Words from the (Investment) Wise for the Week That Was (March 2 - 8, 2009): Part II

By: Prieur du Plessis | Sun, Mar 8, 2009
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Bloomberg: Leuthold says stocks will surge, depression avoided
"Steve Leuthold, whose Grizzly Short Fund returned 74% last year betting against US stocks, said now is the time to buy equities because investors are too fearful about the economy.

"'These comparisons people make with the Great Depression are totally out of touch with reality, and pretty stupid,' he told Bloomberg Television in an interview today. 'We've been in much worse, much more panicked and more scary situations in the US.'

"The economy isn't as bad as it was in 1974, when stocks began rebounding, said Leuthold, who oversees $3.2 billion at Leuthold Weeden Capital Management in Minneapolis. He predicted the Standard & Poor's 500 Index will surge to at least 1,000 in 2009, representing a gain of 44% from yesterday's 12-year low of 696.33.

"Because a rally is likely, Leuthold said investors shouldn't buy his Grizzly Short Fund. It has returned 26% in 2009. Short seller Bill Fleckenstein, who warned of the housing bubble in 2005, closed his 13-year-old bear market fund last year because valuations made it 'too dangerous' to bet on more losses, he said in a interview last month."

Source: Betty Liu and Lynn Thomasson, Bloomberg, March 4, 2009.

John Authers (Financial Times): Awaiting the bottom
"This week's brutal sales of stocks across the world brought indices to historic levels. Harder questions are how far stocks must fall to get there, and how long it will take to climb out, says John Authers."

Click here for the article.

Source: John Authers, Financial Times, March 3, 2009.

Bespoke: US dollar at multi-year high
"Trillion dollar bailouts, trillion dollar deficits, and the largest spending bill in US history. These days, one would think that with all this spending, the US dollar would be as popular as a Wall Street CEO. However, this morning, the US dollar index hit its highest level since April 2006 even as news of another bailout for AIG hit the tapes. But when you're competing against the likes of Europe, the dollar suddenly doesn't look so bad. In a similar comparison, normally Lloyd Blankfein and Jamie Dimon would be worried about their jobs after GS and JPM have both declined by roughly 60%. But when your competition is Jimmy Cayne, Stan O'Neal, John Thain, Dick Fuld, etc. ... they look like superstars."

"Longer term, however, the US Dollar Index remains well off its highs of this decade, or even the last six years. As shown below, as recently as 2003, the index traded above 100, which is about 12.5% above current levels."

Source: Bespoke, February 2, 2009.

Mansoor Mohi-uddin (UBS): Dollar strength will linger
"The inability of non-US banks to roll over short term funding of investments in illiquid US assets has been a key factor behind the dollar's strength since last summer - and should continue to support the greenback, says Mansoor Mohi-uddin, managing director of foreign exchange strategy at UBS.

"'At the height of the credit bubble in mid-2007, the Bank for International Settlements estimates that major European banks' dollar funding needs was around $1,300 billion,' he says.

"'As the credit crunch ensued and then worsened after the bankruptcy of Lehman in September 2008, securing this funding became very difficult due to the severe disruptions in interbank and foreign exchange swap markets and in money market funds.

"'Also, some central banks withdrew dollar foreign exchange reserves they had placed with commercial banks before the crisis.'

"Mr Mohi-uddin notes that to ease the dollar shortage, the Federal Reserve provided swap lines with other central banks in October 2008. These have been extended until October this year, reflecting the need of foreign banks to keep borrowing dollars from domestic central banks.

"'Of course, foreign banks also bought dollars in the spot markets, as evidenced by the drop in euro/dollar since last summer.

"'While the dollar funding shortage in global banking persists, investors in the foreign exchange spot markets should expect the greenback to stay supported against the other majors.'"

Source: Mansoor Mohi-uddin, UBS (via Financial Times), March 4, 2009.

Bloomberg: Stimulus cash to spur inflation, commodity rally

Click here for the article.

Source: Bloomberg, March 5, 2009.

Bloomberg: Dennis Gartman sees $40 oil for "long period of time"
"Dennis Gartman, an economist and the editor of the Virginia-based Gartman Letter, talks with Bloomberg's Carol Massar and Matt Miller about the outlook for crude oil and gold. Gartman sees oil on 'either side of' $40 for a 'long period of time' and says he might cut his gold position."

Source: Bloomberg, March 5, 2009.

Business Intelligence: Christopher Wood - gold may rise to US$3,500 by 2010
"CLSA's International Equity strategist Christopher Wood, whom the Wall Street Journal dubbed in 2007, at the start of the subprime crisis, as 'the man who saw it coming', recently told a conference in Japan that gold will hit US$3,500 an ounce by 2010.

