Words from the (Investment) Wise for the Week That Was (February 22-28, 2010): Part II

By: Prieur du Plessis | Sun, Feb 28, 2010
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Financial Times: US senate moves ahead on $15 billion jobs bill
"The US Senate on Monday voted to move forward on a $15 billion jobs bill proposed by Harry Reid, leader of the Democratic majority in the Senate.

"The 62-30 vote in favour of ending 'cloture' prevents a Republican filibuster and came as an exception to the months of gridlock in Congress. It will pave the way for a jobs bill to clear the Senate, just as other critical employment benefits are set to expire.

"Democrats needed to secure two Republican votes to block the filibuster and one came thanks to Scott Brown, making his first vote since he filled Edward Kennedy's former seat in Massachusetts.

"'I hope this is the beginning of a new day in the Senate,' Mr Reid said, invoking Mr Brown by name for his bipartisanship.

"The scaled-back measure is expected to create 250,000 jobs through an array of tax credits and payroll tax exemptions to stimulate hiring. The bill frees businesses from payroll taxes on workers who are hired after more than 60 days of unemployment and gives them a tax credit of $1,000 for new hires that they keep for more than a year.

"The bill also provides funding for highway and transportation projects, allows companies to write-off equipment purchases as expenses and expands the Build America bond scheme to help subsidise school and energy projects."

Source: Alan Rappeport, Financial Times, February 22, 2010.

Standard and Poors': Home prices continue to send mixed messages
"Data through December 2009, released today by Standard & Poor's for its S&P/Case-Shiller Home Price Indices, the leading measure of US home prices, show that the US National Home Price Index fell in the fourth quarter of 2009 but has improved in its annual rate of return, as compared to what was reported in the third quarter.

"The chart above depicts the annual returns of the US National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller US National Home Price Index, which covers all nine US census divisions, recorded a 2.5% decline in the fourth quarter of 2009 versus the fourth quarter of 2008. This is a significant improvement over the annual rates reported in the first, second and third quarters of the year, at -19.0%, -14.7% and -8.7%, respectively. In December, the 10-City and 20- City Composites recorded annual declines of 2.4% and 3.1%, respectively. These two indices, which are reported at a monthly frequency, have seen improvements in their annual rates of return every month since the beginning of the year.

"'As measured by prices, the housing market is definitely in better shape than it was this time last year, as the pace of deterioration has stabilized for now. However, the rate of improvement seen during the summer of 2009 has not been sustained,' says David Blitzer, Chairman of the Index Committee at Standard & Poor's."

Source: Standard and Poor's, February 23, 2010.

VisualEconomics: Cost of home ownership
"The last three years have seen a significant drop in the cost of housing in the United States; bringing prices back down from once astronomical levels."

Source: VisualEconomics, February 23, 2010.

Asha Bangalore (Northern Trust): Existing home sales and inventories disappoint
"Sales of all existing homes fell 7.2% to an annual rate of 5.05 million units in January after a 16.2% drop in December. Sales of existing single-family homes declined 6.9% to an annual rate of 4.43 million units. Purchases of existing single-family homes have risen nearly 9.0% from the trough in January 2009. Sales of existing homes fell in all four regions across the nation during January. It appears that the extension of the first-time home buyer tax credit program is yet to translate into increased sales; the program expires in April 2010.

"The median price of an existing single-family home was down 0.4% from a year ago to $163,600. There is a gradual stabilization of home prices visible in latest movements of the median price of an existing single-family home but the recent increase in inventories of unsold homes casts a shadow on projections of further improvements on the price front.

"The seasonally adjusted inventory-sales ratio of single-family existing homes rose to 8.4-month supply during January from a 7.6-month mark in December."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 26, 2010.

Asha Bangalore (Northern Trust): Consumer confidence slips in February
"The Conference Board's Consumer Confidence Index fell to 46.0 in February from 56.5 in the prior month. This is the lowest since July 2009. Sluggish employment conditions are seen to be a major reason for the loss of confidence in February after a string of three monthly gains. The Present Situation Index (19.4 vs. 25.2 in February) and the Expectations Index (63.8 vs. 77.3 in February) declined in February.

