Words from the Wise for the Week That Was (Dec 31, 2007 - Jan 6, 2008)

By: Prieur du Plessis | Tue, Jan 8, 2008
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A trading week made up of a bit of the old year and a bit of the new caused some anxiety in financial markets as economic woes escalated and weighed on investor sentiment. The problems related to the housing market and the subprime implosion seemed to be coming to a head. After all, the Dow Jones Industrial Index recorded its worst three-day start to a New Year year since the depths of depression in 1932, according to Barron's.

Stock markets were left in the shade as both gold and oil hit all-time highs. Nouriel Roubini, professor of economics at New York University, wrote on his blog: "... the stock market started the year with another bearish fall ... a lousy stock market in 2007 will look good compared to an awful stock market in 2008."

Santa Claus failed to call upon the traders on Wall Street. The "Santa Claus Rally", as defined in the Stock Trader's Almanac, is the propensity for the S&P 500 Index to rally during the last five trading days of December and the first two of January. This year's Rally saw the S&P 500 Index down 2.5% and the Dow Jones Industrial Index (-2.9%) and the Nasdaq Composite Index (-3.3%) were not spared either.

It is pointed out by the Stock Trader's Almanac that the lack of a rally had often been "a harbinger of a sizable correction or a bear market in the coming year." Hence the saying: "If Santa Claus should fail to call; bears may come to Broad & Wall."

John Mauldin, author of the Thoughts from the Frontline newsletter, is also of the opinion that the equities bull market may finally succumb in 2008, and said in his 2008 forecast: "I think that we are in a recession for most of the first half of this year, and that we begin a slow recovery in the second half. It will be a Muddle Through Economy for at least another year after that. That would suggest that most companies will come under serious earnings pressure. If history is any indicator, that means we should see a bear market in the first half of this year. How deep will depend on how fast the Fed cuts, but I don't think we are looking at anything close to the bear market of 2000-2001. Still, I wouldn't want to stand in front of a bear market train."

Before highlighting some thought-provoking news items and quotes from market commentators, let's briefly review the financial markets' movements on the basis of economic statistics and a performance chart.

Economy
The past week's economic reports fueled concerns about the spillover effect of the subprime crisis leading to an economic recession.

The much anticipated US employment report on Friday, which showed weaker-than-expected job growth and a rise in the unemployment rate, compounded investors' worries.

According to the Institute for Supply Management, national manufacturing activity shrank unexpectedly in December. Specifically, the ISM Index fell to 47.7 from 50.8 in November - a reading below 50 indicates a contraction in manufacturing activity.

These reports provide strong support for further Fed easing. An interest rate cut of 25 basis points at the FOMC's next meeting on January 30 seems a foregone conclusion, but the Fed Fund futures now also indicate a 46% chance of a 50 basis point reduction. "There are those who hope that the Fed will ride to the rescue with more rate cuts. I believe they will, but it is a case of 'too little, too late'," remarked John Mauldin.

WEEK'S ECONOMIC REPORTS

Date Time (ET) Statistic For Actual Briefing Forecast Market Expects Prior
Jan 2 10:00 AM Construction Spending Nov 0.1% -0.3% -0.4% -0.4%
Jan 2 10:00 AM ISM Index Dec 47.7 52.0 50.5 50.8
Jan 2 2:00 PM FOMC Minutes Dec 11 - - - -
Jan 3 12:00 AM Auto Sales Dec - 5.4M 5.5M 5.6M
Jan 3 12:00 AM Truck Sales Dec - 7.0M 6.8M 6.8M
Jan 3 8:15 AM ADP Employment Dec 40K - - 173K
Jan 3 8:30 AM Initial Claims 12/29 336K 340K - 357K
Jan 3 10:00 AM Factory Orders Nov 1.5% 1.0% 1.0% 0.7%
Jan 3 10:32 AM Crude Inventories 12/28 -4056K NA NA -3299K
Jan 4 12:00 AM Auto Sales Dec 5.2M 5.4M 5.5M 5.6M
Jan 4 12:00 AM Truck Sales Dec 7.1M 7.0M 6.8M 6.8M
Jan 4 8:30 AM Nonfarm Payrolls Dec 18K 75K 70K 115K
Jan 4 8:30 AM Unemployment Rate Dec 5.0% 4.8% 4.8% 4.7%
Jan 4 8:30 AM Hourly Earnings Dec 0.4% 0.3% 0.3% 0.4%
Jan 4 8:30 AM Average Workweek Dec 33.8 33.8 33.8 33.8
Jan 4 10:00 AM ISM Services Dec 53.9 53.0 53.5 54.1

Source: Yahoo Finance, January 4, 2007.

