Words from the (Investment) Wise for the Week That Was (February 9 - 15, 2009)
"Words from the Wise" this week comes to you from my abode in a visibly depressed Europe, from where I am compiling this report as welcome relief from gloomy conversations with taxi drivers and cheerless meals in deserted eateries.
Events during the past few days were dominated by the announcement of US Treasury Secretary Timothy Geithner's financial stability plan and a deal reached by Congress on the economic stimulus bill. However, the much-anticipated bailout bang soon whimpered as investors were disappointed about the lack of "beef". Meanwhile, markets were also mired in uncertainty on the back of fresh evidence of headwinds facing the global economy - notably in major economies such as the UK, continental Europe and Japan.
Jim Rogers gave the bank rescue plan a big thumbs-down: "(Geithner) ... has been dead wrong about everything for 15 years in a row ... This (the rescue plan) is not going to solve the problem, it's going to make it worse."
Referring to the stimulus bill, Steve Forbes said: "It's just a grab bag of every spending proposal that's been banging around Congress for years."
And Bill King (The King Report) commented as follows: "A cure should have something to do with the diagnosis. The classic argument for fiscal stimulus presumes that the central cause of our current economic problems is this: We, the people and our government, are not doing nearly enough borrowing and spending on consumer goods. The government must step in to force us all to borrow and spend more. This diagnosis is tragically comic once said aloud."
Stock markets were on the receiving end as risk-averse investors sought out the safe havens of the US dollar (+0.8% in the case of the US Dollar Index), gold (+3.1%) and bonds (with the yields of 10-year Bunds and Gilts down by 21 and 17 basis points respectively).
The week's movements of the MSCI Global Index (-3.9%, YTD -9.0%) and MSCI Emerging Markets Index (-0.6%, YTD -2.2%) reflect global investors' skepticism about the rescue plans. Strong performances came from China (+6.4%) and Russia (+14.3%), but still left these markets in the red by 61.9% and 63.0% since their respective bull market highs. As mentioned before, the chart pattern of the Chinese Shanghai Composite Index shows arguably one of the most bullish formations of the major stock market indices.
The major US indices suffered their worst weekly losses this year (to record five losing weeks out of six): Dow Jones Industrial Index -5.2% (YTD -10.6%), S&P 500 Index -4.8% (YTD -8.5%), Nasdaq Composite Index -3.6% (YTD -2.7%) and Russell 2000 Index -4.7% (YTD -10.2%).
John Nyaradi (Wall Street Sector Selector) pointed out that among the exchange-traded funds (ETFs) none of the main economic sectors registered positive returns, as summarized in the chart below. Not shown, the KBW Bank Index ETF (KBE) lost 14.3% on the week, and the Dow Jones US Real Estate Index ETF (IYR) 12.0%. The ProShares Short Dow30 ETF (DOG) led the way among inverse funds with a gain of +5.3%.
As investors became more fearful of the economic situation, gold bullion (+3.1%) assumed its traditional safe-haven role. "Inflows into gold-backed exchange-traded funds surged in January, pushing their bullion holdings to an all-time high of 1,317 tons. Last month's flows of 105 tons were above September's previous record of 104 tons, and absorbed about half the world's gold mine output for January," said Barclays Capital, as reported by the Financial Times.
The chart below shows the long-term trend of the yellow metal (green line) together with a 14-month rate of change (ROC) indicator (red line). Monthly indicators come in handy for defining the primary trend. In this case the ROC line above zero depicts the bull market in bullion that commenced in 2001. And there is more to come: According to Gary Dugan, the chief investment officer of Merrill Lynch, gold prices may hit US$1,500 an ounce in the next 12 to 15 months.
In addition to last week's bailout actions, policymakers are also working on a housing subsidy plan that will use government money to help reduce interest rates for struggling borrowers. The details are to be announced by President Obama on Wednesday.
Needless to say, Capitol Hill's various actions come at a hefty price. According to The Wall Street Journal, Strategas Research estimates that the federal budget will work out to roughly 13.5% of GDP in 2009. Asha Bangalore (Northern Trust) added: "2009 will go down in history as the year during which the US economy recorded the largest federal budget deficit as a percent of GDP in a span of eighty years, excluding the war years. The budget deficit as a percent of GDP through the war years of 1942 to 1945 was 14.2%, 30.3%, 22.7% and 21.5%, respectively."
Next, a tag cloud of the text of all the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. As the saying goes: A picture paints a thousand words ...
But back to the stock market. Key resistance and support levels for the major US indices are shown in the table below. All the indices are trading below their 50-day moving averages and the Industrial and Transportation Averages have also breached the December 1 lows. The all-important November 20 lows are now within close reach - already broken by the Transportation Average - and must hold in order to prevent considerable technical damage.
