Words from the (Investment) Wise for the Week That Was (April 13 - 19, 2009): Part II

By: Prieur du Plessis | Sun, Apr 19, 2009
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CNBC: McCulley - Pimco's plans for financials
"The free-fall of the markets has been aborted and there is a bounce off a bottom, says Paul McCulley, Pimco portfolio manager/managing director."

Source: CNBC, April 17, 2009.

Bespoke: S&P 500 moving average analysis
"The S&P 500 is currently trading above its 50-day moving average and below its 200-day moving average. The recent rally has also been one of the most impactful during the current bear market in regards to where the index is trading relative to both its 50- and 200-days.

"As shown in the second chart below, the S&P 500 is now 7.85% above its 50-day moving average, which is the most overbought reading for the spread since the bear market began. The index has also now traded above its 50-day for 11 days in a row, which is the longest streak since the 33-day period that ended last May.

"And finally, the S&P 500's 200-day moving average spread is the highest it has been since the market really tanked last September. If the index can eventually trade above both its 50-day and 200-day, it will be a big positive for technicians looking for signs that the bear is officially over."

Source: Bespoke, April 16, 2009.

Bespoke: S&P 500 financial sector overbought
"The S&P 500 Financial sector is now 28.5% above its 50-day moving average. Below we highlight the historical 50-day moving average % spread for the sector going back to 1990 (as far back as daily sector pricing goes). As shown, just as the sector hit extremes on the oversold side in recent months, we've now hit extremes never seen before on the overbought side."

Source: Bespoke, April 16, 2009.

Bloomberg: Russell 2000 rising 36% flashes warning for S&P rally
"The Russell 2000 Index's record one-month gain is sending danger signals to investors who remember how similar rallies in US stocks came to an end.

"The gauge of companies with a median value of $301 million is beating the Standard & Poor's 500 Index, where stocks have an average market value of $6.5 billion, by 9.8 percentage points through last week.

"While small-caps tend to lead the way out of bear markets, when they have outpaced larger stocks by this much, both indexes erased gains and fell, according to data compiled by Birinyi Associates. Increased trading and ratios of advancing to falling stocks have also risen to levels that preceded declines, boosting investor concerns that the S&P 500's 27% advance since March 9 will end the same way as the 24% rally that fizzled in January.

"'This move is too explosive to be sustainable,' said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $60 billion. 'None of the structural underpinnings of the market have really changed. It's going to be a multiyear healing process.'

"Mistaking a temporary jump for a sustained bull market can be costly. In 41 so-called bear market rallies since 1928 - gains of more than 10% that are later wiped out - equities fell an average 25% after peaking, according to Birinyi.

"'Buying stocks is like crossing Fifth Avenue when the light is red,' Birinyi said today in an interview with Bloomberg Television. 'You might make it, but the odds are not with you.'"

Source: Lynn Thomasson, Bloomberg, April 13, 2009.

Bespoke: Percentage of stocks above 50-day moving averages
"After registering gains for five weeks in a row, there are now 84% of stocks in the S&P 500 trading above their 50-day moving averages. As shown below, this is the highest level over the last year.

"And six of the ten S&P 500 sectors have more than 90% of their stocks above their 50-days. Materials and Telecom are at 100%, while the Financial sector ranks third at 97%. Technology and Consumer Discretionary are at 95%, and Industrials is at 93%. Health Care has the second weakest breadth reading at the moment with only 51% of its stocks above their 50-days. And the most defensive sector in the market - Utilities - also has the smallest number of stocks above their 50-days at 49%."

Source: Bespoke, April 13, 2009.

Richard Russell (Dow Theory Letters): Is this a true bear market bottom?
"... the market is now about one month off its March 9 low. Yet already the mood has changed, public sentiment is turning almost rosy, and analysts are openly urging people to buy stocks.

"The bear is doing its job. In less than a month, the Dow has recouped 20% of its 7,617 bear market losses. If the Dow was to retrace the normal one-third to one-half of its loss since late-2007, the following is where the Dow would be. A one-third recovery would take the Dow to 9,086. A one-half recovery would take the Dow to 10,355. Last Thursday the Dow ended the week at 8,083, which was 1,003 points short of a one-third recovery.

"It seems to me that this is awfully fast for the business news to turn rosy - only one month away from the March 9 'supposed' bear market bottom. Bear market bottoms don't tend to work that way. After a true bear market bottom, it often requires many months before the crowd and the media turn bullish.

"To repeat, I'm suspicious."

Source: Richard Russell, The Dow Theory Letters, April 13, 2009.

