Words from the (Investment) Wise for the Week that Was (Jan 28 - Feb 3, 2008)

By: Prieur du Plessis | Sun, Feb 3, 2008
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The decision by the US Federal Reserve to cut interest rates by another 50 basis points on top of the 75-basis-point-cut eight days earlier dominated financial headlines during the past week. On Wednesday the Fed gave stock markets exactly what they wanted and provided respite to a downward trend by slashing the Fed funds rate to 3.0%.

The Fed's accompanying statement made it clear that it was scared about the markets, which "remain under considerable stress", and the knock-on effects they could have on the economy, as "credit has tightened further for some businesses and households".

Jeffrey Saut, chief investment strategist of Raymond James said: "The question du jour is: will the rate cuts, combined with the economic stimulus package, be enough to prevent the normal ending to the business cycle ...?"

On this score, Richard Russell, octogenarian author of the Dow Theory Letters, refers to the cover of the latest Newsweek magazine, blaring out "Road to Recession" in large letters. He remarked: "Really, let's turn to the magazine cover rule - when an item becomes so widely accepted that it makes the cover of a national magazine, the odds are that the item is either not going to happen or it's over. There ain't goin' to be no stinkin' recession. The magazine (contrary reading) says so, the stock market says so, Richard Russell says so."

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.

Negative economic reports during the past week were digested by market participants with relative ease. Examples of disheartening reports include: new home sales falling to a 13-year low, weekly initial claims jumping from 306 000 to 375 000, Q4 GDP growing just 0.6%, and January nonfarm payrolls declining by 17 000.

In addition to putting their faith in a proactive Fed and hyperactive Treasury, pundits preferred to emphasize aspects such as a report that durable orders rose 5.2%, a jump in the manufacturing sector's ISM Index to 50.7 (a number above 50 reflects growth), reports of a rescue package for the ailing bond insurers, and the Microsoft buyout offer for Yahoo.

Futures signalled the Fed funds rate would reach 2.5% by the summer.


Date Time (ET) Statistic For Actual Briefing
Jan 28 10:00 AM New Home Sales Dec 604K 635K 645K 634K
Jan 29 8:30 AM Durable Orders Dec 5.2% 5.0% 1.5% 0.5%
Jan 29 10:00 AM Consumer Confidence Jan 87.9 86.0 87.0 90.6
Jan 30 8:15 AM ADP Employment Jan 130K - - 37K
Jan 30 8:30 AM GDP-Adv. Q4 0.6% 1.9% 1.2% 4.9%
Jan 30 8:30 AM Chain Deflator-Adv. Q4 2.6% 3.0% 2.6% 1.0%
Jan 30 2:15 PM FOMC Policy Statement - - - - -
Jan 31 8:30 AM Employment Cost Index Q4 0.8% 0.8% 0.8% 0.8%
Jan 31 8:30 AM Personal Income Dec 0.5% 0.4% 0.4% 0.4%
Jan 31 8:30 AM Personal Spending Dec 0.2% 0.1% 0.1% 1.0%
Jan 31 8:30 AM Core PCE Inflation Dec 0.2% 0.2% 0.2% 0.2%
Jan 31 8:30 AM Initial Claims 01/26 375K 335K 320K 306K
Jan 31 9:45 AM Chicago PMI Jan 51.5 52.5 52.0 56.4
Jan 31 10:30 AM Crude Inventories 01/26 - NA NA 2297K
Feb 1 12:00 AM Auto Sales Jan - 5.2M 5.2M 5.5M
Feb 1 12:00 AM Truck Sales Jan - 7.3M 7.2M 6.9M
Feb 1 8:30 AM Nonfarm Payrolls Jan -17K 80K 70K 82K
Feb 1 8:30 AM Unemployment Rate Jan 4.9% 4.9% 5.0% 5.0%
Feb 1 8:30 AM Hourly Earnings Jan 0.2% 0.2% 0.3% 0.4%
Feb 1 8:30 AM Average Workweek Jan 33.7 33.8 33.8 33.8
Feb 1 10:00 AM Construction Spending Dec -1.1% -0.5% -0.5% 0.1%
Feb 1 10:00 AM ISM Index Jan 50.7 48.5 48.4 48.4
Feb 1 10:00 AM Mich Sentiment-Rev. Jan 78.4 80.5 79.0 80.5
Source: Yahoo Finance, February 1, 2008.

In addition to speeches by members of the Fed every single day next week, the week's economic highlights include Factory Orders on Monday, ISM Services on Tuesday, Productivity on Wednesday, Initial Jobless Claims, Pending Home Sales, and Consumer Credit on Thursday, and Wholesale Inventories on Friday.

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, February 3, 2008.

Global stock markets experienced a shift in sentiment during the past week, resulting in strong gains. The FOMC's rate cut and the prospect of further easing fueled a rally, resulting in the S&P 500 Index finishing the week 4.1% higher - its best weekly performance for nearly five years. The Dow Jones Transportation Index (+7.4%), the Down Jones Industrial Index (+4.4%) and the Nasdaq Composite Index (+3.7%) all steamed ahead.