Richard Russell (Dow Theory Letters), 84-year old doyen of investment newsletter writers, interprets the technical situation as follows: "The Point & Figure chart below may currently be the most important single chart in the world. This is the DJ Industrial Average, and it's in the act of testing its November 20 low. If the Dow violates its low, it will have confirmed the prior bearish penetration of the Transportation Average. If that happens, the primary bear market will be reconfirmed. But if the Industrials stubbornly refuse to break to a new low, then the inference is that something else is happening. The inference is that the bear market may be forming a temporary bottom."
"What I think we've seen, so far, is the end of forced selling. At this point, professionals are trying to gauge whether the huge market collapse of 2007-2008 has discounted the worst to come or whether 'the worst' still lies ahead," said Russell. "The drama should be played out over the next week or so."
Given all the cross-currents, short-term movements are almost impossible to predict and traders will simply have to remain level-headed and wait for Mr Market to show his hand, especially as far as the November 20 lows are concerned.
For more discussion about the direction of stock markets, also see my recent posts "Finally, the plan ... sort of" and "Video-o-rama: Risk appetite fades on stimulus gloom".
"There is no let-up in the dark pessimism that engulfs nearly all businesses across the globe. Global business sentiment weakened again in early February back close to the record low set in mid-December," said the latest Survey of Business Confidence of the World conducted by Moody's Economy.com. "Confidence is poor across the globe; if there is a distinction it is that Asian businesses are a bit more upbeat than businesses everywhere else."
A snapshot of the week's US economic data is provided below. (Click on the dates to see Northern Trust's assessment of the various reports.)
• Fiscal stimulus package in a nutshell
• Federal budget deficit in turbulent times
• Consumer sentiment remains gloomy
• Retail sales stabilized in January, future remains gloomy
• Sharp drop in exports and imports reflects global recession
• Geithner unveils financial stability plan
• Market spreads - moving in the desired direction but more is necessary in the mortgage market
In last Sunday's "Words from the Wise" I referred to the surge in the Baltic Dry Index (BDI) - measuring freight rates for iron ore and other bulk goods. The Index has gained 188% over the past two months after plunging by 94% since its high in May. In my opinion, the rally in the BDI is in the expectation (or, should I say, "hope") that the manufacturing Purchasing Managers' Indices (PMIs) will start improving, i.e. moving closer to the neutral level of 50 (see graph below). This does not mean the global economy will expand, but merely that the trough of the logjam in international trade might have been reached. Not shown, the trends of the BDI and credit spreads follow a strong inversely correlated path.
Source: Plexus Asset Management
|Date||Time (ET)||Statistic||For||Actual||Briefing Forecast||Market Expects||Prior|
|Feb 10||10:00 AM||Wholesale Inventories||Dec||-1.4%||-0.7%||-0.7%||-0.9%|
|Feb 11||8:30 AM||Trade Balance||Dec||-$39.9B||-$36.0B||-$35.7B||-$41.6B|
|Feb 11||2:00 PM||Treasury Budget||Jan||-||NA||-$75.0B||-$83.6B|
|Feb 12||8:30 AM||Initial Claims||02/07||623K||600K||610K||631K|
|Feb 12||8:30 AM||Retail Sales||Jan||1.0%||-0.6%||-0.8%||-3.0%|
|Feb 12||8:30 AM||Retail Sales ex-auto||Jan||0.9%||-0.6%||-0.4%||-3.2%|
|Feb 12||10:00 AM||Business Inventories||Dec||-1.3%||-1.2%||-0.9%||-1.1%|
|Feb 13||10:00 AM||Mich Sentiment-Prel||Feb||56.2||62.0||60.2||61.2|
In addition to Fed Chairman Bernanke speaking at the National Press Club in Washington (Wednesday, February 18) and the Bank of Japan's monetary policy announcement (Thursday, February 19), the US economic highlights for the week include the following:
Source: Northern Trust
Click the links below for the following reports:
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, February 13, 2009.
"It is the markets' job to reallocate money from the ignorant to the intelligent, from the lazy to the hard working and studious, from the naive to the educated, and from the speculator to the investor," said Barry Ritholtz (The Big Picture). Hopefully the "Words from the Wise" reviews offer assistance to Investment Postcards' readers not to get separated from their hard-earned funds in these taxing times.
That's the way it looks from Cape Town (or, more accurately, from "gnomeland", Switzerland, for the next few days).
Barry Ritholtz (The Big Picture): Stimulus package explained (Q&A)
"Sometime this year, taxpayers will receive an Economic Stimulus Payment. This is a very exciting new program that I will explain using the Q and A format:
Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers.
Q. Where will the government get this money?
A. From taxpayers.
Q. So the government is giving me back my own money?
A. No, they are borrowing it from China. Your children are expected to repay the Chinese.
Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.