The next week's economic highlights, courtesy of Northern Trust, include the following:

Markets
The performance chart obtained from the Wall Street Journal Online indicates how different global markets fared during the past week.


Source: Wall Street Journal Online, January 6, 2007.

As this article deals only with the past week's performance, a separate performance review of 2007's market movements was posted on the blog last week. This round-up makes for interesting reading and also provides pointers of what to expect in the year ahead. Please click here for full the article.

Global stock markets began the year on shaky ground, trading lower during the past week amid escalating concerns about the fallout in the housing and credit markets. The MSCI World Index lost 3.2% during the course of the week, but a number of emerging markets helped to stem the overall losses.

The US markets were at the forefront of the sell-off with the blue-chip Dow Jones Industrial Index losing 4.2%, the broader S&P 500 Index 4.5% and the technology-heavy Nasdaq Composite Index 6.3%. Small caps and the sectors for REITS, financials, housing and consumer discretionary spending, in particular, were not spared the selling pressure.

Government bond yields declined in both developed and emerging markets as the global economic outlook worsened and investors switched stocks to what is perceived to be a safe-haven asset class.

On the currency front, the US dollar came under renewed pressure as markets started pricing in the possibility of the Fed reducing interest rates by 50 basis points at the end of January. Concerns about the deteriorating prospects for the UK economy resulted in the British pound recording a four-year low against the euro.

The star performers among the major currencies were the Japanese yen (+4.1%) and Swiss Franc (+2.0%) as increased risk aversion resulted in unwinding of carry trades. The Chinese yuan also caught the limelight on the back of its uptrend (as reported in the "quotes section" below).

Commodities were the big winners during the past week as investors piled into oil and precious metals.

Crude oil hit a record level of $100 a barrel early in the New Year, but subsequently eased back somewhat. Factors driving the oil price included a weaker dollar, geo-political tensions over the Middle East and supply concerns.

The gold price also reached a record high during the past week, soaring above the $850 an ounce level last achieved in January 1980. In addition to the factors driving the oil price, gold benefited strongly from mounting inflation jitters.

Agricultural commodities again put in a strong performance and gained 3.6% during the week.

This week promises to be a key week for the direction of financial markets. Hopefully the words (and graphs) from the investment wise below will assist in guiding us through the stormy waters and making the correct investment decisions. But firstly, to cheer you up, here is nature's way of saying "have a nice day!".


Hat tip: Jim Sinclair's Mineset

Financial Times (Alphaville): Marc Faber - when surrounded by rubbish and danger, buy gold
"'The credit bubble is just beginning to unwind, and while US borrowers are being blamed for the mess, they were really just a pawn in a global game.' So says Marc Faber, aka Dr Doom.

"In the New Year issue of his Gloomboomdoom.com monthly market commentary for subscribers, Faber muses darkly on the direction of the US economy, markets, bond insurers and Wall Street banks, and concludes - as he has increasingly in the past months - that gold, among other commodities, is a very good place to put your money.

In the US, the severity of the housing recession is evident from the record level of existing home inventories as a percentage of US households, he notes. 'It should therefore, only be a matter of time until housing starts decline further and will also signal the onset of a recession.'

"He sets out three key observations:

  1. I have never experienced a bull market in equities without the participation of financial stocks. In addition, when financial stocks across the board collapse it is a very negative sign for the overall health of the stock market.

  2. The fact that a stock has declined from the peak by 50% or even 90% does not make it necessarily inexpensive. In 1985, I recommended the purchase of a basket of Texas banks, which at the time had declined by 95% from the peak, as a contrarian play. Subsequently, they all went bankrupt.

