Words from the (Investment) Wise for the Week That Was (February 9 - 15, 2009): Part II

By: Prieur du Plessis | Sun, Feb 15, 2009
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Bespoke: Baltic Dry, winning streaks, and China
"The Baltic Dry Index (BDI) has been making news lately after its impressive performance over the last few weeks. For those unfamiliar with the BDI, it measures the cost to transport raw materials by sea, and it is currently on a 16-day winning streak in which it has risen 126%. The last five trading days have seen the index rise 14.63%, 13.83%, 9.61%, 10.54%, and 8.80% - talk about a rally!

"And while the Baltic Dry doesn't have much correlation with US stocks, it does follow China's equity market pretty closely. Over the Baltic Dry's 16-day winning streak, China's Shanghai Composite index is up 14% as well, and it really looks like it's beginning to turn a corner. Below we provide a chart of the Baltic Dry Index compared to China's Shanghai Composite. While the percentage changes are more extreme for the Baltic Dry, the direction of its move is very similar to China. Given the fact that China is such an export based economy, it's no surprise that this trend exists.

"Finally, it's important to note a few things regarding the Baltic Dry. First, the index declined more than 94% from its peak to trough over the last two years. While it has made a nice move upward in the past few weeks, it is still way, way down from its highs."

Source: Bespoke, February 10, 2009.

Bespoke: Commodity snapshot
"Below we provide our trading range charts of commodities. The green shading represents two standard deviations above and below the commodity's 50-day moving average. Moves above or below this green shading are considered overbought or oversold.

"As shown, oil has once again taken a turn for the worse, and it is currently testing support at its prior lows over the past couple of months. Metals, on the other hand, continue to surge. Gold, silver, and platinum are all trading at the very top of their trading ranges. They've rallied nicely over the past few weeks, and a further move of 1% to 2% higher will put them at overbought levels."

Source: Bespoke, February 12, 2009.

Richard Russell (Dow Theory Letters): Gold frenzy lies ahead
"There's only one item that is bought through both fear and greed. That item is gold. Are you worried about the viability of the dollar? Then buy gold - (fear). Are you afraid that the gold market is getting away from you? Then don't wait - buy gold (greed).

"Those subscribers who have heeded my advice - 'buy gold'. They are doing OK today. Of course, for years I advocated buying gold coins and hiding them away and never looking at them or thinking of selling those little beauties. Now if you want gold, you have to buy 'paper gold' in the form of GLD. Which is probably OK. Below we see an up-dated chart of GLD. And we see the breakout today at 92.29. This completes a huge base, which started at the 69 box and since has been building and building.

"Today, with the upside breakout at the 93 box on the P&F chart, we're forced to buy gold in the 944 (April futures) area. For those who missed out on gold when it was in the 700s and 800s, this is a scary proposition. So question - is it too late to buy GLD or high-premium coins if you can find them? As I see it, the frenzy, the speculative phase of gold, the rush of a frightened public lies ahead.

"Big bull markets always find a way to keep you frightened and OUT. Big bull markets are devils with no conscience - to get in you have to 'close your eyes, and just do it'. Not easy, but in this business nothing is easy except losing money. 'There's no fever like gold fever.' And I'm beginning, just beginning, to feel the fever now. When I look at the chart below, I can sense the fever rising."

Source: Richard Russell, Dow Theory Letters, February 11, 2009.

Business Intelligence: Merrill Lynch - $1,500 target for gold
"Gold prices may hit US$1,500 an ounce in the next 12 to 15 months, Gary Dugan, the Chief Investment Officer of Merrill Lynch, said yesterday.

"Dugan termed his apprehensions of gold striking such a high as a 'fear' that may come true. He reasoned that such a price would mean the other commodities and streams of investments have been shunned by investors.

"With confidence in currencies shaken to the core, the yellow metal is increasingly assuming the role of 'the most trusted currency', Dugan said. 'We have never seen such a rush to buy gold. It's bringing in security and it's still affordable.'

"Merrill Lynch commodity price forecast authored by Dugan showed that gold prices can rise from the currently prevailing US$913 per ounce to US$1,100 in the first quarter of 2009 and to US$1,150 in the second quarter. 'While demand for gold has been rising production has been declining. South Africa, which accounts for the major share of global gold production, is facing political issues and has energy problems,' Dugan said.