Q. But isn't that stimulating the economy of China?
A. Shut up.
"Below is some helpful advice on how to best help the US economy by spending your stimulus check wisely:
If you spend that money at Wal-Mart, all the money will go to China.
If you spend it on gasoline it will go to Hugo Chavez, the Arabs and Al Queda
If you purchase a computer it will go to Taiwan.
If you purchase fruit and vegetables it will go to Mexico, Honduras, and Guatemala (unless you buy organic).
If you buy a car it will go to Japan and Korea.
If you purchase prescription drugs it will go to India
If you purchase heroin it will go to the Taliban in Afghanistan
If you give it to a charitable cause, it will go to Nigeria.
"And none of it will help the American economy. We need to keep that money here in America. You can keep the money in America by spending it at yard sales, going to a baseball game, or spend it on prostitutes, beer (domestic only), or tattoos, since those are the only businesses still in the US."
Source: Barry Ritholtz, The Big Picture, February 13, 2009.
CEP News: Financial rescue plan unveiled
"The US Treasury's financial rescue package includes up to $1 trillion in insurance financing for the purchase of toxic assets, and the expansion of a Fed lending facility (TALF) - backing up to another $1 trillion in consumer debt including mortgage backed securities. Under the program, the US Treasury will enter into a private and public sector partnership where both sides will provide insurance financing on toxic debt.
"However, the final details of the toxic debt program remain unclear, according to Treasury Secretary Tim Geithner. 'We are exploring a range of different structures for this program, and we will seek input from market participants and the public as we design it,' Geithner said. 'We believe this program should ultimately provide up to $1 trillion in financing capacity, but we plan to start it on a scale of $500 billion, and expand it based on what works.'"
Source: CEP News, February 10, 2009.
BCA Research: Where's the beef Mr. Geithner?
"There is still no clarity about how the US will 'fix' its troubled banking sector.
"Markets yesterday gave Treasury Secretary Geithner's Financial Stability Plan a resounding thumbs down because of a lack of detail about how it will work, following a build-up of expectations that concrete measures were ready to go.
"The plan's tenets are broadly sound - examining and stress testing bank balance sheets and then using government money to re-capitalize banks and eventually induce private sector purchases of the banks' toxic assets; supporting a US$1 trillion Consumer and Business Lending Initiative modeled on the Fed's Term Asset Backed Securities Loan Facility (TALF) to keep credit flowing to the private sector; and, launching a comprehensive program to stabilize the beleaguered housing sector.
"Yet, Geithner offered no specifics on the implementation process needed to identify and value the toxic assets, compel banks to disgorge them, and incentivize private capital to acquire them, though he indicated that details would be forthcoming in the weeks ahead. In short, many of the hurdles that befell the original TARP plan remain in place.
"Bottom line: Financial market risks will remain elevated until policymakers spell out more clearly how banks can be restored to health and encouraged to lend."
Source: BCA Research, February 11, 2009.
CNN: Yves Smith - "Banks must be nationalized"
"Blogger Yves Smith says that 'bad bank' proposals won't work; the government must take direct control of troubled lenders."
Source: CNN, February 11, 2009.
Martin Wolf (Financial Times): Why Obama's new Tarp will fail to rescue
"Has Barack Obama's presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.
"What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.
"Yet hoping for the best is what one sees in the stimulus programme and - so far as I can judge from Tuesday's sketchy announcement by Tim Geithner, Treasury secretary - also in the new plans for fixing the banking system. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years' economic crisis, has let Congress shape the outcome.
"The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this "progeny of the troubled asset relief programme" fails, Mr Obama's credibility will be ruined. Now is the time for action that seems close to certain to resolve the problem; this, however, does not seem to be it.
Click here for the full article.
Source: Martin Wolf, Financial Times, February 10, 2009.
Bill King: Tell the truth about toxic assets
"Only weeks ago the fin media hyped the Great & Powerful Geithner as a market savior!
"Though Geithner offered up to $2 trillion to aid banks and credit markets, stocks tanked because the plan had few specifics and was lamer than what had been leaked and proffered over the past several weeks.
"More importantly, Geithner and Team Obama have been furiously polling private equity and Street titans to gauge their interest and participation thresholds in various bailout plans. Geithner's lame plan implicitly indicates that few people wanted to participate in the leaked/proposed plans.
"Private investors know toxic paper remains incalculable with open-ended liability. The market understands that no bank bailout has been announced because there is no plan, barring an outright gift, that will fly with private investors. And an outright gift will infuriate taxpayers.
"Also, as any trader that has bought into any syndicate or group offering would tell you, a major problem is calculating the behavior of the other buyers. How much pain can they stand? When will they panic?
"If other buyers cannot endure pain or go bust themselves, bids will be hit and the entire buying group will suffer huge losses ... It keeps coming back to toxic payer and transparency.
