Words from the (Investment) Wise for the Week That Was (January 11-17, 2010): Part II

By: Prieur du Plessis | Sun, Jan 17, 2010
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Asha Bangalore (Northern Trust): Inflation - "Don't worry, be happy," for now
"If there is good cheer to go around, it is from inflation, for now. The Consumer Price Index (CPI) edged up 0.1% in December, putting the year-to-year change at 2.7%. The large jump after a string of declines in the eight months ended October 2009 is primarily due to higher energy prices. The energy price index moved up 0.2% in December, but was up 18.2% from a year ago. Food prices rose 0.2%, which translates into a 0.5% drop in food prices in all of 2009.

"Excluding food and energy, the core CPI, inched up 0.1% in December, with the year-to-year increase at 1.8%, matching the gain seen in 2008. The cycle low for the year-to-year increase of the core CPI is a 1.4% gain posted in August 2009. The main reason for the significantly contained core CPI is the decelerating trend of the shelter index (the single-largest component of the core CPI). The 0.3% year-to-year gain of the shelter index in December is smallest increase since record keeping began in 1953 for this price index.

"The Fed continues to be a sweet spot with regard to inflation and can continue to focus on economic growth for several more months. Although the Fed has begun examining the ways in which inflation emerges at the December FOMC meeting, the more vigorous debate and concern about inflation is topic for several months ahead."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, January 15, 2010.

Reuters: Fannie, Freddie re-defaults reach 34 pct
"More than a third of US residential loans modified by Fannie Mae and Freddie Mac early last year were in arrears again after six months, though the default rate has improved, according to the regulator of the two largest mortgage finance companies.

"About 34 percent of homeowners with loans guaranteed by the companies modified in the first quarter of 2009 were at least 60 days delinquent, the Federal Housing Finance Agency said in a quarterly report on Friday.

"That compares with 39 percent of mortgages going bad after the companies agreed to ease terms of the loans in the last quarter of 2008, the report said.

"The re-default measures cover loans modified before the start of President Barack Obama's Home Affordable Modification Program that gives lenders a standard blueprint to ease terms of loans for troubled borrowers."

Source: Al Yoon, Reuters, January 8, 2010.

Financial Times: US commercial property attracts new wave of money
"The beleaguered US commercial real estate sector has been attracting a new wave of money from sources including foreign banks, US private equity firms, and a leading Chinese sovereign wealth fund.

"Market participants warn that the activity represents 'bottom-feeding' by opportunistic investors whose strategies could be derailed by rising interest rates. Also, sums are tiny compared with the debts that need refinancing. Nevertheless, the growing interest from investors is a sign of stabilisation, making it less likely that worsening commercial real estate conditions will sink banks and choke off a US recovery.

"'We believe the real story is that capital is ready to buy, even though it may not be so visible today," said Bob Steers, co-chairman of Cohen & Steers, a real estate investment firm.

"Recently, state-owned China Investment Corporation has enlisted Cohen & Steers, Angelo Gordon and Morgan Stanley to identify commercial real estate opportunities, people familiar with the matter say.

"A public sign of such activity came on Friday when Colony Capital won a Federal Deposit Insurance Corporation auction for $1bn of commercial property loans formerly held by failed banks in states hit hard by the real estate downturn.

"The deal valued the loans at 44 cents on the dollar and was structured so the FDIC contributes $136m and holds 60 per cent of the equity, while Colony, a Los Angeles investment firm, puts in $90m for the remaining 40 per cent.

"Tom Barrack, Colony founder, called the investment 'an implicit bet that rates stay low' and warned: 'If rates go up, everyone will be crushed.'"

Source: Henny Sender, Financial Times, January 10, 2010.

MoneyNews: Boskin: US economic data is almost criminal
"Former White House economist Michael Boskin says American investors no longer place much credibility in the economic and fiscal statistics being reported by the US government, and are 'increasingly inclined to disbelieve them'.

"Boskin, the one-time economic adviser to President George H.W. Bush, says that solid, reliable information is needed by investors, because 'as a society, and as individuals, we need to make difficult, even wrenching choices, often with grave consequences'.

"To base those decisions on misleading, biased, or manufactured numbers, is not just wrong, 'but dangerous', he wrote in The Wall Street Journal.

"But, due to the obvious fudging of numbers involved in the government's health care insurance industry reform effort, most Americans now believe the health-care legislation will actually raise their insurance costs, rather than reduce them, and increase the federal budget deficit, rather than contain it.

"That's not the only area where cynicism over official statistics is growing.

"'Most Americans are highly skeptical of the claims of climate extremists,' writes Boskin, now a professor of economics at Stanford University and a senior fellow at the Hoover Institution.