"The number of respondents indicating that 'jobs are to hard to get' rose in February (47.7% vs. 46.5% in January), while the number claiming that 'jobs are plentiful' fell (3.6% vs. 4.4% in January). The net of these two indexes tracks the unemployment rate closely. The difference between these two indexes widened to 44.1 in February from 42.1 in January, suggesting that the jobless rate is most likely to inch higher in February."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 23, 2010.

Asha Bangalore (Northern Trust): Have durable goods orders and shipments turned the corner?
"The headline number for orders of durable goods in January (+0.3%) is strong. But, shipments of durable goods edged down 0.2% after a 2.4% increase in the prior month. The durable goods numbers always show big swings because of large ticket items. The January increase in orders was lifted by the 126% increase in orders of aircraft, with orders excluding transportation posting a 0.6% drop. One way to sort out the large deviations of month-to-month data is to look at year-to-year changes. On a year-to-year basis, orders (+9.9%) and shipments (+1.5%) of durable goods posted gains in January, after an extended period of declines going back to early-2008. This change in trend is noteworthy and warrants close watching."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 25, 2010.

Financial Times: Foreclosures in the US
"Aline van Duyn, US markets editor of the Financial Times, says that a number of American homeowners whose houses are worth less than their mortgages are choosing to let their homes go into foreclosure and let the banks suffer the losses."

Source: Financial Times, February 22, 2010.

Clusterstock: Bankers getting paid a lot to sit on their hands and do nothing
Yesterday we pointed you to the latest data from the St. Louis Fed showing that bank lending continues to plunge. Rather than ply businesses with loans, banks are instead opting to hoard cash and buy Treasuries.

"And yet despite the lending shutdown, bonuses are back up, per fresh data out today from the New York Comptroller. In other words, sitting on your hands and doing nothing is a pretty lucrative gig."

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - Business Insider, February 23, 2010.

Financial Times: Number of US "problem" banks soars
"The number of problem banks in the US continued to soar in last year's fourth quarter, hitting their highest level since 1993, according to a regulatory report released on Tuesday.

"The findings by the Federal Deposit Insurance Corp suggest that, although the US economy is on the mend, the financial industry, bedevilled by souring residential and commercial real estate loans, will take longer to recover.

"The FDIC said 702 banks were considered troubled at the end of 2009, up from 552 three months earlier. Problem assets totalled $402.8bn in the final period, compared with $345.9bn in the third quarter. By contrast, Lehman Brothers listed $639bn in assets at the time of its bankruptcy filing in September 2008.

"No longer confined to Wall Street, the financial crisis has cascaded over to regional and community banks that are feeling a disproportionate amount of the pain. 'The great recession has very much become a Main Street problem,' said Richard Brown, the FDIC's chief economist.

"Although bank earnings showed a slight improvement in the fourth quarter, totalling $914m against a $37.8bn loss in the year-ago period, they still remain below historical highs. Any improvement in earnings, the FDIC said, was concentrated among the largest institutions.

"For the full year, banks earned $12.5bn, up from $4.5bn in 2008 but far below the $100bn recorded in 2007.

"Loan losses jumped for the 12th consecutive quarter to total $53bn, an increase of 37 per cent over the year-ago period. On an annualised basis the rate of losses accounted for in the quarter was the highest in more than two decades.

"Losses rose in all significant categories, including residential mortgage loans and credit card debt. One of the fastest growing categories for uncollectable debt was commercial real estate.

"Although the level of bank failures is alarming, it pales against the troubles of the savings and loan crisis. At the height of that meltdown, in 1987, some 2,165 banks were considered troubled and problem assets totalled $833bn.

"But the full weight of the current crunch has yet to be felt. The FDIC took over 140 banks in 2009 and analysts expect more to follow. The FDIC said on Tuesday it set aside another $17.8bn in the fourth quarter for bank failures. It expected total bank failures to cost $100bn from 2008 to 2013."