"Geithner asserted, 'We will have to try things we've never tried before.' You mean like telling the truth about the quantity and quality of toxic assets?"
Source: Bill King, The King Report, February 11, 2009.
Financial Times: Nouriel Roubini - Anglo-Saxon model has failed
"The Anglo-Saxon model of supervision and regulation of the financial system has failed, Nouriel Roubini, chairman of RGE Monitor and professor of economics at New York University, told the Financial Times on Monday.
"Answering questions from FT.com readers, Prof Roubini, who is widely credited with having predicted the current financial crisis, said the supervisory system "relied on self-regulation that, in effect, meant no regulation; on market discipline that does not exist when there is euphoria and irrational exuberance; on internal risk management models that fail because - as a former chief executive of Citi put it - when the music is playing you gotta stand up and dance."
"'All the pillars of Basel II have already failed even before being implemented,' he added, referring to the internationally agreed set of banking regulations that are forcing banks to set aside more capital to maintain their existing lending.
"Prof Roubini also predicted that it was possible another large bank could fail, saying: 'In many countries the banks may be too big to fail but also too big to save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system.'
"He also criticised the US and UK approach to bank bail-outs, comparing it with attempts by Japan in the 1990s to solve its banking crisis. 'The current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze,' he said."
Source: Financial Times, February 9, 2009.
CEP News: US Senate approves $787 billion stimulus bill
"The US Senate approved President Barack Obama's $787 billion stimulus bill late Friday night, satisfying his request that the bill be ready for signing after President's Day long weekend.
"The bill, which Obama says is designed to energize the American economy and save 3.5 million jobs, passed in a 60-38 vote. Three moderate Republicans voted in support of the bill, giving it the crucial 60-vote support, which it needed to be approved.
"Earlier on Friday, the House or Representatives voted 246-183 in favour of the bill, while no Republicans supported the legislation.
"The bill contains roughly $212 billion, or 27%, in tax cuts for individuals and businesses. Republicans had wanted at least 40% of the bill to be dedicated to tax relief.
"A stabilization fund for education, police and fire services at the state level was set at $53.6 billion, and $87 billion was allotted for Medicaid.
"The final version of the bill scales back tax credits for home and car first-time buyers.
"The final version of the package also contains a softer version of the controversial 'Buy American' clause, which now stipulates that all government spending from the plan must use American-made products and labour, but only if this does not violate current trade deals with US trade partners."
Source: CEP News, February 14, 2009.
Bloomberg: Krugman says stimulus not up to scale of recession
"Paul Krugman, a professor at Princeton University and winner of the 2008 Nobel Prize for economics, talks with Bloomberg's Kathleen Hays about the likely effectiveness of President Barack Obama's $787 billion economic stimulus plan. Krugman also discusses the outlook for government debt and potential nationalization of troubled banks."
Source: Bloomberg, February 13, 2009.
Bloomberg: Feldstein says Senate stimulus bill better than House's
"Martin Feldstein, an economics professor at Harvard University, talks with Bloomberg's Kathleen Hays about the US economic stimulus package scheduled for a critical procedural vote in the Senate. Feldstein also discusses the outlook for Treasury Secretary Timothy Geithner's financial rescue plan, the Federal Reserve's efforts to increase consumer lending and the priorities of President Barack Obama's Economic Recovery Advisory Board."
Source: Bloomberg, February 9, 2009.
Bloomberg: US housing plan to fund interest-rate reductions
"The Obama administration's housing plan will use government money to help reduce interest rates for struggling borrowers, while asking lawmakers to approve more ways to modify mortgages, according to a person briefed on the proposal.
"US Treasury Secretary Timothy Geithner intends to make the plan public in coming days, possibly within a week, said the person, who declined to be identified before the announcement. Some elements can begin immediately, and others must be considered by Congress.
"Foreclosure filings in the US surged 81% last year to 2.3 million, the highest on record, as home prices fell and tighter mortgage standards made it harder for homeowners to sell or refinance, according to RealtyTrac, a provider of real estate data. The administration has pledged to use $50 billion to $100 billion for housing relief, taken from the $700 billion bank rescue package enacted last year.
"'Our focus will begin on using the full resources of the government to help bring down mortgage payments and help reduce mortgage interest rates,' Geithner told the Senate Banking Committee yesterday."
Source: Rebecca Christie and Margaret Chadbourn, Bloomberg, February 12 2009.
CEP News: JPMorgan and Citigroup announce moratorium on foreclosures
"Three major US financial institutions have announced they will halt foreclosures after coming under intense pressure from US politicians on Wednesday to do something to help US citizens weather the financial crisis.
"Citigroup announced it will be halting foreclosures starting February 12. The bank said it will uphold this commitment until US President Barack Obama has finalized the details of his plan to modify mortgage loans to benefit US residents at risk of losing their homes.