"With reports of declining returns from other investment options, 'cash' - keeping money safe in banks and investing in government bonds - is the option in front of investors, Dugan said.

"'Fear' and eventual decline of the greenback are the two factors that will drive gold prices, he said. While commodity markets could also bounce back in the first half of the year, a rebound is likely to be short-lived in the absence of strong US consumer demand."

Source: Business Intelligence, February 8, 2009.

Financial Times: Bullion sales hit record in rush to safety
"Investors are buying record amounts of gold bars and coins, shunning risky assets for the relative safety of bullion amid renewed fears about the health of the global financial system.

"The US Mint sold 92,000 ounces of its popular American Eagle coin last month, almost four times that which it sold a year ago and more than it shipped during the whole of the first half of 2007.

"Other countries' mints have also reported strong sales. 'Large purchases of coins are perhaps the ultimate sign of safe-haven gold buying,' said John Reade, a precious metals strategist at UBS.

"Inflows into gold-backed exchange traded funds surged in January, pushing their bullion holdings to an all-time high of 1,317 tonnes. Last month's flows of 105 tonnes were above September's previous record of 104 tonnes, and absorbed about half the world's gold mine output for January, said Barclays Capital.

"'We estimate that investment demand [into gold] could double in 2009 compared to 2007,' said Mr Reade. 'Purchases of physical gold have jumped over the past six months as investors' fears about the current financial crisis ... have intensified.'

"The move into gold is being driven by the very rich, with bankers saying that some clients are hoarding gold in their vaults. UBS and Goldman Sachs said last week that investor hoarding would drive prices back above $1,000 an ounce.

"Traders and analysts said jewellery demand, historically the backbone of gold consumption, had collapsed under the weight of the high prices. Sharp falls in demand in the key markets of India, Turkey and the Middle East have capped the potential of any price rally. But the lack of jewellery demand has not discouraged investors.

"GFMS, the precious metal consultancy, estimated bullion coin demand last year reached its highest level in 21 years."

Source: Javier Blas, Financial Times, February 9, 2009.

CEP News: Euro Zone GDP contracts at record pace in fourth quarter
"The euro zone economy shrank at a record pace to end off 2008, suggesting that the current recession in the monetary union will be both deep and prolonged.

"According to advance estimates from Eurostat, the euro zone economy contracted by a record 1.5% in the fourth quarter of 2008 compared to the previous quarter. Economists had expected a more modest fall of 1.3% following Q3's 0.2% decline.

"Germany led the way in declines, contracting 2.1% in the fourth quarter. Conversely, Slovakia was one of the few economies to show any gains over the period, rising 2.1% according to preliminary estimates.

"Year-over-year, overall output in the monetary union shrank by 1.2%, its sharpest pace in series history and down from both the 1.1% contraction expected and Q3's annualized gain of 0.6%. Looking at 2008 as a whole, GDP growth slowed to 0.7%, down two percentage points from the rate in 2007."

Source: CEP News, February 13, 2009.

David Fuller (Fullermoney): China has the money
"Every country faces the most serious economic problems in decades but you can be reasonably certain that US Treasury Secretary Tim Geithner and UK Chancellor of the Exchequer Allistar Darling would love to have China's problems. China is a creditor nation with enviable amounts of cash.

"Yes, the export sector is in a mess and the PRC had been overly reliant on it for two decades. Nevertheless, by being the world's manufacturer of first resort, China gained enormous technological know how. This will be invaluable as they move their manufacturing base to a more sophisticated level.

"China will not worry about lots of toy manufacturers going out of business. However consider these comments mentioned to me last weekend by a friend visiting from Hong Kong. China is making huge efforts to improve the economic wellbeing of its rural poor. For instance, he said the government has told manufacturers of refrigerators not to lay off workers or slash prices. Instead, it is buying surplus refrigerators at market prices and selling them to the rural poor at half price. There are plenty more rural poor who need looking after than unemployed factory workers in the Southern provinces, although China's population statistics are astronomical for Western observers.

"The point is, China has the money to do that and does not need to borrow. However, the PRC is not just subsidising the poor with its vast surplus.

"For over a year it has been fashionable to say once again that: 'Cash is king.' To the extent that this is a truism, it means that anyone with cash can buy cheap assets when others are forced sellers. From Russia to Australia, China is buying cheap industrial resources for its long-term development."