"And because of the spin over 'jobs created and saved' by the stimulus, they have a 'more realistic reaction to the extraordinary deterioration in our public finances than do the president and Congress,' Boskin adds.

"Squandering their credibility with these numbers games will only make it more difficult for America's elected leaders to garner support for difficult decisions from a public increasingly inclined to disbelieve them, writes Boskin."

Source: Gene Koprowski, MoneyNews, January 14, 2010.

Financial Times: FDIC chief blames Fed for crisis
"The Federal Reserve was blamed by a fellow regulator for contributing to the financial crisis on Thursday as the central bank and one of its former chairmen fought back against congressional moves to curb its powers.

"In unusually pointed criticism, Sheila Bair, chairman of the Federal Deposit Insurance Corporation, told the Financial Crisis Inquiry Commission that 'much of the crisis may have been prevented' had the Fed dealt with subprime mortgages seven years before it did.

"In New York, Paul Volcker, former Fed chairman and now White House economic adviser, was making the case for the defence.

"He said there was 'a compelling case that central banks should have a strong voice and authority in regulation and supervisory matters'.

"Both Ms Bair and Mr Volcker carry weight on Capitol Hill, where the Fed has drawn blame for aspects of the crisis.

"Mr Volcker told the Economics Club of New York he was 'particularly disturbed' about moves to take away the Fed's regulatory function.

"Chris Dodd, Senate banking committee chairman, has proposed consolidating bank supervision into a single regulator.

"The Fed published a paper on Thursday, which had been sent to Mr Dodd on Wednesday, arguing that its financial stability and monetary policy roles were complemented by supervising bank holding companies.

"Mr Volcker said: 'What seems to me beyond dispute, given recent events, is that monetary policy and the structure and condition of the banking and financial system are irretrievably intertwined.'"

Source: Tom Braithwaite, Financial Times, January 14, 2010.

Bloomberg: Federal Reserve seeks to protect US bailout secrets
"The Federal Reserve asked a US appeals court to block a ruling that for the first time would force the central bank to reveal secret identities of financial firms that might have collapsed without the largest government bailout in US history.

"The US Court of Appeals in Manhattan will decide whether the Fed must release records of the unprecedented $2 trillion US loan program launched after the 2008 collapse of Lehman Brothers Holdings Inc. In August, a federal judge ordered that the information be released, responding to a request by Bloomberg LP, the parent of Bloomberg News.

"'This case is about the identity of the borrower,' said Matthew Collette, a lawyer for the government, in oral arguments today. 'This is the equivalent of saying 'I want all the loan applications that were submitted."

"Bloomberg argues that the public has the right to know basic information about the 'unprecedented and highly controversial use' of public money. Banks and the Fed warn that bailed-out lenders may be hurt if the documents are made public, causing a run or a sell-off by investors. Disclosure may hamstring the Fed's ability to deal with another crisis, they also argued. The lower court agreed with Bloomberg.

""The question is at what point does the government get so involved in the life of the institution that the public has a right to know?' said Charles Davis, executive director of the National Freedom of Information Coalition at the University of Missouri in Columbia. Davis isn't involved in the lawsuit.

"The ruling by the three-judge appeals panel may not come for months and is unlikely to be the final word. The loser may seek a rehearing or appeal to the full appeals court and eventually petition the US Supreme Court, said Anne Weismann, chief lawyer for Citizens for Responsibility and Ethics, a Washington advocacy group that supports Bloomberg's lawsuit.

"New York-based Bloomberg, majority-owned by Mayor Michael Bloomberg, sued in November 2008 after the Fed refused to name the firms it lent to or disclose the amounts or assets used as collateral under its lending programs. Most were put in place in response to the deepest financial crisis since the Great Depression."

Source: David Glovin and Thom Weidlich, Bloomberg, January 11, 2010.

Financial Times: Wall Street titans face the flak
"Four of Wall Street's top executives offered some contrition and a defence of their actions on Wednesday, as the head of the Financial Crisis Inquiry Commission promised to use wide-ranging powers to establish the causes of the financial crisis and pursue any wrongdoing.

"Lloyd Blankfeinof Goldman Sachs, Jamie Dimon, chief executive of JPMorgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America maintained a united front as the Financial Crisis Inquiry Commission, headed by Phil Angelides, probed the bail-out of AIG, risk management and executive compensation.

"Mr Blankfein, whose bank has become a lightning rod for public anger at Wall Street, bore the brunt of the panel's questions. He mounted a robust defence after being asked whether part of his business was akin to selling a car with faulty brakes and then buying an insurance policy. But he added: 'Anyone who says I wouldn't change a thing, I think, is crazy.'