"Minutes later, JPMorgan announced it will also put a moratorium on foreclosures for a three-week period, or until March 6. Morgan Stanley later made a similar statement.
"Bank of America CEO Ken Lewis already announced a similar pledge earlier this week in a hearing before the House Financial Services Committee.
"On Wednesday, CEOs from Bank of America, Goldman Sachs, Citigroup, Morgan Stanley, Wells Fargo, JPMorgan Chase, Bank of New York Mellon and State Street all faced harsh criticism from lawmakers for allowing the financial system to come crashing down in 2008.
"All of the executives said they will do what they can to boost lending and stem foreclosures to aid the US economic recovery."
Source: CEP News, February 13, 2009.
Peter Schiff (SafeHaven): This is just the beginning
"The intense scrutiny recently paid to my investment strategy in the immediate wake of the financial crisis of the last six months has unfortunately obscured the central element of my larger economic forecast. The standard line has been that although I was able to predict the crash, in the form of the housing collapse and the credit crunch, my expected fallout of a weaker dollar and global decoupling has been proven false. However, this assumes that the crash has fully played out. In reality, all we have heard thus far is the overture.
"In 2008, the bubble economy that I had meticulously described years ago finally hit the pin that I knew was out there. The corporate losses, frozen credit markets and plunging home prices were the opening salvo in the unfolding economic crisis. However, the vast majority of air has yet to leak out of the bubble. As it does, the US economic crisis will kick into a much higher gear. I have positioned my clients to withstand the full fury of the gale, and when it finally comes, the question 'was Peter Schiff right?' will finally be answered.
"Thus far, our economy has actually been spared the worst due to the temporary strength in the dollar and the recent desirability of our Government's debt. These movements derailed the short-term performance of many of my investment recommendations (though clearly not to the extent alleged by my critics) and threw a life-line to the downing US economy. The demand for US Treasuries has led to one of the sharpest dollar rallies on record, which has helped bring about just as pronounced a decline in commodity prices. As a result, although consumer income has fallen, so too have prices and interest rates."
Click here for the full article.
Source: Peter Schiff, SafeHaven, February 6, 2009.
Google Video: Peter Schiff's presentation at the Global Competitiveness Forum
Source: Google Video, February 9, 2009.
Chales Munger (The Washington Post): How we can restore confidence
"Our situation is dire. Moderate booms and busts are inevitable in free-market capitalism. But a boom-bust cycle as gross as the one that caused our present misery is dangerous, and recurrences should be prevented. The country is understandably depressed - mired in issues involving fiscal stimulus, which is needed, and improvements in bank strength. A key question: Should we opt for even more pain now to gain a better future? For instance, should we create new controls to stamp out much sin and folly and thus dampen future booms? The answer is yes.
"Sensible reform cannot avoid causing significant pain, which is worth enduring to gain extra safety and more exemplary conduct. And only when there is strong public revulsion, such as exists today, can legislators minimize the influence of powerful special interests enough to bring about needed revisions in law.
"Many contributors to our over-the-top boom, which led to the gross bust, are known. They include insufficient controls over morality and prudence in banks and investment banks; undesirable conduct among investment banks; greatly expanded financial leverage, aided by direct or implied use of government credit; and extreme excess, sometimes amounting to fraud, in the promotion of consumer credit. Unsound accounting was widespread.
Click here for the full article.
Source: Charles Munger, The Washington Post, February 11, 2009.
CNN: Vanguard founder blames banks
"John Bogle, the founder of the Vanguard Group, says Wall Street's risky business resulted in the worst recession he's ever seen."
Source: CNN, February 11, 2009.
Financial Times: Sales of PCs to fall for first time in eight years
"Problems in the personal computer business have increased the likelihood that 2009 will bring the first decline in PC sales since 2001, according to industry analysts.
"Evidence has been accumulating since the start of the year that the deterioration has reached unexpected parts of the market, with trouble appearing even in some emerging markets, which had previously been seen as the main source of growth.
"'We're definitely more pessimistic,' said Loren Loverde at IDC, the technology research group.
"He said IDC's latest official forecast, for 4 per cent growth in the number of PCs sold this year, was unlikely to hold: 'As things sink in, it could easily be in negative territory.'
"Weak earnings reported last week by Lenovo, the world's fourth-biggest PC maker, showed that corporate buyers in particular have been cutting back.
"That, and softening sales in emerging countries, suggests that the pain has spread beyond consumers in the developed world, who had been expected to be the main source of industry weakness.
"Last month Microsoft warned that the first half of this year at least could see even weaker conditions than the final quarter of last year, when an expected 10-12% increase in the PC market completely evaporated."
Source: Richard Watersin, Financial Times, February 8, 2009.