Source: David Fuller, Fullermoney, February 12, 2009.

Financial Times: Alarming times for China as exports fall
"Jung Ulrich, chairman, China equities at JP Morgan says the exports drop is a real cause of concern for the Chinese leadership. She tells FT's capital markets correspondent David Oakley that there is little prospect of a return to 8% growth until world economy recovers."

Source: Financial Times, February 11, 2009.

Bloomberg: China's new loans rise by record on stimulus efforts
"China's new loans rose by a record in January and money supply expanded at the fastest pace in more than a year as the government pressured banks to support a 4 trillion yuan ($585 billion) stimulus package.

"Banks extended 1.62 trillion yuan of new local-currency loans and M2, the broadest measure of money supply, climbed 18.8% from a year earlier, the People's Bank of China said today on its website.

"The jump in new loans to twice the record set a year earlier shows China may succeed in reviving growth even as credit markets around the world remained locked and after developed economies slumped into what the International Monetary Fund calls a 'depression'. Loan default risk is rising and represents the biggest single threat to Chinese lenders this year, Fitch Ratings said last month.

"'We believe China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near collapse,' said Lu Ting and T.J. Bond, Merrill Lynch economists in Hong Kong. Soaring credit growth 'might be at the cost of the future health of the banking system'."

Source: Kevin Hamlin and Luo Jun, Bloomberg, February 12, 2009.

Financial Times: Economists warn of Chinese deflation
"China faces a bout of deflation, economists warned on Tuesday as data revealed that inflation dropped to its lowest in 2½ years in January and that the price of goods leaving factory gates fell 3.3% in January.

"In the latest sign of economic weakness in the country, consumer price inflation fell for the ninth month in a row to 1% in January from 1.2% the previous month as prices for clothing, transport and housing tumbled.

"Several economists forecast that consumer prices in China would begin to fall from this month.

"However, most analysts say that China will avoid a prolonged period of deflation, which could lead to a sharp drop in output as consumers and companies delay spending, because of the aggressive monetary and fiscal stimulus policies introduced by the Chinese authorities."

Source: Geoff Dye, Financial Times, February 10, 2009.

Financial Times: Japan faces "unimaginable" contraction
"Japan's economy faces an 'unimaginable' contraction, the chief economist of its central bank warned on Monday, as figures revealed surging bankruptcies and a big fall in machinery orders.

"The warning from Kazuo Momma, head of the Bank of Japan's research and statistics department, underscored the gloom surrounding the world's second-largest economy as export orders dry up, companies shut down production lines and consumers stop spending.

"Japan, where industrial output plunged a record 9.6% month on month in December, is due to announce fourth-quarter gross domestic product data next week. Polls of economists suggest GDP will have fallen more than 3% compared with the previous quarter - an annualised decline of more than 10%.

"'From October to December the scale of negative growth [in GDP] may have been unimaginable - and we have to consider the possibility that there could be even greater decline between January and March,' Mr Momma said in a speech on Monday.

"His remarks came as a private research company reported a 16% year-on-year rise in the number of bankruptcies among Japanese companies to 1,360 in January, the highest level for six years. Total debts left by failed companies rose 44% from a year earlier to Y839 billion ($9.2 billion), Tokyo Shoko Research said."

Source: Mure Dickie, Financial Times, February 9, 2009.

Financial Times: Australian Senate passes A$42 billion stimulus plan
"Australia's Senate on Friday passed a A$42 billion ($27.4 billion) economic stimulus package it had blocked the day before after frantic overnight negotiations won a vital extra vote allowing the government to over-ride opposition from conservative parties.

"Independent South Australian senator Nick Xenophon switched sides after winning a commitment from Wayne Swan, Australia's Treasurer, that the Labor government would commit almost A$1 billion to help improve water flow in the ailing Murray-Darling river system.

"The unexpected second vote, in which senators backed the amended package by 30 votes to 28, boosted the Australian dollar on hopes the stimulus payments would reach households in time to avert recession in an economy badly hit by the global slowdown.

"'I'm not sure whether this package is going to save this country from recession,' Xenophon told parliament. 'I'm pleased to say I believe we have been able to reach a compromise, which while not giving everybody what they want, may give everyone what they need.'"

Source: Kevin Brown, Financial Times, February 12, 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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