"The Goldman boss said that he and his rivals had been insufficiently sceptical of loose credit standards.

"'We rationalised [it] because a firm's interest in preserving and growing its market share, as a competitor, is sometime blinding - especially when exuberance is at its peak.'

"Mr Angelides, a former California treasurer appointed head of the panel by Congress last year, told the witnesses on the first day of public hearings: 'We're after the truth ... the hard facts ... we'll use our subpoena power as needed. And if we find wrongdoing, we'll refer it to the proper authorities.'

"Bonuses are drawing increasing political fire on Capitol Hill as the banks prepare to announce billions of dollars in pay-outs over the next few days.

"'Clearly Wall Street has to be a lot more attuned to what's going on in the economy,' said Mr Mack. But he said that compensation had to allow the banks to compete for staff. 'I have to run a company.'

"As part of a plan to quell anger and ensure that any government bail-out losses are recouped, the Obama administration is planning to impose a levy on banks.

"Mr Dimon told reporters: 'Using tax policy to punish people is a bad idea.' He added that the banks should not be paying for losses caused by car companies and other industries.

"Mr Dimon acknowledged that 'certain subprime mortgages ... weren't great products. I think there were some unscrupulous mortgage salesmen and mortgage brokers. And, you know, some people mis-sold.'

"Mr Dimon and Mr Moynihan agreed that banks should not be considered 'too big to fail'.

"Mr Obama will on Thursday announce a new levy on banks to try to recoup some of the stimulus funding they received."

Source: Tom Braithwaite and Francesco Guerrera, Financial Times, January 13, 2010.

The Wall Street Journal: Goldman Sachs CEO singled out
"The Wall Street Journal's Jerry Seib joins the News Hub from Washington, where he says Goldman Sachs CEO Lloyd Blankfein became a target at a hearing before the Financial Crisis Inquiry Commission."

Source: The Wall Street Journal, January 13, 2010.

MoneyNews: Romer - big bonuses to bankers are offensive, ridiculous
"A White House economic adviser says big year-end bonuses for bailed-out financial institutions would be 'ridiculous' and 'offensive'.

"Christina Romer says the Bush administration's $700 billion bailout was necessary to avoid a collapse of the financial system.

"Now that banks are returning to profitability as a result of government help, Romer says that paying out billions of dollars in bonuses 'does seem really ridiculous'.

"Romer, who heads the president's Council of Economic Advisers, say that kind of big payout 'is going to offend the American people. It offends me.'"

Source: MoneyNews, January 11, 2010.

Financial Times: Obama vows to recover crisis cash
"Barack Obama slammed 'obscene' bank bonuses on Thursday, as the US president formally revealed plans to impose a levy on big financial institutions to recoup some of the costs of the financial crisis.

"'We want our money back and we're going to get it,' Mr Obama said, pledging to 'recover every single dime the American people are owed' for the troubled asset relief programme bail-out fund.

"Appearing keen to pick a political fight with the big banks, Mr Obama faulted them for trying to 'return to business as usual' with 'risky bets to reap quick rewards' and compensation practices that did not reflect the state of the nation.

"'I'd urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or your citizens but by rolling back bonuses,' he said. Aides said the levy would recover at least $90bn from 50 of the largest institutions, including US subsidiaries of foreign banks and insurance companies as well as US banks.

"Treasury secretary Tim Geithner told the Financial Times that the US would urge other countries to adopt a similar principle of recouping bailout costs from the financial sector. 'We are going to see if we can encourage policymakers in other important financial centres to do something similar,' he said."

Source: Krishna Guha, Financial Times, January 14, 2010.

Financial Times: Banks braced for Basel battle
"Banks are gearing up to fight a proposal by global regulators to sharply increase capital requirements for institutions that bring in outside investors to fund subsidiaries, saying it will cripple their ability to expand in emerging markets.

"Bank executives fear the provision would create huge holes in the capital stocks of a wide range of UK, European and Japanese financial institutions, at a time when they are already under pressure to increase their regulatory capital.

"Analysts described the proposal as one of the most 'draconian' and 'potentially devastating' parts of a package of measures put forward in December by the Basel committee, which sets global standards that are implemented by local regulators.

"Credit Suisse analysts calculate the rule would substantially reduce the estimated equity buffers that banks hold against potential losses.

"They estimate the so-called equity tier one capital ratio, a key measure of balance sheet strength which excludes hybrid capital such as preference shares, would be cut by 0.7 percentage points from the current 9.6 per cent.

"In essence, the Basel committee wants to force banks to stop counting minority-owned stakes as part of their equity capital but insists they continue to recognise the entire potential losses of any subsidiary.