Chart of the Day: "Smart money" positioning themselves
"Today's chart illustrates how large commercial institutions (i.e. "smart money") are positioning themselves in the current market environment.

"When the gold line in the bottom chart is at a high level, it suggests that the smart money is betting on a rally. Large commercial institutions have tended to position themselves for a rally around the time of a stock market trough.

"One exception to this prescient ability occurred in 2007 when large commercial institutions became bullish just prior to the beginning of the current bear market. However, they did move to a bearish position prior to the financial collapse in the latter part of 2008.

"What is of particular interest with today's chart is that the smart money has not moved back into the market since the financial collapse of 2008. This suggests that the smart money is viewing the current rally that began on March 9 as a bear market rally."

Source: Chart of the Day, April 14, 2009.

CNBC: Mobius - investing in the next frontier
"An investing legend who started his first fund at the same time of CNBC's launch sheds light on emerging-market problem spots and opportunities, with Mark Mobius, Templeton Asset Management managing director."

Click here for a Globe and Mail interview with Mobius.

Source: CNBC, April 17, 2009.

Bespoke: Emerging markets on a tear?
"The Wall Street Journal has an interesting article in its Money & Investing section today titled "Emerging Markets Go on a Tear". China is one of the countries highlighted, which is now up 47% from its lows late last year. As shown below, however, China's Shanghai Composite still has a long, long way to go before it makes a dent in the losses it experienced in '07 and '08. As shown, even after its 47% run, the index needs to gain 142% to reach its old highs. From its peak, China is still down 59%.

"Conversely, the S&P 500 is down 46% from its peak and only needs to gain 84% to reach its old highs. Emerging markets like China have rallied significantly, but since its starting base was so low, its market is still in worse shape than the US."

Source: Bespoke, April 13, 2009.

CEP News: Bernanke says US dollar will remain dominant currency
"The US dollar remains the dominant world currency and US Treasuries remain a sound investment, Federal Reserve Chairman Ben Bernanke said in Atlanta, Georgia on Tuesday.

"In a Q&A session after his speech Bernanke said he does not see the US dollar's role changing in the foreseeable future.

"The comments come after news reports that China is attempting to push wider use of the yuan in global markets. China has signed currency swap contracts with six nations since December 2008.

"China has also alluded to worries about the value of US bonds.

"Bernanke did address the US deficit problem in his speech on Tuesday, and said the government needs a plan to reduce long-term fiscal imbalances.

"For the time being, however, he said they have no choice but to spend."

Source: Megan Ainscow, CEP News, April 14, 2009

Fin 24: Zim dollar shelved for a year
"Zimbabwe will not use its own local currency for at least a year, a state newspaper reported on Sunday, while it tries to repair an economy which critics say was destroyed by President Robert Mugabe.

"The southern African state has allowed the use of multiple foreign currencies since January to stem hyperinflation which had rocketed to over 230 million percent and left the Zimbabwe dollar almost worthless.

"The state-controlled Sunday Mail said the unity government of Mugabe and opposition leader Morgan Tsvangirai decided the Zimbabwe dollar should only be reintroduced when industrial output reaches about 60% of capacity from the current 20% average.

"'The Zimbabwe dollar will be out for at least a year. We resolved that there will be no immediate plans to (re)introduce the money because there is nothing to support and hold its value,' the newspaper quoted Economic Planning and Development Minister Elton Mangoma as saying.

"'Our focus is to first ensure that we have a vibrant industry. If we try to reintroduce the local currency now, it will face the same fate of being wiped out of its value within weeks.'

"Critics say Mugabe, who has led Zimbabwe since independence from Britain in 1980, has destroyed one of Africa's most promising economies through controversial policies, including the seizure of white-owned commercial farms for redistribution to inexperienced black farmers.

"Mugabe, 85, denies the charge and says the economy has been sabotaged by enemies opposed to his nationalist policies."

Source: Fin 24, April 12, 2009.

Eoin Treacy (Fullermoney): Gold in no-man's land
"Gold continues to go through a difficult phase as other commodities and stock market sectors move to relative outperformance. Gold, and other so-called 'safe havens' such as the US dollar, yen and Treasuries, have all retreated from their highs and remain vulnerable as long as the global appetite for risk continues to increase. However gold is different from these three vehicles, since it can be classed as real money rather than a paper asset whose supply depends on the whim of governments.

"Gold found support above the 200-day moving average last week, but needs to sustain a move back above $900 to indicate more than a temporary return of demand at that level. A sustained move above $967 would break the short-term progression of lower highs and a push back above $1,000 is needed to reassert the overall uptrend."

Source: Eoin Treacy, Fullermoney, April 14, 2009.

