80% of Belgium's manufacturing output is sold abroad, mostly to fellow EU members), the BNB's business confidence index is a reliable leading indicator - about six months out - for GDP growth in the Eurozone as a whole.

"The Belgian and German data imply that the Eurozone as a whole will see a marked contraction in Q4 2008 and Q1 2009, flat-to-negative growth in the middle of the year, and a sustained improvement finally underway by Q4."

Source: Victoria Marklew, Northern Trust - Daily Global Commentary, January 27, 2009.

CEP News: Spain is officially in a recession, says Central Bank
"With GDP contracting for two quarters in a row, the Spanish economy has officially entered into a technical recession, the Bank of Spain said in its quarterly GDP report released on Wednesday.

"According to the central bank, the Spanish economy contracted by 1.1% to Q4 from Q3, when output had fallen 0.2%. On an annualized basis, the economy declined 0.8% in Q4, down from Q3's 0.9% increase. The Bank of Spain also reported that for 2008 as a whole, the economy grew at 1.1%, down from 2007's 3.7% print.

"With the economy expected to decline 1.6% in 2009, the government is looking to spend upwards of €90 billion in stimulus measures. As a result of the pressures on public finances, Standard & Poor's had reduced Spain's sovereign credit rating from AAA to AA+ earlier in the month."

Source: CEP News, January 28, 2009.

BCA Research: UK economy - in a deep recession
"The UK economy is the epicenter of the global housing/credit crisis and will need substantially more support from policymakers.

"Last week's release highlighted that the UK economy contracted again in Q4 by more than expected to -1.8% YoY. More importantly, the outlook is grim given that the collapse in both commercial and residential real estate prices is still gaining momentum, banks have shut off the credit taps, and business sentiment surveys indicate that activity has ground to a halt.

"UK households face dramatic headwinds from plunging home prices and rapidly rising unemployment. Correspondingly, our models warn that retail sales growth will contract later this year, causing deflationary pressure to build further.

"Bottom line: In order to prevent debt-deflation from gaining further momentum, UK policymakers will need to continue stimulating aggressively (using both conventional and unconventional measures). While the collapse in the pound is helping ease overall monetary conditions, the lack of global trade limits the positive impact for the economy."

Source: BCA Research, January 26, 2009.

US Global Investors: China - threat of capital flight
"While China's capital outflow during the fourth quarter is only 2% of the country's formidable foreign exchange reserve, the specter of liquidity fleeing China may continue to haunt investors as the worst-case scenario if the government's policy efforts fail to revive the economy."

Source: US Global Investors - Weekly Investor Alert, January 30, 2009.

Financial Times: Japan's production falls record 9.6%

"Japanese industrial production fell a record 9.6% in December, while core annual inflation almost evaporated, reinforcing expectations of a record economic contraction as the global financial crisis worsens.

"Unemployment hit a three-year high, household spending dipped, and manufacturers saw no quick turnaround in the outlook for industry - the main driver of the world's second-biggest economy - as inventories hit record highs despite factory closures and lay-offs.

"Subsiding inflation and worsening economic conditions are also stoking deflation worries, as in other major economies, which may prompt more central bank steps to support the staggering economy and free up frozen credit markets that are starving key companies of cash.

"Economists said fourth-quarter GDP figures, due out in February, would show Japan's economy shrinking at a double-digit annual rate, and Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities, said early 2009 also looked bleak."

Source: Reuters, Financial Times, January 30, 2009.

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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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