"Regulators are essentially saying that banks are on the hook for all the losses of their subsidiaries, but that equity owned by minority investors in a particular subsidiary would not be available to absorb group losses elsewhere in the world.

"Banking analysts at Citi and Evolution have concluded that HSBC, BNP Paribas, Credit Agricole and Natixis would be particularly hard hit. The banks either did not respond or declined to comment."

Source: Brooke Masters and Patrick Jenkins, Financial Times, January 12, 2010.

The Wall Street Journal: Beware of bond bubble
"Bond traders are leery of a possible growing bond bubble. If the bubble bursts, people's retirement savings may be in jeopardy, SmartMoney's Russell Pearlman reports."

Source: The Wall Street Journal, January 12, 2010.

Financial Times: Rate rise fears spark rush to issue bonds
"Businesses and governments have rushed to raise tens of billions of dollars from bond markets in a frenetic round of new year fundraising amid fears that interest rates are set to jump.

"A flurry of issuers, including Virgin Media, BMW and Manchester United football club, turned to the capital markets on Monday aiming to raise more than $20bn.

"Poland and Mexico were among a number of governments that also tapped international investors.

"So far this month more than $75bn has been raised, more than two-thirds of this by financial institutions trying to repair their balance sheets in the wake of the economic crisis.

"Last week, the US corporate bond market had its second busiest day on record.

"Wayne Hiley, of Barclays Capital, said a recent rally in the corporate bond markets had lowered the interest rate premium to government bonds that businesses pay. 'There are issuers who are saying 'let's take advantage of this' even if they hadn't planned to come to the market until later on,' he said.

"Companies usually aim to sell bonds early in the year when investors have fresh funds and before many companies enter a 'purdah' period ahead of earnings announcements.

"However, the current round of capital raising is particularly intense. Some companies believe a recovery in economic growth this year will lead to central banks raising interest rates, pushing up the cost of borrowing.

"Other companies, fearing market turbulence as the authorities begin to unwind last year's emergency monetary and fiscal measures to prop up the economy - which have included buying bonds - are borrowing as much as they can while demand for debt remains strong."

Source: Jennifer Hughes and Aline van Duyn, Financial Times, January 11, 2010.

Financial Times: Sovereign bonds seen as riskier than corporates
"The cost of insuring against the risk of debt default by European nations is now higher than for top investment-grade companies for the first time, as mounting government debt prompts fears over the health of many leading economies.

"It now costs investors more to protect themselves against the combined risk of default of 15 developed European nations, including Germany, France and the UK, than it does for the collective risk of Europe's top 125 investment-grade companies, according to indices compiled by data provider Markit.

"Markit's iTraxx Europe index of 125 companies is trading at 63 basis points, or a cost of $63,000 to insure $10m of debt over five years. This compares with 71.5bp, or $71,500, for Markit's SovX index of 15 European industrialised nations.

"Fears over sovereign risk have risen sharply in the past few months as investors have become increasingly alarmed over rising budget deficits and record levels of government bond issuance needed to pay off public debt.

"By contrast, hopes of a recovery have helped support corporate credit markets. Since September, the SovX index has jumped 20bp, while the iTraxx Europe index has narrowed 30bp.

"Bankers are even warning that big economies, such as the US and the UK, could lose their top-notch triple A status because of the deterioration in public finances."

Source: David Oakley, Financial Times, January 12, 2010.

MoneyNews: Gross - German, Brazil bonds better than Treasuries
"Bill Gross, who manages the world's biggest bond fund for Pimco, expects German and Brazilian bonds to outperform US Treasuries.

"In the US, the budget deficit, which totaled $1.4 trillion last year, will push up Treasury yields faster than German government bonds, Gross said.

"And while the US will likely endure huge deficits for years, Germany has a constitutional amendment requiring a balanced budget by 2016.

"'(It) is the most fiscally conservative, has half the deficit of the United States, potentially has a low inflation rate, and they yield about the same,' Gross told Bloomberg, comparing US and German 10-year government bonds.

"The 10-year US Treasury now yields about 45 basis points more than the equivalent 10-year bund.

"Brazilian bonds, which make up 2 percent of Gross' Pimco Total Return Fund, also are attractive, he says.

"'Brazil has the highest real interest rates in the world,' he pointed out.

"Brazil's 10-year government bond yields 11.22 percent."

Source: Dan Weil, MoneyNews, January 14, 2010.

Bespoke: Strategists get stock happy
"Each week Bloomberg asks Wall Street strategists (the same ones polled for their year-end S&P 500 price targets) for their recommended portfolio allocations to stocks, bonds, and cash. Currently, the consensus recommended stock allocation is 60.5%. As shown in the chart below, this number has spiked significantly in recent weeks. Throughout the financial crisis, strategists lowered their recommended stock allocations pretty much every week. They missed the bottom, however, as the market turned before their consensus hit bottom. During the week of the Lehman collapse, strategists were recommending that investors have 56.6% of their portfolio in stocks.