Source: Suzanne Kapner, Financial Times, February 23, 2010.

John Authers (Financial Times): US yield curve
"We ignore the yield curve at our peril. That is one of the lessons from the financial implosion that started in 2007, but how do we apply it now?

"The yield curve is the popular name for the spread between the yields on 10-year and two-year Treasury bonds. Usually, investors require a bigger yield to compensate them for the greater risks that come with lending money over a longer term.

"When short-term yields rise above long-term ones, then market jargon holds that the yield curve is "inverted". This has been a great recession indicator, as it implies the market thinks short-term interest rates must imminently be cut. Each of the past seven recessions was preceded by a brief period when the yield curve was inverted and there has only been one false signal.

"But what happens when the yield curve gets very steep? That is happening now and there are few, if any, precedents. Last week, 10-year yields exceeded two-year ones by 2.94 percentage points, the highest figure since the Federal Reserve's records for this indicator began in 1976.

"Its previous peaks were at about 2.5 percentage points in October 2003, when a brief bull market in equities was gathering pace, and October 1992, when years of expansion for both markets and the economy lay ahead.

"Should this, then, be regarded as a big reason for optimism? Perhaps not. An implicit bet that rates will rise over the next 10 years is not daring when rates are virtually at zero. Neither is a call for an intermediate economic recovery after a savage recession.

"In any case, the extremes that financial markets have touched in the past few years make it dangerous to read any indicator with too much confidence. But it does seem to suggest that the market is more convinced than economists both that central banks will be raising rates sooner rather than later and that the US economy is enjoying a true recovery."

Source: John Authers, Financial Times, February 22, 2010.

MoneyNews: Rogers - China will keep dumping US Treasuries
"China will continue to sell US Treasuries in the future, says Jim Rogers, co-founder of the Quantum Fund.

"China will unload more debt as the 'euro scare' continues, he said.

"The government reported that appetite for Treasuries declined by the largest amount in December as China reduced its allocation by $34.2 billion to $755.4 billion. Japan made a similar move and lowered its amount by $11.5 billion to $768.8 billion.

"'I am surprised China has not dropped more,' Rogers told CNBC.

"The United States should be concerned about this change in investments, he said.

"'The US should be worried about everyone lightening up - not just China,' Rogers said.

"Lawrence Summers, director of the White House National Economic Council, said the paring back is not a concern, CNBC reported.

"'The truth is that these numbers fluctuate and that there's a wide range of holders of Treasury debt. What's been very clear from the market responses over the last two years is that the United States is seen as a major source of quality and a place people run to when they're uncertain,' he said.

"Other analysts said the amount of US government debt held by the Chinese is likely to be a larger amount since they also buy anonymously via banks in Switzerland, Britain and other countries, the Associated Press reported.

"'We do not believe that the Chinese are dumping Treasuries. What they are doing is diversifying the channels through which they make these purchases so that it is much more difficult for the market to ascertain what they are doing,' said Arthur Kroeber, managing director of GaveKal Dragonomics, a Beijing research firm."

Source: Ellen Chang, MoneyNews, February 25, 2010.

MoneyNews: Pimco - junk bonds may post double digit returns in 2010
"US high-yield bonds could post investment returns in the high single digits to the low double digits this year after their record 58 percent return in 2009, Pimco, the world's biggest bond fund, said in a new report.

"With yields still attractive and the risk of a financial system collapse largely in the past, 'we believe investors can capture attractive yields and excess spread in the high-yield market with relatively low default risk,' Andrew Jessop, high-yield portfolio manager at Pacific Investment Management Co, said in a note on the company's website.

"High-yield bonds also look attractive compared with equities, which typically depend on faster growth to perform well at this point in the economic cycle, Jessop said.

"However, Pimco's forecast is that slower economic growth will become the 'New Normal' amid broad deleveraging trends, increased regulation and deglobalization, he said.

"'In that environment, many investors believe equities could continue to underperform high-yield' bonds, he said."

Source: MoneyNews, February 24, 2010.