"The US is facing a deflationary collapse more severe than the crash that hobbled Japan's economy in the 1990s, leaving gold as the only defensive play for investors, he said.

"Speaking at CLSA's annual Japan Forum Conference last week, Wood said: 'The collapse of securitization is a much more deflationary situation in the US than anything seen in Japan when the bubble collapsed in the early 1990s. What we need in the future is a more fundamentally disciplined system, even at the cost of higher levels of growth.'

"Gold is likely to more than triple from the current level to US$3,500 in 2010, he said. 'It's the only form of money or credit not contaminated by the credit system - and the fact it's still money is that central banks still own a lot of it, the global paper currency system will steadily deteriorate, eastern and central Europe will face a full-scale currency collapse, putting huge pressure on western Europe."

"Wood, who in 2003 predicted the US housing crisis and the subprime crisis, has been consistently rated among the top equity strategists on Asia - most recently by Institutional Investor magazine."

Source: Business Intelligence, March 1, 2009.

CEP News: Euro zone manufacturing PMI hits record low in February
"Manufacturing activity in the euro zone fell at a record pace in February as companies reduced output and cut staff in response to slowing demand.

"According to Markit Economics, the euro zone manufacturing purchasing managers index fell to 33.5 in February, down from both the advance estimate of 33.6 and January's 34.4 level.

"The decline in the activities indicator was driven primarily by new orders, employment and output contracting at record paces in the month.

"'The final Eurozone PMI data are a further disappointment on the earlier flash numbers for February, and indicate that the rate of decline of manufacturing has yet to stabilise,' Markit chief economist Chris Williamson said in a press release.

"'The data are consistent with manufacturing output and employment falling at annual rates in the region of 12% and 5% respectively.'"

Source: CEP News, March 2, 2009.

CEP News: Euro Zone GDP confirmed to have contracted at record pace in Q4
"Eurostat has confirmed that the overall economic output in the euro zone has fallen at a record pace in the fourth quarter of 2008.

"According to preliminary estimates, euro zone GDP fell by a record 1.5% in the fourth quarter, in line with expectations and flash estimates. Economic output had contracted 0.2% previously.

"Disaggregating the figures, Eurostat noted that the weakness was widespread over the quarter. From Q3 to Q4, household consumption fell 0.9%, despite expectations of a 0.2% fall after rising 0.1% previously.

"At the same time, government expenditure fell 0.6% quarter-over-quarter, down from the +0.7% figure forecast, while investment spending also lost ground, falling 2.7% in Q4 and adding to Q3's 0.6% slide.

"After remaining stable in the third quarter, exports fell 7.3% in the three months to December. Imports slid 5.5% after spiking 1.4% previously.

"Year-over-year, euro zone GDP fell 1.3% in Q4, down from both the 1.2% decline expected and Q3's 0.6% annualized increase."

Source: CEP News, March 5, 2009.

CEP News: ECB's Noyer says EU will aid troubled member nations
"The probability of a country within the European Union failing seems far-fetched, but if such an event were to occur, the Union would be compelled to come to its aid, European Central Bank Governing Council member Christian Noyer told lawmakers in Paris on Tuesday.

"The central banker, who is also the governor of the Bank of France, echoed comments by European finance ministers and central bankers on Tuesday about the possibility that some European countries will have to seek IMF loans to finance their balance of payments deficits.

"Closer to home, Noyer also noted that credit conditions within France are improving and that a recovery in the country's banking system is conceivable.

"He also criticized the so-called 'Bad Bank' plan, which would take troubled assets off the balance sheets of financial institutions, arguing that such a model is difficult to implement and not necessary in France."

Source: CEP News, March 3, 2009.

CEP News: Quantitative easing is BoE's new monetary policy tool
"Quantitative easing is the new monetary policy tool of the Bank of England now that the central bank cut its benchmark interest rate by 50 bps, as expected, to 0.50% on Thursday and unveiled an ambitious plan to buy UK government paper and private assets by printing money.

"'Quantitative easing is clearly now going to be at the forefront in the Bank of England's ongoing efforts to stimulate the economy,' said IHS Global Insight Economist Howard Archer, who suggested that the BoE will expand the £75 billion in asset purchases authorized under the plan.

"The transactions will be made using the existing Asset Purchase Facility and will be funded using the central bank's balance sheet rather than the original plan to finance the APF by using short-term debt from the Treasury, the majority of which would be government paper.

"The monetary policy decisions taken by the Bank of England on Thursday were fully expected, explained Rob Carnell at ING.