"Add this as another indicator that is currently back to its pre-Lehman levels, while the S&P 500 is still has about 9% to go.

"The current reading of 60.6% is up quite a bit from its level at the market lows. This doesn't yet suggest that strategists are too bullish, however, as their average recommendation during the '03-'07 bull market was about 64%."

Source: Bespoke, January 14, 2010.

Bespoke: And you thought the rally in equities was impressive
"Even though the S&P 500 has rallied more than 60% off its March 2009 lows, the index is still well below the 1,251.70 level it closed at on the Friday before Lehman's bankruptcy filing. While the rally has been quite impressive, it pales in comparison to the gains we've seen in the corporate bond market. As of last week, the spread between Baa rated corporate bonds and 30-year US Treasuries had narrowed to its lowest levels since July 2007! Yes, you read that right - July 2007. Back then, the S&P 500 was trading above 1,500."

Source: Bespoke, January 11, 2010.

Bespoke: Estimated Q4 S&P 500 and sector earnings growth
"S&P 500 earnings are currently expected to grow by 62.1% in Q4 '09 versus Q4 '08. In the first chart below, we highlight how this growth estimate has changed since the start of the fourth quarter. As shown, estimates are essentially right where they were at the start of Q4, but there was a lot of movement in the estimate throughout the quarter. From October to the end of November, the growth estimate rose on a weekly basis all the way up to 75.7%. Since peaking, however, estimates headed lower by quite a bit until finally bumping up from 60% to 62.1% in the last week. As we enter earnings season, it's probably a good thing for the bulls that expectations have come down a little.

"While the S&P 500 as a whole is expected to grow by 62.1% in the fourth quarter, the bulk of this growth is expected to come from the Materials and Financial sectors. As shown below, these are the only two sectors with Q4 growth expectations that are higher than the S&P 500. And more sectors are still expected to see a decline in earnings than a rise. Energy and Industrials are both expected to see earnings decline by more than 20% in the fourth quarter, while Telecom is not far behind at -19.2%. Health Care, Consumer Staples and Utilities are all expected to see a drop of about 5%. Technology and Consumer Discretionary are the other two sectors expected to see growth."

Source: Bespoke, January 12, 2010.

John Authers (Financial Times): Too soon for complacency
"Markets have set themselves up for some bad news to send them spinning. On Tuesday, the bad news broke.

"Markets move on the interaction of news with flows of greed and fear among investors. When fear is lowest, the danger of a fall is greatest.

"This week the CBOE Vix Index, measuring volatility in US stocks, hit its lowest level since May 2008, when a lull after the Bear Stearns rescue gave way to an implosion.

"Another great contrarian indicator is the survey of sentiment by the American Association of Individual Investors. Last week, this showed the lowest proportion of self-described "bears" since February 2007 - when volatility first started to spike as investors at last began to grasp the severity of the subprime mortgage crisis in the US.

"Bearishness in this survey hit an all-time high in March last year when the current rally first started, showing how much money can be made by betting against extremes of sentiment.

"Even bulls should concede that this optimism looks overdone. Stock market valuations enshrine very strong earnings growth for this year, while there are numerous possibilities of macroeconomic shocks around the world.

"Tuesday, China tightened monetary policy, in a necessary action which displeased the market, while the European Commission condemned Greece for falsifying data, in a broadside that raised fears once more that Greece could default without being bailed out by fellow eurozone members.

"Meanwhile, Alcoa, the aluminium producer, revealed disappointing results to launch the US earnings season for the fourth quarter of last year.

"If not exactly the sum of all fears, this combination of bad news showed that it is too soon for complacency. There are real risks in many different places and the chance of a sharp correction looks high. In that context, Tuesday's falls for stock markets around the world look surprisingly muted."

Source: John Authers, Financial Times, January 12, 2010.

Bespoke: Volatility at lowest level since May 2008 - should you care?
"Now that the VIX index is at its lowest levels since May 2008, and down nearly 80% from its record high in late 2008, there is a growing concern among some investors that there is not enough fear in the marketplace. As the chart below indicates, the current level of 17.55 is lower than the long-term average of 20.3 since 1990. However, during the mid-nineties and the middle part of this decade, which were both good periods for equity investors, the VIX not only traded at and below current levels, but it also remained at those levels for several years.

"While the VIX's decline over the last year indicates that investors are not as fearful as they were a year ago, can you blame them for not being so? Things haven't quite returned to normal, but they are a lot closer now than they were then."