  3. As I have explained before, the financial sector has become disproportionally large over the last 15 years or so. Therefore, I would also expect the reversion to the mean of the financial sector to take several years and not to be completed in just six months! In short, I would avoid purchasing financial stocks for now and would also defer new commitments to equities.

"Emerging stock markets are definitely to be avoided, he adds, 'following their significant out-performance over the last few years'.

"So, where would Dr Doom put his money? He likes sugar, cotton and he still recommends accumulating gold, which he expects to continue to out-perform equities for several years. Still, nothing goes up in a straight line, notes Faber, and, therefore, investors need to be aware that gold could still correct to around $750 or so.'

"In Faber's opinion, 'the gold bull market will come to an end when Sovereign Wealth Funds - sick and tired of their investments in financial stocks - will finally purchase gold - probably at above $3,000 per ounce.'"

Source: Gwen Robinson. Financial Times - Alphaville, January 3, 2008.

Richard Russell (Dow Theory Letters): Stock market's primary trend turning down
"Question - Russell, you've been talking about a third phase to the stock market. Where are you now on this subject?

"Answer - As you know, I'm guided at all times by the action of the stock market itself. When the market doesn't agree with me, I stop, revise my thinking - and get in harmony with the market. Which is what I've been doing over recent weeks.

"Something has interrupted the major rising trend of the market. It's not a little thing, no, it's something very big, very powerful, very basic. Frankly, I don't know what it is. Could it be that the dollar is in serious trouble? Could it be that the US economy is in chronic trouble? Could it be that the US consumer is finally throwing in the towel on spending? Could it be that the real estate situation is a lot worse than we think? Could it be that the situation is so major that it is beyond the Fed's ability to manipulate? I don't know, I honestly don't know.

"But I do know one thing. The primary trend, the great tide of the stock market, appears to be in the process of turning down."

Source: Richard Russell, Dow Theory Letters, January 4, 2008.

Asha Bangalore (Northern Trust): Weakness in US labor market points to recession
"The civilian unemployment rate rose to 5.0% in December from 4.7% in November. The December reading is the highest since September 2005. The jobless rate has now risen from a cycle low of 4.4% in March 2007. The increase in the unemployment rate reflects a widespread loss of jobs ... Historically, sharp increases in the unemployment rate are associated with recessions."


Note: Shaded areas denote recessions.
Source: Bureau of Labor Statistics /Haver Analytics

Unemployment Rate and Recessions

"Payroll employment rose only 18 000 in December, the smallest gain since August 2003. Revisions to October and November payroll estimates show a net gain of 10,000 jobs. Private sector payroll employment fell 13 000 in December, the first monthly record of private sector job losses since July 2003. Total payroll employment increases averaged 111 000 per month in 2007 versus a 189 000 per month in 2006. On a year-to-year basis, total payroll employment slowed to a 0.9% gain, down from a peak growth rate of 2.14% in March 2006. Household survey data also show a similar decelerating trend in hiring."


Source: Asha Bangalore, Northern Trust - Daily Global Commentary, January 4, 2008.

Moody's Economy.com: US ISM Index - manufacturing activity contracting
"Manufacturing activity contracted in December with the ISM index falling 3.1 points to 47.7. This marks the sixth consecutive decline in the index, the last time this occurred was between 2000 and 2001. Also, the latest decline puts the ISM below its expansionary threshold of 50 for the first time since January. With business confidence fragile and uncertainty surrounding the economic outlook growing, it is clear that manufacturers are letting final demand set the pace of production. Today's report provides additional support for further Fed easing."


Source: Moody's Economy.com, January 2, 2008.

Moody's Economy.com: US MBA Mortgage Applications Survey - mortgage demand depressed
"Mortgage demand decreased 11.6% in the week ending December 28. Purchase applications decreased 8.5% and refinance applications decreased 15.4%. Another week of declining activity suggests improving conditions in the nation's housing market are still not in sight."


Source: Moody's Economy.com, January 3, 2008.

Wall Street Journal Online: US home prices must fall far to be in sync with rents
"US house prices would have to fall considerably to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists. The study ... suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly.