CNBC: Marc Faber: "US will default on debt or enter hyperinflation"
Source: CNBC (via YouTube), February 5, 2009.
Asha Bangalore (Northern Trust): Housing market update - applications for
both purchase and refinance decline
"The Purchase Index of the Mortgage Bankers Association fell to 235.9 during the week ended February 6 from 261.4 in the prior week. The Purchase Index is at its lowest level since the end of 2000.
"The Refinance Index fell sharply to 2722.7 from 3906.3 in the prior week. The 30-year fixed rate mortgage has risen to 5.19% during the week ended February 6 from a low of 4.89% in the week ended January 9. Although the Housing Affordability Index is at a record high, demand for homes will gather momentum only after employment conditions have improved."
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 11, 2009.
Asha Bangalore (Northern Trust): Retail sales stabilized in January, future
"Retail sales moved up 1.0% in January, after a revised 3.0% drop in December. The gain in retail sales in January was a surprise. But, the good news does not imply that the weakness in consumer spending is behind us. Unemployment claims numbers were also published in addition to retail sales this morning. Jobless claims remain at elevated levels and reinforce expectations of a continued gloomy outlook. The bottom line is that consumer spending will be weak again in the first quarter, but by a considerably smaller degree. The weakness in the fourth quarter is most likely the worst performance of retail sales in the current downturn."
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 12, 2009.
Asha Bangalore (Northern Trust): Consumer sentiment remains gloomy
"The University of Michigan Consumer Sentiment Index fell to 56.2 in the early-February survey from 61.2 in January. The Current Economic Conditions Index moved up slightly (67.1 versus 66.5). The Expectations Index dropped to 49.1 from 57.8 in January. The gloomy outlook should not be surprising given the nature of economic reports and financial market conditions. The level of the index is second only to the low readings seen in 1980."
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 13, 2009.
Asha Bangalore (Northern Trust): Sharp drop in exports and imports reflects
"The trade deficit of the US economy narrowed slightly to $39.9 billion in December. Both exports (-6.0%) and imports (-5.5%) of goods and services fell in December. The trade deficit of goods, after adjusting for inflation, was wider in December compared with November ($43.3 billion versus $40.1 billion in November). The headline GDP estimate is most likely to be revised down to a nearly 5.0% drop to reflect this discrepancy and that of inventories and construction outlays (net impact of both these components is also a weaker GDP), assuming insignificant revisions of retail sales during November and December."
The Wall Street Journal: $100 bills as toilet tissue?
"Efforts to avoid a deflationary depression will probably produce the opposite - a nasty bout of inflation, says John Williams of Shadow Government Statistics, who advises hoarding gold and even Scotch to barter. Alistair Barr reports."
Source: The Wall Street Journal, February 12, 2009.
Telegraph: GM and Chrysler "Chapter 11" to protect US taxpayers
"The US government is exploring the possibility of placing General Motors and Chrysler in Chapter 11 bankruptcy protection in an effort to safeguard the $17.4 billion in loans extended to the two ailing car manufacturers.
"The move, which is one of a range of options understood to be being considered by government advisers, would ensure that taxpayers would be paid out first in the event that either company actually collapsed.
"Chapter 11 is designed to allow a company to undertake drastic restructuring measures while protecting it from its creditors. However both companies have in the past said that a move into Chapter 11 would destroy them, as customers would lose confidence and many suppliers would cease working with them.
"As the current loan agreements stand, the US Treasury's loans stand behind those from other creditors, including banks such as Goldman Sachs and Citigroup, as those lenders have, according to Bloomberg News, first position on some assets.
"It is thought that Treasury officials are aiming to renegotiate their position in the debt chain ahead of a March 31 deadline. By then, both car manufacturers must show that they have begun to restructure their operations to such an extent that they will be able to return to profitability. If not, the government can demand return of the loans."
Source: James Quinn, Telegraph, February 9, 2009.
Dealbreaker: CDS death bill introduced in the house
"H.R. 977 (The Derivatives Markets Transparency and Accountability Act of 2009), from the brilliant mind of Rep. Collin Peterson (D-MN), puts restrictions on OTC contracts and would 'deny the Federal Reserve the authority to establish regulations or rules with regard to clearing OTC transactions.'
"Instead, OTC contracts must either be cleared centrally or reported to the CFTC. Ouch. This would pretty much end the custom options and swap business, making it very difficult to tailor specific instruments for specific risk.
"The bill also gives 'the CFTC the authority to suspend credit default swap trading, with the concurrence of the president.'"
Source: Dealbreaker, February 12, 2009.
Bloomberg: Post-election movements of Dow
Source: Bloomberg (via Fullermoney), February 12, 2009.