"'At £75 billion, the amount earmarked for the expanded APF is at the lower end of expectations of £50-£150 billion. But it looks as if the Governor of the Bank of England had asked for the facility to be £150 billion,' he said. 'It is unclear at this stage whether there is a further £75 billion waiting in the wings and that might be only a first instalment.'"

Source: CEP News, March 5, 2009.

Financial Times: Martin Wolf - BoE's monetary policy should start unfreezing credit markets
"If the Bank of England is sufficiently ruthless, expansionary and imaginative, its new monetary policy should begin to unfreeze credit markets and allow the government to increase its spending, says Martin Wolf."

Source: Financial Times, March 5, 2009.

BCA Research: Japan - economic implosion!
"The Japanese manufacturing sector has collapsed, and further production cuts lie ahead.

"Industrial production plunged 10% in January, on the heels of a similar decline in prior months. Output has contracted a mind-boggling 25% in the past three months, exceeding the rate of decline in US production at any point during the Great Depression. The cuts in the transport and electronics sectors have been even more severe.

"Unfortunately, more pain looms in light of the spectacular surge in the inventory ratio, to the highest level on record. Firms will have to reduce production sharply to clear their excessive inventories in the absence of a pronounced pickup in demand, which is not in the cards.

"Last week's export data reinforced how difficult the current situation is for Japanese producers, with overseas sales down 46% in the past year and even more sharply in the past few months.

"Policy is likely to provide little support in the near term. Instead, any improvement in Japanese activity awaits an upturn in external demand. There is no sign of that anytime soon. Bottom line: Japan's economy will remain severely depressed in the coming months."

Source: BCA Research, March 2, 2009.

CEP News: Chinese manufacturing PMI strengthens for third straight month
"China's manufacturing sector continued to strengthen in February, according to a report from the National Bureau of Statistics and the Federation of Logistics and Purchasing on Wednesday, which noted a third straight monthly increase in its headline manufacturing index.

"The headline index increased to 49.0 from 45.3 in January marking a three-month rebound from November's low of 38.8.

"The new orders component rebounded to 50.4 from 45.0 in January while the output index advanced to 51.2 from 45.5.

"The employment index also increased to 46.1 from 43.0.

"The report, coupled with expectations of additional stimulus from the Chinese government, are beginning to improve estimates of economic growth in 2009, according to Andrew Pyle, Wealth Adviser at ScotiaMcLeod.

"'Estimates for the country's growth outlook in 2009 have also started to levitate from the alarming 5-6% suggestions earlier this year back to 8%. Not as lofty as what we have been used to, but firm enough to put a floor under commodity prices and that's what we're seeing this morning,' he said."

Source: Erik Kevin Franco, CEP News, March 4, 2009.

Financial Times: China sets sights on 8% rise in growth
"Chinese premier Wen Jiabao promised on Thursday to deliver 8% economic growth and record government spending this year, although he failed to outline the new stimulus package many investors had been expecting.

"In a two-hour speech outlining his 'work report' to the National People's Congress, China's parliament, Mr Wen said the global financial crisis was deepening but the goal of 8% growth remained realistic.

"'The global financial crisis continues to spread and get worse. Demand continues to shrink on international markets; the trend toward global deflation is obvious; and trade protectionism is resurging,' he said.

"But, 'as long as we adopt the right policies and appropriate measures and implement them effectively, we will be able to achieve this target', he added.

"He provided few extra details to help clarify how much of that investment would be genuinely new spending and where the money would be allocated.

"Mr Wen said China would run a budget deficit this year of Rmb950bn, equivalent to nearly 3% of gross domestic product - a record in recent times for China but modest compared with some of the fiscal packages being considered round the world.

"Indeed, for all the talk about China's big fiscal plans for 2009, the 21% increase in total government expenditures for this year is slower than the 25.4% rise last year.

"Economists said China's relatively low debt levels meant the government could expand its fiscal stimulus during the course of the year if there were few signs of recovery."

Source: Geoff Dyer, Financial Times, March 5, 2009.

CNBC: Chinese economy unlikely to grow 8%
"Gerard Lyons, chief economist and group head of global research at Standard Chartered, says China's stimulus efforts will work, but it is unlikely the economy will grow 8% this year. He speaks to CNBC's Martin Soong and Karen Tso."

Source: CNBC, March 6, 2009.

Colbert Nation: Market psychology - Jim Cramer
"Jim Cramer discusses the psychology of the market with puppies and kittens behind him."

Source: Stephen Colbert, Colbert Nation, March 6, 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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