Bespoke: Country and region ETFs
"Below we highlight the recent action in a number of country and region ETFs. For each ETF, we provide its 5-day price change, its percentage from its 50-day moving average, and its percentage overbought or oversold. An ETF is overbought if it's trading more than one standard deviation above its 50-day, and the percentage number shown indicates how far the ETF is trading above its overbought level. One standard deviation below represents the oversold level.

"As we highlighted in our prior post, the US has been outperforming emerging markets recently. Where the various country ETFs are trading versus their 50-days shows a similar trend. The S&P 500 tracking SPY ETF is one of just four ETFs highlighted below trading above its 50-day moving average. The only other country ETFs trading above their 50-days are Australia (EWA), Canada (EWC), and Mexico (EWW). All of North America is doing well. If we look at the various regional ETFs (Europe, Emerging Markets, Asia, etc.), all of them are still trading below their 50-days."

Source: Bespoke, February 22, 2010.

Bespoke: Welcome back - USA back in style
"In the charts below, we show the performance of ETFs which track the S&P 500 (SPY) and the MSCI Emerging Market Index (EEM). The third chart shows the relative strength of emerging markets versus the S&P 500. In the relative strength chart, a rising line indicates that emerging markets are outperforming the US, while a falling line indicates the US is outperforming.

"Based on the performances of both ETFs over the last several years, investors have become conditioned to the theme that when equities are rising, emerging markets typically outperform the US. On the other side of the coin, during periods when equities are weak, US stocks have typically held up better than their emerging market peers. As seen on the relative strength chart, the only period where US stocks meaningfully outperformed emerging markets was during the credit crisis (red line in all three charts).

"The existence of this long-term trend makes recent developments all the more interesting. Since the recent lows in early February, equity markets around the world have all recovered to some degree. However, unlike prior rebounds, emerging markets have been underperforming. In fact, while the major US averages (S&P 500, DJIA and Nasdaq) closed above their 50-day averages on Friday, all four BRIC countries (Brazil, Russia, India, and China) had yet to achieve that milestone. Whether or not this trend fizzles out or is an early warning sign for the global economy is debatable, but in either case, emerging market investors would be wise to be on alert."

Source: Bespoke, February 22, 2010.

Bespoke: S&P 500 sector stats
"As shown below, Consumer Discretionary and Consumer Staples are currently trading the farthest above their 50-day moving averages of the ten sectors. The other two sectors currently above their 50-days are Industrials and Financials. Below we provide the year-to-date change, % from 50-DMA, dividend yield, P/E ratio, price to sales ratio, and price to book ratio for the various sectors. Across the board, we use red to green as the color code from lowest to highest, but obviously for ratios, the lower the better.

"While it used to have one of the highest yields, the Financial sector currently has the second lowest yield at 1.15%. It also has the highest P/E ratio at 66.44, but it has the lowest price to book at 1.14. Consumer Staples, Consumer Discretionary and Telecom have the lowest price to sales ratios, while Technology has the highest. Technology also has the highest price to book."

Source: Bespoke, February 24, 2010.

Bespoke: Retail sector closes at new bull market high
"Yesterday's weak Consumer Confidence report has many worried that the consumer is still down in the dumps. If so, no one has told the consumer sectors of the stocks market. As shown below, the S&P 500 Retail sector actually made a new bull market high today. The S&P 500 still has a ways to go to get back to new highs. While the Consumer Confidence report is indicating a weak consumer, the market still seems to be predicting strength from the consumer. If it weren't for groups like retail, the overall market would be doing worse."

Source: Bespoke, February 24, 2010.

Bespoke: Percentage of stocks above 50-day moving averages
"As shown below, 55% of stocks in the S&P 500 are currently trading above their 50-day moving averages. The index itself is still trading below its 50-day, so breadth in this case is strong. Looking at sectors, Energy and Consumer Discretionary have the highest percentage of stocks above their 50-days at 69%. Consumer Staples ranks third at 64%. Technology, Materials, Utilities, and Telecom are the four sectors with readings that are still below 50%."