"The study tracks rents and home prices back to 1960 and found annual rents fluctuated at around 5% to 5.25% of home prices until 1995. At the end of that year, the average monthly rent was about $553 (or about $6 600 a year) and the average home price was about $134 000. But starting in 1996, home prices started to grow much more rapidly than rents. By the end of 2006, they had more than doubled to an average of $282 000, while the average rent had risen 48% to $818. That drove the annual rent/price ratio down to 3.48%.

"That means the rent/price ratio is about a third below its long-term average. To return to normal would require some combination of falling prices and rising rents. The paper suggests house prices would need to fall about 3% a year, if rents grew in line with their 4% average annual growth this decade."


Source: Greg Ip, Wall Street Journal Online, January 3, 2008.

Nouriel Roubini (RGE Monitor): US recession now unavoidable
"As expected ... a US recession is now unavoidable ... The combination of the worst housing recession ever getting worse, a severe liquidity and credit crunch being worse now than in August, oil close to $100, capex spending by the corporate sector falling for four months now, commercial real estate being in serious trouble, the labor market beginning its slack (as initial claims and continuing claims are surging), and a shopped-out, saving-less and debt-burdened consumer having stopped its shopping spree this holiday season will all lead to a severe - rather than mild - recession in 2008.

"According to Bill Gross this recession may have already started in December 2007; when eventually the NBER business cycle dating committee will date (in the next 12 months) the peak of this business cycle December 2007 may indeed end up being the beginning of this recession or, at the latest, Q1 of 2008."

Source: Nouriel Roubini, RGE Monitor, January 2, 2008.

Paul Kasriel and Asha Bangalore (Northern Trust): Fed Monetary Policy - 50-50 for 50; 99-1 for 25
"The December employment report confirms expectations of further easing of monetary policy. A 25 basis point cut in the federal funds rate to 4.00% on January 30 is nearly certain; a more aggressive 50 basis point cut is an even bet in our view.

"The ISM manufacturing survey indicates a contracting factory sector to go along with a contracting housing sector. The marginal increase in auto sales in December appears to be fleeting given soft hiring conditions. Weakness in the labor market is also supported by the latest employment surveys such as the Manpower Survey, Monster Employment Index, and Hudson Employment Index and jobless claims data.

"The nature of recent economic reports has raised the probability of a recession. The FOMC voting-member hawks, Philadelphia Fed President Plosser and Dallas Fed President Fisher, will try to limit the reduction in the fed funds target to only 25 basis points by arguing that the past year's run-up in food and energy prices and the run-down in the foreign exchange value of the dollar are clear and present inflation dangers. However, FOMC voting-member doves might counter with the argument that inflation is a lagging economic process and that a severe recession is the clearer and more present danger."

Source: Paul Kasriel and Asha Bangalore, Northern Trust - Daily Global Commentary, January 4, 2008.

Bloomberg: Bush to meet with Treasury about economic stimulus package
"President George W. Bush will meet with Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke tomorrow as he considers whether to announce a new economic stimulus package amid slowing growth.

"Bush will speak to reporters tomorrow after a 1 p.m. meeting at the White House with members of the President's Working Group on Financial Markets, press secretary Dana Perino said today.

"'It will be a number of weeks before the president makes a decision' on a stimulus package, White House spokesman Tony Fratto said. 'There will be some additional data coming in the next few weeks, and the president has said he won't make any decisions until it gets much closer to the State of the Union' address on Jan. 28.

"The meeting tomorrow will come hours after the Labor Department's December employment figures, which economists anticipate will show a weaker pace of job gains and higher unemployment. Reports in the past week showed a contraction in manufacturing and the weakest new home sales in 12 years.

"The administration 'will do what we think is appropriate to continue to foster economic growth,' Ed Gillespie, senior counselor to the president, told reporters Jan. 1. 'There's more to be done, we think, on the housing front to address concerns people have.'"

Source: Roger Runningen and Holly Rosenkrantz, Bloomberg, January 3, 2008.