Bespoke: A look at 10-year market returns
"The New York Times published an article this weekend highlighting that the current 10-year stretch that ended last month was the worst for the S&P 500 in at least the last 82 years. The Times looked at total returns for the S&P 500, and below we provide a similar analysis of the 10-year rolling price change of the Dow Jones Industrial Average going back to 1910.
"As shown, there have only been four other periods where the 10-year return has been negative, and three of the four periods saw returns float around the negative to flat line for quite some time. While it may have taken 'buy-and-holders' a few years to end up making money if they got in early when the 10-year returns went negative, they did end up making money.
"When looking at 10-year returns, however, where the market was 10 years ago is just as big of a factor as where it is now. Ten years ago, the market was just about to hit the peak of the Internet bubble, and once it burst, the 10-year return was destined to take a big hit right about now."
Source: Bespoke, February 9, 2009.
Bespoke: Percentage of stocks above 50-day moving averages
"Below we highlight the percentage of stocks in the S&P 500 that is currently trading above their 50-day moving averages. As shown, even though the S&P 500 has been getting close to touching its November lows recently, 42% of stocks in the index are above their 50-days. This means breadth within the index is still strong even though the index itself has been struggling.
"On a sector basis, Financials have the weakest breadth with just 16% of stocks above their 50-days. Health Care, Energy, and Technology are the three sectors that currently have more than 50% of stocks above their 50-days."
Source: Bespoke, February 13, 2009.
John Authers (Financial Times): The importance of dividends
"John Authers explains why dividends are the key to finding long-term value in equities."
Click here for the article.
Source: John Authers, Financial Times, February 10, 2009.
Bespoke: Earnings season "beat rate" at 55%
"Along with guidance and a multitude of other indicators, we track the 'beat rate', which is the quarterly percentage of companies that report earnings that are better than analyst expectations. As shown in the chart below, this earnings season, 55% of US companies have reported better than expected earnings.
"Nearly 1,000 US companies have already reported, and there is only a week or so left of earnings season, so this number is definitely starting to firm up. The current 'beat rate' of 55% is the weakest reading in about 8 years, but it still hasn't gotten as low as it got during the '00-'02 bear market. Bears will argue that the 'beat rate' needs to get down to the '00-'02 levels before a bottom can be put in, while bulls will argue that it's an indication that things aren't as bad as people think. Only the market will eventually tell us who is right."
Source: Bespoke, February 9, 2009.
The New York Times: Why analysts keep telling investors to buy
"Even now, with the recession deepening and markets on edge, Wall Street analysts say it is a good time to buy. Still.
"At the top of the market, they urged investors to buy or hold onto stocks about 95% of the time. When stocks stumbled, they stayed optimistic. Even in November, when credit froze, the economy stalled and financial markets tumbled to their lowest levels in a decade, analysts as a group rarely said sell.
"And last month, as the Dow and Standard & Poor's 500-stock index suffered their worst January ever, analysts put a sell rating on a mere 5.9% of stocks, according to Bloomberg data. Many companies have taken such a beating in the downturn, analysts argue, that their shares are bound to bounce back.
"Maybe. But after so many bad calls on so many companies, why should investors believe them this time?"
Source: David Ranson, The New York Times, February 8, 2009.
David Fuller (Fullermoney): Where should we look for global stock market
"Most analysts, not to mention those who are Americans, will inevitably hover over US stock market's data, given the size and influence of that market. However, this mother ship seldom leads the global equity armada either north or south, although none will significantly diverge from Wall Street's course for long.
"So where should we look for global leadership and what is Wall Street doing at present?
"Taken in reverse order, US stock market indices are ranging in potential base formation development. However, the Dow and S&P 500 are uncomfortably close to their November lows. Both need to sustain moves above this week's highs to remain consistent with base development. While this may seem like a 'big ask' to some, the Nasdaq 100 is considerably firmer.
"However the largest capitalisation market seldom leads. With the US economy remaining the epicentre of global economic risk, there is no chance that it will lead on the upside, although it could still drag other stock markets lower.
"If the S&P and Dow stay within their current trading ranges, let alone move higher, markets with better fundamentals such as China and Brazil will do considerably better, as we are already seeing. Fortunately, they remain highly favoured Fullermoney investment themes."
Source: David Fuller, Fullermoney, February 11, 2009.
Charles Dumas (Lombard Street Research): A bleak outlook for Asia
"The recent crash in Chinese imports augurs ill for the region - and Asian stocks are less likely to recover than their north American counterparts, says Charles Dumas, economist at Lombard Street Research.
"'China's imports are down 40% over six months, as are the exports of South Korea and Taiwan, and almost certainly Japan,' he says.
"'By contrast, the drop in Chinese exports has been a 'mere' 20%. This suggests that Chinese final assemblers of goods for export are lowering their sales expectations.'