Source: Bespoke, February 19, 2010.

Bespoke: Final earnings season stats
"The fourth quarter earnings season came to an end yesterday with Wal-Mart's report. Below we highlight the final earnings and revenue beat rate for all US companies that reported this earnings season. For the third quarter in a row, 68% of companies beat earnings estimates. The revenue beat rate was really strong this quarter at 70% - the highest reading since Q4 '04. Does this put the 'strong bottom line, but weak top line' bearish argument to rest?"

Source: Bespoke, February 19, 2010.

MoneyNews: Biggs - US, Asian stocks will rally higher
"Stocks have further room to rise, thanks to buoyant global economic growth, says Barton Biggs, managing partner at hedge fund firm Traxis Partners.

"'There is every reason to believe the US is in a strong recovery, and Asia is in a very strong recovery,' he says.

"While Europe's growth has been a bit disappointing, the Greek crisis could actually help economies on the continent by pushing the euro down, he told Bloomberg.

"'A little weakness in the euro is probably good for European exports and for the European economy.'

"Biggs thinks the European Union is handling the Greek situation properly.

"'The Europeans sent the right message, saying if you can convince us you're going to practice some discipline, then we'll take care of you. And I think that's going to happen.'

"Biggs also approves of China's steps to deflate its credit bubble.

"'The Chinese authorities are doing the right thing in terms of gradually tightening. ... In all probability China is going to have a soft landing.'

"So what does all this mean for stocks?

"'On balance, ... I'm pretty bullish here,' Biggs said."

Source: Dan Weil, MoneyNews, February 22, 2010.

BCA Research: Hot money flows are driving the US dollar trend
"Recent data shows that speculative flows have been a major driver of the bounce in the dollar, especially versus the euro. 'Hot money' positions have now reached levels where marginal dollar buyers will be increasingly scarce. For the dollar's recovery to persist and to be a genuine cyclical advance, it needs the tailwind of long term capital inflows.

"Foreign flows into US equities and Treasury bonds have accelerated smartly and net sales of agency bonds have come to a halt. But capital flows should be analyzed alongside trade and current account deficit positions. While foreign portfolio flows into the US are improving, the US trade account is deteriorating anew. Moreover, capital outflows by US-based investors have resumed. The sum of net long term portfolio inflows and the trade deficit, a monthly proxy for the basic balance, remains well below the 2002 - 2007 average, which was a period of steady dollar weakness.

"Over the coming months, the cyclical economic recovery and the record low national savings rate should keep the US current account deficit on a widening path. This will make it difficult for the basic balance to improve. Indeed, the healthiest environment for the dollar is when the current account deficit is financed by private sector capital inflows. This is typically a sign of strong US growth and attractive expected returns.

"History shows that whenever the US becomes reliant on foreign monetary authorities, the dollar has been under pressure. Foreign reserve accumulation can prevent a dollar crash, but it has never led to sustainable dollar strength. Bottom line: Trends in long term capital flows suggest that the dollar is not yet in a sustainable bull trend."

Source: BCA Research, February 25, 2010.

MoneyNews: Soros - euro's future in question even if Greece saved
"A makeshift assistance should be enough to rescue Greece but bigger problems facing Europe would leave the future of the euro currency in question, billionaire investor George Soros said.

"Writing in the Financial Times, Soros said what the European Union needed was more intrusive monitoring and institutional arrangements for conditional assistance.

"He said a well organized euro bond market was desirable.

"'A makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland. Together they constitute too large of a portion of euro land to he helped in this way,' Soros said.

"'The survival of Greece would still leave the future of the euro in question.'

"Greece's deficit swelled to 12.7 percent of gross domestic product in 2009, way above the EU's cap of 3 percent.

"Greece has pledged to reduce its budget deficit to 8.7 percent in 2010."

Source: MoneyNews, February 22, 2010.