Interest-rate- and economically sensitive stocks were at the forefront of the gains in the US. Examples include homebuilders (+17.9%), banks (+11.2%), retailers (+7.5%), small caps (+8.8%) and REITs (+6.3%).

European markets also gained throughout, but the Nikkei 225 Average was less fortunate and recorded a 1.0% loss. The biggest casualty of the week, however, was the Shanghai Composite Index which fell by 9.3% - the steepest weekly decline in a decade - on concerns that the worst winter storms in 50 years will reduce economic growth. The Hong Kong Hang Seng Index (-4.0%) also ended the week in the red.

The gains of most indexes during the past week masked significant declines for the month of January, with the Dow Jones World Index down 6.5% and the S&P 500 Index down 6.1% - the sixth worst in history.

US government bond yields fell after the Fed's rates announcement and indications of further easing of monetary policy. Yields in the UK, Germany, and Japan also moved somewhat lower.

The US dollar Index lost 0.7% over the week, dropping below 75 to within striking distance of its record low after the poor jobs report on Friday, but then rebounded on the back of better manufacturing data. The Chinese renminbi, the Japanese yen, Swiss franc and euro strengthened, but the British pound lost ground after poor manufacturing and housing data.

Expectations increased that the Bank of England would cut interest rates next week but that the European Central Bank would maintain its hawkish stance.

Elsewhere on the currencies front, the South African rand dropped by 3.9% over the week after the country's central bank kept interest rates on hold and a speedy resolution of the electricity crisis appeared unlikely.

Industrial commodities were star performers during the past week as a result of severe weather conditions and power supply problems causing disruptions in Chinese production. The entire base-metals complex gained strongly, with aluminum (+10.6%), zinc (+8.6%) and lead (+8.4%) leading the pack.

Opec heeded expectations and maintained production quotas, but crude oil closed the week almost 2% lower on recession worries and the possible impact thereof on demand.

Gold bullion dropped to $910 by the close on Friday, after having recorded a new high of $936.5 earlier during the day. Platinum, however, rose strongly (+5%) to a new all-time high as concerns mounted about the implications of South Africa's electricity rationing for the world's largest producers.

Now for a few news items and some words (and graphs) from the investment wise that will hopefully assist to make sense of markets' action during the week ahead.

Source: Financial Times, January 24, 2008.

Asha Bangalore (Northern Trust): FOMC lowers Fed funds rate by 125 bps over eight days!
"The FOMC reduced the federal funds and discount rate by 50 bps to 3.00% and 4.50%, respectively. The Fed has now lowered the federal funds rate 225 bps since September 18, 2007. The obvious and main conclusion from these aggressive moves is that Fed is more than worried about the economy and financial markets.

"The Fed continues to see weakening economic conditions as the predominant risk suggesting that additional rate cuts are possible. However, today's statement changed the description 'appreciable downside risks to economic growth remain' in the January 22 statement to 'downside risks to growth remain'. In addition, the statement indicated that the Fed's actions should help to lift economic growth and reduce risks of a severe downturn. These modifications to the January 22 statement suggest that additional aggressive moves are less likely.

"The FOMC statement made no mention of the fiscal policy stimulus package. The note of optimism that today's action and prior actions 'should help to promote growth over time' probably refers to the impact of a double dose of medicine - a large monetary policy easing and fiscal policy stimulus - to cure an ailing economy. Our most likely scenario is additional easing on March 18."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, January 30, 2008.

BCA Research: The Fed delivers!
"The Fed confirmed market expectations for a 50 basis point rate cut today. Policymakers are working hard to get ahead of the curve, against a backdrop of falling house prices, a slowing economy, ongoing financial market turmoil and a dramatic tightening in lending standards that is limiting the impact of easier policy.

"Critically, the FOMC statement retained the open-ended commitment to provide more interest rate relief if necessary, which will reassure jittery investors. Fed Governor Mishkin highlighted again recently the importance of easing early and aggressively in the face of a major negative shock, such as a housing recession.

"The speed of rate cuts will depend crucially on payrolls and the evolution of credit market tensions. Another jump in the unemployment rate and/or a spreading of credit market dislocation would spark further aggressive Fed action."

Source: BCA Research, January 30, 2008.

The Wall Street Journal: Trichet - Fed's monetary mistakes have global consequences
"This week the world learned that economic 'decoupling' from America is a myth. The next lesson to re-learn is that the Federal Reserve's monetary mistakes have global consequences, and that one result of the Fed's great dollar miscalculation this decade has been a dangerous breakdown in world monetary cooperation.

"Look no further than the European Central Bank, which was notably absent when the Fed made its emergency rate cut amid falling global stocks on Tuesday. In testimony Wednesday before the European Parliament, ECB President Jean-Claude Trichet came about as close as a member of the brotherhood ever will to calling out a fellow central banker: 'In demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets.'