Financial Times: Oil falls as IEA cuts demand forecast
"Oil prices fell below $50 a barrel on Monday after the International Energy Agency, the energy watchdog, reduced its demand forecast for the year.

"The IEA reported on Friday that global oil demand this year would fall by 2.4 million barrels a day as inventories in developed countries hit their highest levels in 16 years.

"This overshadowed the news that China's daily crude oil imports rose to year highs in March, suggesting demand in the world's second-biggest oil importer was starting to recover.

"However, Edward Meir at MF Global said: 'It is important to remember that import levels are skewed by the fact that the government controls energy prices, so the 'blip' needs to be seen in that context.'"

Source: Neil Dennis, Financial Times, April 13, 2009.

Bloomberg: OPEC cuts thwarted as Brazil, Russia grab US market
"As OPEC nations make their biggest oil production cuts on record, Brazil and Russia are pumping more, threatening to send crude back below $50 a barrel as demand slows.

"US imports from the Organization of Petroleum Exporting Countries fell 818,000 barrels a day, or 14%, to 5.02 million in January from a year earlier, according to the latest monthly report from the Energy Department. At the same time, imports from Brazil more than doubled to 397,000 and Russia's increased almost 10-fold to 157,000, a trend that continued in February and March, according to data from each country.

"While the median forecast in a Bloomberg News survey of 32 analysts shows crude in New York averaging $61 a barrel in the fourth quarter, up from the second-quarter's estimate of $50, traders are increasing bets on a decline. The fastest-growing options contract on the New York Mercantile Exchange is for prices to fall below $40 a barrel by May 14.

"'OPEC has done a good job keeping oil in the $50 area, but they will have to cut substantially more, maybe more than they are capable of, if they want higher prices,' said John Kilduff, senior vice president of energy at MF Global in New York. 'You are going to hear greater calls for non-OPEC producers to cooperate and make cuts.'"

Source: Mark Shenk, Bloomberg, April 14, 2009.

Newsweek: Rogers on commodities
"Jim Rogers, the legendary American investor, financial commentator and, along with George Soros, founder of the Quantum Fund, is the ultimate commodities bull. More than 10 years ago, he started the Rogers International Commodities Index, and in 2005 he wrote 'Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market'. Below, he explains to Newsweek's Rana Foroohar why oil is still black gold.

Foroohar: Inflation-adjusted, oil is the same price that it was in 1976, and in 1870. So why are you still a bull?
Rogers: It doesn't matter. It's also true that just about any stock you can think about is at or below where it was in the 1970s right now. So what? There are still 15- to 20-year periods when commodities, stocks and any other asset class goes up a great deal. In 1987 stocks collapsed by 40-80%. But people who were smart enough to stay in them made 1,000% returns in the next decade. The point is to take advantage of those periods and make some money.

What's the fundamental case for commodities right now?
Supply is declining. There's been 35 years of low investment in production capacity. The last lead smelter in the US was built in 1969! There's been no major oilfield discovery in 40 years. Oil is in decline. According to the International Energy Agency, oil reserves are declining significantly. At this rate, in 20 years, there will be no oil left. The only people to make money in the next 20 years will make it in commodities. It's the only asset class where the fundamentals are improving. I mean, look at Citigroup, look at GM. Those fundamentals are not improving.

Do you see commodities as an inflation hedge?
Absolutely. This is only time in history where you've got every central bank in the world printing money at the same time. Consumer prices are going to go way up. The public is already getting out of paper money, which is why you're seeing gold go up.

Does the future growth of China factor into your bullishness?
China is tiny in comparison to the US economy. Anyone who thinks that the commodities story is driven by China needs to do more homework. In the 1970s, everyone was in recession, and you still had declining supply [in oil] and higher prices. Asia wasn't even in the game then. China was run by Mao. But now, of course, there are those 3 billion people in Asia who are in the game. It's just another factor."

Click here for the full article.

Source: Rana Foroohar, Newsweek, April 11, 2009.

Financial Times: Beijing struggles to prop up growth
"China's economy grew at an annual rate of 6.1% in the first quarter - its slowest pace since quarterly gross domestic product data was first published in 1992 - as Beijing struggled to prop up activity in the face of the global crisis.

"The increase was down from 10.6% growth in the same period a year earlier and 9% for the whole of 2008 but aggressive government stimulus measures begun in the fourth quarter last year have started to yield signs of recovery.

"The figure was 'indeed quite an achievement' against the background of the worsening global crisis and recession in many of the developed economies that China relies on to buy its exports, said Li Xiaochao, spokesman for the National Bureau of Statistics.