Bespoke: Commodity snapshot
"Below we highlight the year-to-date change for ten key commodities. As shown, orange juice has gotten off to a nice start (+13.15%), while natural gas has once again resumed its seemingly perpetual decline (-13.75%). Platinum is the second best performing commodity shown with a gain of 5.34%, followed by gold at +1.59%, and oil at +0.34%. While gold and platinum are up in 2010, silver is down 2.69%."

Source: Bespoke, February 26, 2010.

Reuters: India seen as potential buyer for IMF gold
"India's central bank, which has increased its gold holdings to diversify its reserves, looks set to be a buyer again when the International Monetary Fund begins selling 191.3 tonnes of the precious metal amid volatility in major currencies.

"The uncertain outlook for two of the world's major reserve currencies - the dollar and euro - provides a spur for central banks, including India's, to buy gold. India's gold holdings lag those of major economies despite a big purchase in October.

"'India is no stranger to gold. They are gearing up for growth and want to recalibrate their reserves,' said Mark Pervan, senior commodities analyst at ANZ.

"'They can't lift their gold holdings from domestic output, unlike China. And they have shown an appetite to buy in the past.'

"Reserve Bank of India officials declined to comment on their gold plans but some said the central bank considered gold to be a safe investment strategy.

"The IMF said last Wednesday it would soon begin selling the gold in the open market in a phased manner to avoid disrupting the market.

"The sale is part of an IMF programme announced last year to sell a total of 403.3 tonnes of gold, or about one-eighth of its total stock.

"China, with about $1.6 trillion in reserves, is a producer of gold and is unlikely to buy the gold being offered by the IMF, the official China Daily reported on Wednesday."

Source: Abhijit Neogy and Suvashree Dey Choudhury, Reuters, February 24, 2010.

BusinessWeek: Soros more than doubled gold ETF stake in Q4
"Billionaire George Soros's Soros Fund Management LLC more than doubled its holding in the biggest gold exchange-traded fund in the fourth quarter after bullion advanced 8.9 percent to a record.

"The $25 billion New York-based firm became the fourth-largest holder in the SPDR Gold Trust, adding 3.728 million shares valued at $421 million, according to a filing with the US Securities and Exchange Commission yesterday. Its investment was worth about $663 million, the fund's largest single investment, as of December 31.

"Soros joined China Investment Corp. and central banks including those in China and India in acquiring gold. China Investment, the $300 billion sovereign wealth fund based in Beijing, took a 1.45 million-share stake in the SPDR Gold Trust worth $155.6 million, according to a SEC 13F filing posted on February 5.

"SEC filings are done quarterly, with a 45-day lag, so Soros could have sold some or all of the position since then. Soros, speaking last month at the World Economic Forum in Davos, called gold the 'ultimate asset bubble' and said the price could tumble, according to a report in the UK's Daily Telegraph newspaper."

Source: Katherine Burton and Glenys Sim, BusinessWeek, February 17, 2010.

MoneyNews: Credit Suisse - gold set to surge to $1,227
"Credit Suisse analyst David Sneddon says the price of gold is poised to move sharply higher.

"'If we look at the (rising) momentum chart ... it suggests to us that price should follow suit," he told CNBC.

"'We think gold is going all the way back up to $1,227.'

"Gold denominated in euros shows a much more bullish position than denominated in dollars, Sneddon says. 'Gold in euros has moved to an all time high with all the euro weakness that's been going on,' Sneddon observes.

"Gold priced in euros reached a record today as European Union finance ministers failed to agree on measures to help Greece reduce its budget deficit, Bloomberg reports.

"The precious metal climbed to a four-week high in New York, before paring gains, on speculation that wider Greek budget deficits will spur demand for the metal as an alternative to holding currency."

Source: Julie Crawshaw, MoneyNews, February 23, 2010.

Financial Times: China taps more Saudi crude than US
"Saudi Arabia's oil exports to the US last year sank below 1m barrels a day for the first time in two decades just as China's purchases climbed above that level, highlighting a shift in the geopolitics of oil from west to east.

"The drop in US demand for oil from the kingdom, traditionally one of its primary sources, is the result of overall lower energy consumption but also greater reliance on imports from Canada and Africa.