Source: Bespoke, January 12, 2010.

CNBC: Kass' correction
"The man who called the bottom now calls for a correction, with Douglas Kass of Seabreeze Partners."

Source: CNBC, January 13, 2010.

David Fuller (Fullermoney): Treasuries above 5% could harm equities
"The main risk to economic recovery will surface when long-dated interest rates back up, presumably as quantitative easing (QE) is phased out. However, every seasoned financial observer, including those at the Fed and US Treasury, will be aware of this risk. Therefore, will they blur the date at which QE supposedly ends? Will they extend it? Might they agree to no more than a partial phase-out, retaining the freedom to squeeze 'bond vigilantes' if rates rise too quickly?

"My guess in response to these questions is, yes, one way or another. After all, the Fed has always been active in government bond markets and it will not want to leave yields looking exposed, like ducks in a shooting gallery. Whether the Fed and US Treasury can prevent rates from rising too quickly, possibly later this year, remains to be seen.

"I will take my cue from the chart action, with particular interest in how higher yields affect stock markets. For me, a sustained move above 4% by US 10-year Treasuries will be equivalent to a yellow caution light for equity investors. Above 5%, stock markets could be in dangerous territory, as we saw in the last cycle.

"However every forecast for a precise repetition of a previous cycle assumes that all other factors remain equal, which of course, is never the case. Therefore stock markets, which remain mostly in consistent uptrends today, could weaken sooner or later relative to long-term rates.

"Consequently I will continue to view US Treasury 10-year yields as a lead indicator. Currently, they are still in a 'sweet spot'. However when they move higher I will monitor stock market indices, particularly for Wall Street, even more closely for signs of fatigue in the form of inconsistencies, not least a loss of upward momentum.

"Lastly, an eventual break in 10-year yields to the downside below 3%, which I do not expect, could also be bearish for equities by signalling weaker GDP growth and rising deflationary pressures."

Source: David Fuller, Fullermoney, January 11, 2010.

Bespoke: The smaller the better
"The average S&P 500 stock is up 3.50% so far in 2010. We broke the index into 10 deciles (10 groups of 50 stocks) based on market cap and calculated the average YTD percent change of the stocks in each decile to see how a company's size has impacted performance so far this year. As shown below, the 50 biggest stocks in the S&P 500 are up an average of 2.4% year to date. The 50 smallest stock in the index are up an average of 6.5%. In general, the bigger the stock, the smaller the gain so far in 2010."

Source: Bespoke, January 14, 2010.

MoneyNews: Goldman - big banks, Latin America are best buys for 2010
"A recent report from Goldman Sachs' shows the investment bank forecasting that big banks with consumer exposure and commodities will be among the best bets for 2010.

"Goldman says that corporate profits will grow, especially in tech, business travel, office supplies and advertising - and that excess corporate cash will drive more mergers and acquisitions, bigger dividends and more stock buybacks.

"Tech growth will be built on the move towards cloud computing and a corporate level refresh of personal computers and servers.

"E-commerce will also continue to grow, taking advantage of its strength to draw business away from traditional competitors.

"Commodity prices will rise as demand outpaces supply, and inflation on key agricultural and protein commodities will boost the agricultural and supermarket industries, but damage internationally underexposed restaurant companies because increased foreign demand won't benefit their bottom lines.

"Market-oriented Latin American nations and China are best positioned for what Goldman describes as the "post-crisis economy" and will outpace slow US recovery.

"As a supplier of natural resources, Latin America is becoming the go-to destination for new commodities consuming behemoths, particularly China.

"Obamacare, Goldman claims, is less important than the fundamentals for health care, where financial engineering increasingly generates med-tech earnings per share.

"Brazil's economy will not need additional stimulus in 2010, although some measures introduced in 2009 could become permanent."

Source: Julie Crawshaw, MoneyNews, January 12, 2010.

BCA Research: Interest rate differentials are likely to weigh against the US dollar
"The upturn in the global economy, a renewed widening of the US current account deficit and a Federal Reserve that keeps interest rates near zero will spell trouble for the US basic balance and keep the dollar under downward pressure.

"During 2002-2008, there was a marked divergence between the widening US current account deficit and falling real yields, which weighed on the dollar. The current account represents the US's need for foreign capital. Meanwhile, real interest rates help to attract the required inflows. As these two variables moved in opposite directions, i.e. the current account widened and real rates fell, the dollar suffered as a consequence. Then, the Great Recession narrowed the US current account deficit and the deflationary pressures lifted real interest rates. This combination helped support the dollar in late 2008 and into early 2009. But with the deflationary impulse receding, real interest rates are falling again. As the US current account begins to widen and diverge with real interest rates, the dollar will face renewed downward pressure.