Moody's Economy.com: Survey of business confidence for world
"Global business sentiment ended 2007 weak and fragile. It fell sharply with last summer's subprime financial shock and has never recovered. US businesses are particularly on edge; American confidence is consistent with a contracting economy. Expectations regarding the first half of 2008 are especially bleak, falling to a record low last week on a 4-week moving average basis. Pricing pressures have risen with oil prices near $100 per barrel, but remain very subdued compared to the pressures that prevailed during previous oil price spurts."


Source: Moody's Economy.com, December 31, 2007.

Bloomberg: Central bankers risk inflation to extend growth party
"Ben S. Bernanke, Mervyn King and fellow central bankers may go on filling up the world economy's punch bowl in 2008, even at the risk of an inflationary hangover.

"Signs that the party is ending for global growth are keeping monetary policy leaning in the same direction at major central banks, with those in the UK and Canada likely to join Bernanke's Federal Reserve in cutting interest rates again. The same conditions may lead the European Central Bank and the Bank of Japan, which shelved plans for raising rates, to remain on hold for months.

"'I expect 2008 to mark the beginning of another global liquidity cycle,' says Joachim Fels, Morgan Stanley's London-based co-chief economist. 'More signs of slowdown or even recession are likely to swing the balance towards more aggressive monetary easing in the advanced economies.'"

Source: Simon Kennedy, Bloomberg, January 3, 2008.

Reuters: Gloomy prospects for UK housing market for 2008
"Signs have been mounting of a slowdown in Britain's property market, so what are the prospects for 2008?

"A total 1.4 million people will see their fixed rate mortgage deal end in the early part of next year, and each will be forced to pay an average of 200 pounds per month more to meet the cost of servicing their home loans.

"Tighter lending conditions could add pain to consumers already mortgaged to the hilt - outstanding housing debt stands at more than a trillion pounds - and household finances look set to be stretched further by rising food and energy costs, as wages fail to keep pace with inflation. This will lead to a record 130 000 people being declared insolvent during 2008, according to accountant KPMG, and financial woes, say some experts, will severely dent consumer confidence and exacerbate the housing market slowdown following a period of record growth.

"House prices have risen 179 percent over the past 10 years from an average price of 70 000 pounds in late 1997."

Source: Jennifer Hill, Reuters, December 29, 2007.

Wall Street Journal Online: Oil hits $100 - jolting markets
"The surging price of oil, from just over $10 a barrel a decade ago to $100 yesterday, is altering the wealth and influence of nations and industries around the world. These power shifts will only widen if prices keep climbing, as many analysts predict. Costly oil already is forcing sweeping changes in the airline and auto sectors. It is intensifying the politics of climate change and adding urgency to the search both for fresh sources of crude and for oil alternatives once deemed fringe.

"The long oil-price boom is posing wrenching challenges for the world's poorest nations, while enriching and emboldening producers in the Middle East, Russia and Venezuela. Their increasing muscle has a flip side: a decline of US clout in many parts of the world. Steep gasoline prices also threaten America's long love affair with the automobile, while putting strains on many lower-income people outside big cities, who must spend an increasing share of their budgets just on fuel to get to work.

"No one can say for sure whether sky-high oil - part of a price boom in a wide range of commodities, from gold to wheat - is here to stay. But most in the industry agree that a 20-year stretch in which oil was consistently cheap is long gone. The global thirst for oil shows little sign of retreating, and large new discoveries are few.

"The arrival of $100-a-barrel oil adds to the pressure on the US economy, which has sustained a big blow from a drop in housing prices and a wave of foreclosures. Even at today's prices, though, the oil spike alone isn't enough to push the world into recession, economists say."

Source: Neil King Jr, Chip Cummins and Russell Gold, Wall Street Journal Online Online, January 3, 2008.

Ambrose Evans-Pritchard (The Telegraph): Bullion outshines record from 1980
"Gold has soared through resistance to touch an all-time high of $861.20 an ounce in New York, surpassing the record last seen at the height of the inflation crisis in 1980.

"Bulls seized the initiative as oil spiked briefly to $100 a barrel and the dollar buckled on bad manufacturing data in the US. The New Year surge - setting the tone for the year - may be viewed with some 'alarm by central banks, aware that gold often serves as a proxy for inflation fears.