"Rapid cooling in the Chinese economy has been led by a collapse in exports and private sector investment. This has prompted the government to fast-track infrastructure projects and spending programmes, and order state-run banks to open the credit taps to flood the system with liquidity.

"Although there is still little evidence of new private sector investment, the government's efforts have led to a rebound in investment figures and show signs of stimulating wider demand in the economy.

"Sun Mingchun, an economist at Nomura Securities, said economic data released on Thursday 'showed that the economy has gained significant momentum since February'.

"The decline in Chinese exports decelerated in March, with exports falling 17.1% from a year earlier, compared with a 25.7% decline in February, leading some analysts to predict a stabilisation in trade. Others said further weakness in external demand was the main risk."

Source: Jamil Anderlini, Financial Times, April 16, 2009.

James Pressler (Northern Trust): China - so much for fast recoveries
"It is not normally like us to say 'we told you so', but the release of briskly-compiled Q1 GDP figures for China provides a compelling argument to use that phrase - not that we would. The numbers came in below consensus, and should put to rest for the moment any suggestions that China is somehow amazingly resilient to global contagion.

"In our comment on April 2 we pondered over surprisingly high confidence figures suggesting that Q1 would show the first stages of a rebound. We had our doubts, and indeed, the 6.1% year-over-year growth figure was the worst posted since 1991. Now this figure is nothing to scoff at, but when any country experiences a slowdown in economic activity of at least four percentage points in less than a year, people should take notice.

"However, we do see some bright spots in today's figures. Considering how dramatically export demand and other external indicators have fallen, the Q1 figure did not follow in step, which suggests that the first signs of Beijing's fiscal stimulus are finding their way into the national accounts. (This would be the minor stimulus package announced prior to the Beijing Games, when the government offered additional spending to counter the effects of 'Olympic hangover'.) This might just be enough to keep growth above the 6.0% mark until the real fiscal stimulus package kicks in and the ultra-high amounts of bank lending since November turn into real economic activity.

"Our wager is that Q2 GDP hovers right at the 6.0% level before a slow migration north, though underlying (and unreported) base effects in the data could put some variance in that movement. The overall trend, however, looks like a slow recovery starting in Q3."

Source: James Pressler, Northern Trust - Daily Global Commentary, April 16, 2009.

Financial Times: Singapore's economy sags as exports slow
"Singapore's trade-dependent economy contracted by a record 11.5% in the first three months of 2009 from a year ago as exports fell by 17% in March, the 11th consecutive month of declines.

"The sharper than expected deterioration in the economy's performance, after it contracted by 4.2% in the fourth quarter of 2008, forced the government to revise downward its full-year forecast to between minus 6% and minus 9%, making it Singapore's worst postwar recession.

"The Monetary Authority of Singapore, the de facto central bank also devalued slightly the currency as it re-centred the secret policy band that pegs the Singapore dollar to a basket of international currencies.

"The latest data revealed the plunge in exports is slowing from a 35% drop in January and 24% in February. But there are worries that the continued weakness in the US economy will hurt exports for the rest of the year.

"Another warning sign is that the quarter-on-quarter decline in gross domestic product accelerated to 19.7% between January and March from 16.4% in the fourth quarter of 2008 as the economic slowdown spread to other trade-related domestic sectors, including transport and financial services.

"But economists believe that the dire figures for the first quarter could indicate that the economy has touched bottom and might start recovering or at least stabilise as the pace in the decline in export slows."

Source: John Burton, Financial Times, April 14, 2009.

CNBC: Impact of political unrest on Thai markets
"Discussing how the political unrest in Thailand will impact investor sentiment, with Nicholas Kwan, regional head of research, Asia at Standard Chartered Bank, speaking with CNBC's Karen Tso."

Source: CNBC, April 15, 2009.

CEP News: UK house prices continue to slide
"The decline in UK house prices failed to abate in February, according to a report from the Department for Communities and Local Government (DCLG) on Wednesday.

"The DCLG's house price index for the UK declined to 158.7, compared to January's reading of 164.2.

"On an annual basis, the index is down 12.3% in February, a sharper decline than January's 11.5% contraction.

"The report also suggests that the contraction is broad based with house prices in London falling 12.3% and prices outside the capital also falling 12.3% on the year."

Source: Erik Kevin Franco, CEP News, April 15, 2009.

YouTube: Dow Jones by Downsize
"Dow Jones" is Downsize's first single off their album "Going Out Of Business". The video also features Nicole O'Connell.

Source: YouTube, March 2, 2009.


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Prieur du Plessis

Author: Prieur du Plessis

Dr Prieur du Plessis
investmentpostcards.com

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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