"Bottom line: Low real interest rates and a renewed cyclical widening of the US current account deficit should push the dollar lower in the coming months. This dynamic will be in place at least until the Fed begins to normalize interest rates, i.e. for most of 2010."

Source: BCA Research, January 12, 2010.

CNBC: Implications of a strengthening yuan
"Beijing will probably appreciate the yuan by about 3-3.5% in 2010, predicts Tony Raza, director of asset allocation at UOB Asset Management. He outlines the implications this yuan appreciation will bring."

Source: CNBC, January 11, 2010.

Bespoke: Commodity prices and the consumer
"Since the start of 2010, the rally in commodities has been a boon for companies and investors in the Energy and Materials sectors. Consumers, on the other hand, are increasingly feeling the impact on their wallets. In the chart below we have calculated the cumulative daily price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) since the beginning of 2008. We then multiplied the changes by the annual per capita consumption of each item. When the line is in positive territory, commodity prices are acting as a tax on consumers, while readings in negative territory are indicative of a windfall for consumers. Although this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers' wallets over the last 24 months.

"As shown in the chart, the rally in commodities in 2008 was especially painful on consumers. During the Summer of 2008, commodity prices were acting as a $4.77 per capita daily tax on US consumers versus the start of the year. When the credit crisis escalated, commodities tanked, thus erasing the entire tax (and then some) on consumers. By the time commodity prices bottomed in early 2009, US consumers were now benefitting from nearly a $5 daily windfall due to the decline. Since commodity prices bottomed early last year, however, that windfall has been slowly dwindling away. While US consumers are still benefitting from lower commodity prices compared to the start of 2008, the windfall is less than 30% of what it was nearly a year ago."

Source: Bespoke, January 11, 2010.

MoneyNews: Pickens - forget the wind, go with natural gas
"Famed Texas billionaire T. Boone Pickens is dramatically changing his position on alternative energy.

"Pickens spent most of the last two years, and $62 million of his oil investing fortune, on an advertising campaign in which he sought to persuade Americans to adopt his plan for wind-based energy.

"The scheme called for a massive expansion of wind energy to displace natural gas, leaving natural gas for use in vehicles, thus displacing foreign oil.

"'No American with a television set could escape Mr. Pickens's argument last year. But somehow, a mass conversion to natural gas cars failed to ensue,' a recent report in The New York Times stated.

"But, now Pickens is changing his pitch.

"Pickens said Wednesday he has cut in half an order for General Electric Co. wind turbines and plans to use the rest in other areas instead of Texas, where he once planned a massive wind farm, the Associated Press reported.

"Pickens, who heads the hedge fund BP Capital Management LP in Dallas, purchased 333 turbines from GE, which was about half his initial order of about 687 turbines.

"Pickens scrapped his plan for a 1,000-megawatt wind farm in West Texas last summer because of technical problems in getting power from the site to transmission facilities.

"Pickens now is spending millions more on a new campaign, with the first advertisements scheduled to be broadcast Thursday on cable stations across the country.

"His aides reckon that a stronger message, concentrating on the national security aspects of energy independence, will be quite effective after the thwarted Christmas Day airliner bombing and other, recent terrorist actions in the United States.

"Natural gas is said to be the cleanest fossil fuel, emitting fewer greenhouse gases than either coal or oil.

"Many energy experts say they think it is underutilized as a fuel, especially since new technologies recently unlocked huge reserves in shale gas fields across the country.

"Some, however, say putting in place the infrastructure for natural gas vehicles would be too costly, and battery-powered electric cars and hybrids are a much better alternative."

Source: Gene Koprowski, MoneyNews, January 14, 2010.

Financial Times: China's exports rise as economy picks up
"China's exports rose in December for the first time in 14 months, providing fresh evidence of recovery in the global economy but also placing renewed pressure on Beijing to appreciate its currency.

"Following strong export figures last month from South Korea and Taiwan, China said on Sunday that its exports climbed 17.7 per cent, well ahead of the modest increase that economists had predicted. These numbers put China on track to overtake Germany as the world's largest exporter.

"Chinese imports surged by 55.9 per cent in December, the latest indication of buoyant domestic demand in China, although the figures are also likely to increase concerns about potential inflationary pressures.

"Exports to China's two biggest markets both rebounded last month, with sales to the US increasing 15.9 per cent and to the European Union 10.2 per cent.

"However, the year-on-year comparisons were inflated by the low base of the previous year's figures. Economists said some of the improvement was due to restocking by companies that had run down inventories.