"Ross Norman, director of TheBullionDesk.com, said the world faces a new era of 'peak gold' in which discoveries become rarer, leaving the market starved of the metal just as demand in China and emerging Asia begins to gather pace. 'Supply is declining despite a seven-year bull run,' he said. 'Production in South Africa is the lowest since the 1930s, and it is falling in Canada. As for the central banks, they are no longer quite so keen to part with their gold.'

"'New conduits such as ETFs have opened up, giving investors access to a market that used to be off radar. It has led to a slow, glacial flow of big money into gold that is immune to profit taking. On January 9, China will start trading gold futures in Shanghai,' he said.

"Mr Norman, the top forecaster for the London Bullion Market Association over the past four years, said gold would reach $1 200 an ounce this year. Veteran gold traders say the metal is enjoying a perfect storm of inflation fears, geo-strategic jitters over Pakistan and mounting concerns that the dollar could lose its role as anchor of the international currency system as Mid-East and Asian states break their dollar pegs."

Source: Ambrose Evans-Pritchard, The Telegraph, January 3, 2008.

Richard Russell (Dow Theory Letters): A mighty interesting move coming up for gold
"Now that gold is at all-time highs, is there any way to tell where gold might be going? I'm going to repeat the words of W.D. Gann. Mr. Gann is considered by many professionals to have been one of the greatest commodity and stock traders (and thinkers) of all time. Here are Gann's words (courtesy of my old New York friend, Ron Rosen).

"'When a stock or a commodity advances into new territory or to prices which it has not reached for months or years, it shows that the force or driving power is working in that direction. It is the same principle as any other force which has been restrained and breaks out. Water may be held back by a dam, but if it breaks through the dam, you would know that it would continue downward until it reaches another dam, or some obstruction or resistance which would stop it.

"'Therefore, it is very important to watch old levels of stocks and commodities. The longer the time that elapses between the breaking into new territory, the greater the move you can expect, because the accumulative energy over a long period naturally will produce larger movements than if it only accumulated during a short period of time.'

"It took 28 years for gold to break out above it's 1980 high of 850. In view of what Gann says, this should be a mighty interesting move coming up for gold."

Source: Richard Russell, Dow Theory Letters, January 3, 2008.

David Fuller (Fullermoney): Gold is in a secular bull market
"A continuing refrain heard over the last many years is that: 'Gold is not doing what it is supposed to do', whatever that means. Gold's value is in the eye of the beholder. Therefore sentiment will wax and wane, just as it does for any other market.

"Consequently, a mantra at Fullermoney is that gold and its sister precious metals are best purchased following setbacks. Psychologically, this is not easy because the chart action may raise concerns and sentiment will have deteriorated.

"Gold's new all-time (numerical) high today, in USD and most other currencies, is just a minor step within the overall upward trend. Its main significance is that it reaffirms the uptrend. It may also improve sentiment and another momentum run is possible.
"I maintain that gold is in a secular bull market ... not least because in this era of ultra competitive pressures from globalisation, no country wants a strong currency. However some countries need a weak currency more than others, and these include the US."

Source: David Fuller, Fullermoney, January 2, 2008.

CS Monitor: Why the era of cheap food is over
"Food prices worldwide hit record highs in 2007, and all the signs are that they will go on rising this year, and for the foreseeable future. The era of cheap food, the experts say, is over and we are going to have to get used to it.

"What is behind the increases in food prices?

"Two major trends have been pushing prices up faster than they have risen for more than 30 years. One is that increasingly prosperous consumers in India and China are not only eating more food but eating more meat. Animals have to be fed (grains, usually) before they are butchered. The other is that more and more crops - from corn to palm nuts - are being used to make biofuels instead of feeding people.

"At the same time, the world is drawing down its stockpiles of cereal and dairy products, which makes markets nervous and prices volatile. The result, says Joachim von Braun, who heads the International Food Policy Research Institute (IFPRI) in Washington, is that 'the world food system is in trouble. The situation has not been this much of a concern for 15 years.'"

Source: Peter Ford, CS Monitor, December 31, 2007.