"China's economic growth, meanwhile, is prompting Beijing to buy more Saudi oil, a trend Riyadh has encouraged through refinery joint ventures.

"'China offers demand security, something that for a long time the oil-producing countries including Saudi Arabia have called for,' said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh. 'As global demand has been picking up in the east ... Saudi Arabia has been looking east.'

"Barack Obama, US president, wants to reduce US dependence on foreign oil and encourage renewable fuels. Meanwhile, Saudi Arabia wants stable markets for its oil reserves.

"The divergence will provide the backdrop as Steven Chu, US energy secretary, visits Riyadh on Monday. His agenda reflects Washington's focus, with an emphasis on technology research rather than oil politics."

Source: Gregory Meyer, Financial Times, February 21, 2010.

Financial Times: Harsh winter hits European recovery hopes
"Severe winter weather could have hit economic growth significantly in continental Europe, and especially Germany, at the start of this year, dealing another blow to the region's recovery hopes.

"Disruption in the construction, retail and leisure industries caused by exceptionally low temperatures and persistent snow is likely to have set back further an economic turnround that had already shown signs of losing momentum in the final months of last year - before the bitter weather took grip.

"In Germany, growth in the first quarter of this year could have been reduced 0.3 percentage points, according to Frankfurt-based Commerzbank. January's weather was the coldest since 1987 and the 12th coldest January since 1900, according to the German weather service.

"Axel Weber, Bundesbank president, told Reuters this month that German gross domestic product 'could move sideways or even contract slightly in the first quarter'.

"Jörg Krämer, Commerzbank's chief economist, said, however, that lost business could be made up, and 'people's perceptions of the performance of the German economy are driven by the data on manufacturing - that is, excluding construction'.

"Purchasing managers' indices on Friday showed that German manufacturing 'grew strongly' in February, he added."

Source: Ralph Atkins, Financial Times, February 21, 2010.

Nationwide: House prices slip in the winter snow during February
"The price of a typical UK property fell by a seasonally adjusted 1.0% month-on-month (m/m) in February, ending a strong run of nine consecutive monthly increases. The relatively smoother three month on three month rate of inflation remained positive at +1.6%, though this is down from +2.0% in January and a peak of +3.7% in September 2009. The annual rate of price inflation still managed to increase from 8.6% to 9.2% year-on-year, as this month's fall was smaller than the 1.5% m/m decline recorded in February 2009. The average price of a typical property sold in the UK during February was £161,320.

"There is evidence from a range of indicators that the market may have lost momentum in early 2010 as the stamp duty holiday ended and house hunters were obstructed by the icy weather. New buyer enquiries dropped sharply in the New Year and there was also an associated drop in the number of new mortgages taken out by homebuyers in January. This drop in demand seems to have fed into agreed prices during February.

"Judging from the fall in retail sales during January, however, the housing market does not appear to be the only sector of the economy to have experienced a setback related to adverse weather and the expiry of economic stimulus measures. At this stage, it is difficult to gauge how much of the drop in housing activity is attributable to one-off factors and therefore whether February's fall in prices is just a temporary blip or the start of a new trend."

Source: Nationwide, February 26, 2010.

Nouriel Roubini (Forbes): Easy money in China
"When will Beijing tighten monetary policy?

"A credit-fueled investment boom successfully boosted China's growth to 8.7% in 2009, but cheap money drove up asset prices as well, especially in property markets. As China's output gap closes, loose money is now set to become inflationary, particularly if China's potential growth rate has come down slightly, as we think it has. The People's Bank of China (PBoC) has twice hiked banks' required reserve ratios (RRR) in 2010, following a return to net liquidity reductions through open-market operations in October 2009, but we suspect that the tightening moves have had little effect. China's monetary policy has shifted toward a neutral stance in recent months, but it will have to tighten further if inflation and the property bubble are to be contained.