"Mr Dumas acknowledges that the highly disruptive new year period means the position cannot be fully judged until March data are released. 'But the scale of these trade declines means that in any scenario the outlook for this particular set of mercantilist 'savings gluttons' is for a much worse recession than in the deficit economies with currency and monetary flexibility - i.e. the Anglo-Saxons.'
"He suggests the fall in exports will wipe out more than half of China's 10% trend growth - leading to a significant knock-on to consumer spending, he says.
"'Of course, Beijing will strive to offset the collapse of private demand - but the chance of actual Chinese recession looks major.'
"In Japan, Mr Dumas says a fall of 30-40% in exports implies a fierce recession - and much the same applies to Korea and Taiwan.
"'This Asian recession could be worse than the Asian crisis of 1997-98.'"
Source: Charles Dumas, Lombard Street Research (via Financial Times), February 11, 2009.
Moneywise: Could you profit from new frontiers?
"As developing countries appear to defy the global gloom, Liam Tarry looks at the opportunities - and risks - of investing these new frontier markets.
"Countries such as Vietnam, Nigeria and Kazakhstan are often associated with images of political unrest and corruption - few of us imagine that they could offer a sound investment opportunity. Yet these countries belong to a relatively unknown sector called 'frontier markets', which has performed very well in recent years. Although highly volatile, this sector may hold hidden treasures for those investors willing to take the risk.
"Frontier markets are, in essence, very small emerging markets. Just 15 years ago, the BRIC markets (Brazil, Russia, India and China) were classed as frontier markets, but they now form a part of many investors' portfolios. Today's frontier markets, however, are virgin territory for most of us. They can be found across the globe, from Bulgaria to Bangladesh and from Kazahkstan to Kenya.
"According to Morgan Stanley Capital International, which launched the MSCI Frontier Market Index in November 2007, there are about 20 frontier market countries vying to become tomorrow's emerging markets.
"'Frontier market economies are generally much smaller and less developed than emerging markets, but investors understand their potential to grow and become tomorrow's success stories,' says Mark Mobius, executive chairman of Templeton Asset Management and manager of its range of emerging market funds.
"So, if you dare to step into the unknown, you could find that high returns are there for the taking."
Source: Liam Tarry, Moneywise, February 9, 2009.
Steven Lewis (Monument Securities): A yield too high?
"The Federal Reserve must tread carefully in regard to the sharp rise in Treasury bond yields over the past couple of months, warns Stephen Lewis, economist at Monument Securities.
"He says rising yields risk nullifying the actions being taken by the Fed and the Treasury in other policy areas to stimulate the economy. The authorities need to assess the impact of their fiscal and Tarp-related (troubled asset relief programme) measures on Treasury yields, he says, and balance the loss to demand from higher yields against the gains to demand expected from their actions.
"'It is entirely possible that a point might be reached where the loss would exceed the gains. This would, in effect, set a limit to what the US authorities could do to support the economy.
"'Any attempt to reflate the economy beyond that point would be as futile as an attempt to travel faster than the speed of light.'
"Mr Lewis says the Fed may believe it can circumvent this constraint by holding down yields in the marketplace.
"'If they initiate a strategy of buying Treasuries in such circumstances, they will very likely find plenty of willing sellers.
"'But to keep yields steady, the Fed might have to progressively increase the scale of its purchases, and eventually wind up holding most of the Treasury debt in issuance. This looks like a route-map to the destruction of financial markets and the establishment of a command economy.'"
Source: Steven Lewis, Monument Securities (via Financial Times), February 9, 2009.
Neil Mellor (Bank of New York Mellon): Why the ruble still looks risky
"The recent appreciation of the ruble by no means indicates that Russia has yet secured stability for the currency - particularly if oil prices continue to suffer from declining optimism about the global economy, says Neil Mellor, currency strategist at Bank of New York Mellon.
"He notes that the ruble's jump on Wednesday was the biggest since the current composition of its euro/dollar trading basket was established two years ago. 'On the face of it, the central bank's efforts to steer the ruble away from the lower boundary of its trading band appear to be working,' he says.
"'But in doing so, the Bank has been obliged to draw upon its full arsenal; it has hiked interest rates, limited the money on offer at its liquidity operations, cautioned investors against depreciation bets and put its money where its mouth is by using up around one third of its reserves to defend the currency. Yet it remains to be seen whether this will be enough.'
"Mr Mellor says that for the week to February 6, the central bank spent a further $4.6 billion defending the ruble; and that if weakening optimism indeed bodes ill for the oil price, this might be at the lower end of the expenditure scale.
"'The ruble might have enjoyed a degree of respite, but, at the very least until the price of oil shows greater signs of life, pressure on the currency is unlikely to desist - resulting in central bank intervention that can only further undermine confidence in Russia's current credit ratings.'"
Source: Neil Mellor, Bank of New York Mellon (via Financial Times), February 12, 2009.