"'While December's export figures are encouraging ... a recovery to pre-crisis levels appears some time away," said Jing Ulrich, head of China equities and commodities for JPMorgan.

"Andy Rothman, CLSA's chief China economist, said a resumption of export growth was necessary before Beijing restarted appreciation of the renminbi, suspended over a year ago in the crisis. He said Beijing was unlikely to act on one month's figures alone. But if the export recovery continued, China's leaders would have the political cover to resume renminbi appreciation by mid-year, with a possible rise of 3 per cent for 2010.

"'Beijing has been waiting for three things to happen before resuming gradual appreciation: strong economic recovery in China; stability in the US and European economies; and several months of [positive] Chinese export growth, which is important to sell appreciation to the domestic audience.'

Source: Patti Waldmeir, Financial Times, January 10, 2010.

Financial Times: China raises bank reserve requirements
"China has increased the amount banks must set aside as reserves in the clearest sign yet that the central bank is trying to tighten monetary conditions amid mounting concerns of overheating and inflation as a result of the credit boom.

"The People's Bank of China also raised interest rates modestly in the inter-bank market on Tuesday for the second time in less than a week, as it engages with commercial banks in a tug-of-war over rapid lending.

"Stock markets and commodities fell in Asia on Wednesday after the surprise decision, sparking concerns that the move could slow China's purchases of natural resources and other imported goods from around the region.

"Economists said that Tuesday's announcements were a warning to the banks against lending too aggressively following reports in state media that loans in the first week of 2010 reached Rmb600bn ($88bn), not far short of the monthly average last year.

"'This is a warning across the bows of the commercial banks,' said Tom Orlik, of Stone & McCarthy in Beijing. 'The central bank said that the high level of bank lending needs to come to an end but that the commercial banks do not seem to be taking it seriously.'

"Reserve requirements were raised by 0.5 percentage points, while rates on one-year paper increased by 0.08 per cent and on three-month paper by 0.04 per cent.

"The moves underline the increasingly delicate task the PBoC is facing in managing the consequences of China's credit binge, when lending more than doubled from Rmb4200bn in 2008 to above Rmb9000bn last year."

Source: Geoff Dyer, Financial Times, January 12, 2010.

The Wall Street Journal: China's hot money headache
"While Beijing battles its coldest winter in half a century, Chinese officials are battling a major hot money problem. Heard on the Street's Andrew Peaple ponders the government's efforts to restrain the flow of funds into China."

Source: The Wall Street Journal, January 12, 2010.

Bloomberg: China's property prices rise most in 18 months
"Rong Ren, chief executive officer of Harvest Capital Partners, talks with Bloomberg's Bernard Lo about the implications of China's increase in the proportion of deposits banks must set aside as reserves. Ren, speaking in Hong Kong, also discusses his strategy for investing in China's retail malls and development projects."

Click here for the full article.

Source: Bloomberg, January 14, 2010.

Financial Times: Greece unveils 3-year plan to curb deficit
"Greece on Thursday announced an ambitious three-year plan to curb its runaway budget deficit but failed to convince sceptical markets its targets for growth and fiscal reform were feasible.

"The stability and growth plan calls for the budget deficit to be cut from 12.7 per cent to 2.8 per cent of gross domestic product by the end of 2012.

"The economy is projected to shrink by 0.3 per cent this year before rebounding with growth of 1.5 per cent in 2011 and 1.9 per cent in 2012.

"The deficit would be reduced this year by 4 percentage points of GDP, with deep cuts made in hospital and defence spending where waste and corruption are widespread, according to officials. Revenue increases would be driven by higher excise taxes on tobacco and alcohol, an overhaul of the tax system and a crackdown on tax evasion.

"'This plan can be achieved, we're confident of that,' said George Papandreou, the prime minister, after an outline was presented at a televised cabinet meeting.

"The plan is seen as Greece's passport to borrowing almost €54bn ($78bn) on international markets to fund a swollen public debt expected to rise this year from 113 per cent to more than 120 per cent of GDP.

"But markets reacted negatively almost as soon as George Papaconstantinou, finance minister, finished his presentation at a cabinet meeting broadcast live on Greek television under the government's policy of promoting transparency.

"The cost to insure Greek debt rose to fresh heights as investors continued to worry about the parlous state of the country's finances. The Greek bond markets also sold off, dipping to 12-month lows.

"'We think these forecasts are too optimistic ... we doubt the government will meet its fiscal targets - the recent renewed surge in government bond yields may therefore have further to go', said Ben May of Capital Economics in note published on Thursday.

"'The two targets - growth and public deficit - are inconsistent and at least one won't be achieved,' BNP Paribas said in a note."

Source: Kerin Hope and David Oakley, Financial Times, January 14, 2010.

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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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