"China has not yet started to tighten liquidity significantly, nor has it laid out a clear path for its exit from the extraordinarily loose monetary conditions put in place at the end of 2008. The recent RRR hike, which came into effect on Feb. 25, will drain just over 300 billion renminbi (RMB) in liquidity, but in the first two weeks of February, the PBoC injected a net RMB 508 billion into the banking system through open-market operations to ensure that banks had enough cash on hand for last week's Chinese New Year holiday. It is widely expected that the bank will drain this liquidity after the holiday, and the RMB300 billion withdrawn through the RRR hike will prove helpful but insufficient in this effort. Tuesday's RMB 17 billion one-year bill sale suggests that the central bank may be waiting to see the effect of the RRR hike before moving to a more aggressive tightening stance. It will be difficult, however, for the central bank to tighten very much, even if it had the political backing to do so.

"Other sources of liquidity make this task harder. There are RMB 1.2 trillion in central bank bills and repurchase agreements set to expire in the next two months. In March alone, RMB 680 billion in bills will expire, more than double the RMB 290 billion monthly average over the past four months. Banks are already thought to be holding about 1.5% of deposits in additional excess reserves at the PBoC, dulling the impact of the RRR hike even further.

"The political will to tighten monetary conditions looks weak in China, particularly concerning any appreciation of the RMB. On Monday President Hu Jintao headed a Politburo meeting on economic issues that reiterated the 'active' fiscal and 'moderately loose' monetary policies put in place at the end of 2008. On March 5 Premier Wen Jiabao will present the government's work plan to the National People's Congress (nominally China's highest government authority), likely reiterating this stance.

"Still, we expect the gradual tightening of monetary policy will continue in the coming weeks and months. Rising inflationary pressures are likely to push China's policymakers to tighten monetary conditions in Q2. This will cause some pain to important interest groups this year, and in our view, policymakers will look to distribute the pain, including by allowing higher consumer inflation."

Click here for the full article.

Source: Nouriel Roubini, Adam Wolfe and Rachel Ziemba, Forbes, February 25, 2010.

Financial Times: Japan exports jump on Asian recovery
"Strong shipments to Asia helped Japan report the biggest increase in exports in almost 30 years in January, underlining the strength of the country's economic recovery.

"The value of exports increased 40.9 per cent last month from a year earlier, the fastest pace since February 1980, according to the Ministry of Finance. The increase, however, has been helped by a plunge in exports in the same period a year ago as a result of the global financial crisis.

"Shipments to Asia, which accounted for more than half of total exports, were up 68.1 per cent on the previous year while exports to China, its biggest trading partner, rose 79.9 per cent.

"Like other Asian economies, Japan has benefited from the robust recovery of China, which spurred demand for everything from cars to cement.

"In January, shipments of motor vehicles were up 342.8 per cent while the value of auto parts sales rose 156.6 per cent.

"China's expanding manufacturing sectors also led to strong demand for chemicals from Japan, which jumped 107.5 per cent, and machinery, which rose 68.8 per cent.

"Japan's trade data came after Taiwan and Thailand reported unexpectedly strong economic growth this week due to solid exports to China. Taiwanese exports to China, its biggest trading partner, rose 45 per cent year-on-year in the fourth quarter. In Thailand, January's exports to China grew 94 per cent year-on-year.

"Economists warned that the pace of increase in exports was likely to moderate in the coming months.

"'Fiscal stimulus programs that supported auto exports in 2009 have now expired in China, the US and EU economies. The boost from inventory adjustment abroad is also beginning to wane,' said Nikhilesh Bhattacharyya at Moody's Economy.com.

"'This should result in slower growth in exports, which would be reflective of the weak growth now being seen in advanced economies across the globe,' he said.

"In January, imports rose for the first time since October 2008, rising 8.6 per cent. Japan posted a trade surplus of Y85.2bn last month."

Source: Justine Lau, Financial Times, February 24, 2010.

Financial Times: Toyota's damaged reputation
"Spencer Jakab, Lex columnist of the Financial Times, says Toyota's slow response to addressing safety problems brought the world's largest carmaker to its knees."

Source: Financial Times, February 24, 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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