Eoin Treacy (Fullermoney): No evidence that commodity bull market is over
"Industrial metals have been in a corrective phase for much of the year (2007) with nickel and zinc in particular posting significant declines, but the longer-term demand story, for these and almost all other commodities hasn't changed at all. Asian infrastructure and consumer growth remain some of the most powerful elements affecting commodity markets and this is set to continue for a number of years yet. Some metals remain at relatively depressed levels; although they firmed recently, Precious metals are setting new highs as are a number of agriculturals. I see no evidence that this commodity bull market is over."

Source: Eoin Treacy, Fullermoney, January 4, 2008.

BCA Research: Emerging market decoupling to continue in 2008
"Emerging markets have weathered the US credit market calamity very well and the bull run will continue in 2008.

"The economic decoupling between emerging economies and the US is attributable to underlying fundamentals and is therefore sustainable. Unlike in the 1990s when emerging economies relied on foreign capital to finance their expansion, many of these countries are now net creditors in global financial markets and are not vulnerable to a withdrawal of financing by G7 banks. Domestic interest rates are still very stimulative thanks to their strong currencies and vast savings, which will continue to underpin domestic demand growth. While exports to the US have been slowing, trade among developing economies is booming. As a result, overall emerging market growth will not slow considerably, even if the US economic slump continues. Bottom line: We recommend that investors continue to overweight emerging equity markets within a global portfolio."


Source: BCA Research, January 3, 2008.

Bill Cara: China lets currency appreciate faster
"Thanks to a surge in recent weeks, China's yuan is set to end 2007 up nearly 7% against the dollar - twice the amount it appreciated against the US currency in 2006 - and economists forecast a similar pace of upward movement in 2008. That could help cool down the red-hot growth in the world's third-largest economy.

"Some analysts see the apparent policy shift as a sign of confidence. One reason the government seems more willing to move now is that Chinese exporters are so far surviving the effects of pinched profit margins resulting from the pricier Chinese currency - important because maintaining jobs in the huge export sector is a priority of China's leadership.

"The accelerated movement against the dollar also appears to be driven by several concerns that a stronger currency could help address: inflation running at its highest rate in 11 years, a current-account surplus that soared to 12% of gross domestic product in the first half of 2007, and ballooning valuations on Chinese stock markets. Even so, there is little indication that the yuan's rise has satisfied US politicians, manufacturers or workers, who have complained for years that China is unfairly boosting exports by manipulating the currency."


Source: Bill Cara, December 31, 2007 (text); and Fullermoney (graph).

David Fuller (Fullermoney): Yuan is significantly undervalued
"I maintain that the yuan is a significantly undervalued currency. Therefore its long-term appreciation potential is considerable. This will increase China's global purchasing power. At some point within the next 20 years, I assume that the yuan will become fully convertible. That would usher in a new era, including reserve currency status."

Source: David Fuller, Fullermoney, January 2, 2008.

Bloomberg: US dollar's share of currency reserves falls
"The dollar's share of global foreign-exchange reserves fell to a record low in the third quarter as demand for US assets waned after the subprime-mortgage market collapsed. The dollar accounted for 63.8% of reserves at the end of September, down from 65% three months earlier, the International Monetary Fund said today in Washington. The euro's share rose to 26.4% from 25.5%.

"The figures suggest central banks diversified out of the dollar as it fell to the lowest level in a decade. Investors sold a record amount of US securities in August when defaults on subprime mortgages rippled through financial markets and the Federal Reserve signaled it would cut interest rates.

"'The dollar seems to be losing, at least to some small extent, its favored status," said David Powell, a currency strategist at IDEAglobal in New York. "Foreign central banks aren't necessarily shunning dollar assets, but they were more attracted to other currencies.'

"China, Russia and other countries with trade surpluses or rising energy-export earnings are setting up so-called sovereign wealth funds to increase earnings on their reserves. Speculation also intensified in the third quarter that Saudi Arabia, United Arab Emirates and other Middle Eastern nations would follow Kuwait and end their currencies' pegs to the dollar."

Source: Christopher Swann and Kevin Carmichael, Bloomberg, December 28, 2007.

Thomas Jefferson: Banking establishments
"I sincerely believe ... that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale."

 


 

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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