"If we can interpret Mr. Trichet further, he thinks the Fed helped to create the current financial mess by going on a bender in the late Alan Greenspan era, and is now once again running dangerous inflation risks by cutting rates too soon in the face of Wall Street pressure. He's also unhappy because the dollar's fall against the euro has increased political pressure on the ECB to ease as well. So now that the Fed wants his help to avoid a further dollar decline against the euro, he's in no mood to oblige."

Source: The Wall Street Journal, January 26, 2008.

Bloomberg: US House approves $146 billion economic stimulus plan
"The US House approved a $146 billion economic stimulus plan aimed at averting an election-year recession in part by sending tax-rebate checks to about 111 million Americans.

"Lawmakers voted 385-35 to approve legislation that would also expand investment tax breaks for business and add capital to the slumping mortgage market by allowing federally chartered companies Fannie Mae and Freddie Mac to buy mortgages above the current federal limit. Republican and Democratic lawmakers said the bill would give a much needed jolt to the sagging economy.

"'This is good news for the American public,' said House Majority Leader Steny Hoyer, a Maryland Democrat. 'This stimulus will put money in the hands of hard-working Americans to give them the help they need and at the same time stimulate the economy.'

"The House vote sends the bill to the Senate, where some senators said they would try to alter the House version, potentially delaying passage. Majority Leader Harry Reid, a Nevada Democrat, wants to complete work on the legislation by the end of the week, said his spokesman Jim Manley."

"Lawmakers have said they want to get the bill to President George W. Bush by Feb. 15 so the government can begin distributing checks before June. Under the House measure, individuals would receive as much as $600 and couples would get up to $1 200. Families would get $300 for each child."

Source: Brian Faler, Bloomberg, January 29, 2008.

BCA Research: US fiscal stimulus package - how important?
"The proposed $150 billion stimulus package, recently passed by the House, would have a noticeable positive impact on GDP. About one-third of the proposed bill represents accelerated depreciation for business capital spending, which will have little effect on GDP. However, the $100 billion in tax rebates will have a meaningful impact. While not all of the tax windfall will be spent, it should boost real GDP by about 0.5% in the second half of the year. This would bring the total fiscal stimulus for the year to over 1% of GDP, after including other stimulus that is already in the pipeline according to OECD estimates.

"The total stimulus falls far short of the 2003 'Jobs and Growth Act', but will nevertheless be a significant offset to some of the headwinds consumers currently face. Bottom line: Aggressive monetary and fiscal steps may not avert a recession, but will significantly limit the economic downside."

Source: BCA Research, February 1, 2008.

Financial Times: US bond insurer rescue takes shape
"Efforts to shore up US bond insurers gathered pace yesterday as New York state regulators appointed investment bankers to advise on a rescue plan that could include back-up credit lines for the troubled guarantors. The efforts are being spearheaded by Eric Dinallo, the New York state insurance superintendent, who is being privately supported by the New York Federal Reserve Bank and other regulators, people familiar with the matter said.

"Mr Dinallo met about a dozen banks last week, asking them to provide up to $15 billion for the bond insurers. While there was no indication that any banks had agreed yet, credit lines could help the insurers stave off credit rating downgrades. Some bankers hope the discreet involvement of the Fed will give the initiative greater momentum, because of its influence on Wall Street. The Fed has, for example, been discreetly urging big US banks to shore up their capital bases - with considerable success.

"The rescue efforts come amid concerns that bond insurers are running out of time to reassure rating agencies they have enough capital to deal with losses related to guarantees of bonds exposed to subprime mortgages."

Source: Aline van Duyn, Saskia Scholtes and Ben White, Financial Times, January 28, 2008.

Standard & Poor's: S&P/Case-Shiller® Home Price Indices show record declines
"Data through November 2007, released today by Standard & Poor's for its S&P/Case-Shiller® Home Price Indices, the leading measure of US home prices, show broad-based declines in the prices of existing single family homes across the United States, marking the 11th consecutive month of negative annual returns and a full two years of decelerating returns.

"'We reached another grim milestone in the housing market in November,' says Robert J. Shiller, Chief Economist at MacroMarkets.'"

Source: Standard & Poors, January 29, 2008.

Yahoo Finance: Home foreclosure rate soars
"The number of US homes that slipped into some stage of foreclosure in 2007 was 79% higher than in the previous year, a real estate tracking company said Tuesday. Many homeowners started to fall behind on mortgage payments in the last three months, setting the stage for more foreclosures this year.

"About 1.3 million homes received foreclosure-related warnings last year, up from 717 522 in 2006, Irvine-based RealtyTrac said. Foreclosure filings rose 75% from the previous year to 2.2 million.

"More than 1% of all US households were in some phase of the foreclosure process last year, up from about half a percent in 2006, RealtyTrac said."

Source: Alex Veiga, Yahoo Finance, January 29, 2008.

GaveKal: US GDP growth slowing down, but policy steps reduce risk of recession
"Yesterday, the Commerce Department reported that US GDP growth slowed in the fourth quarter to a worse-than-expected +0.6% YoY, a significant drop from the +4.9% YoY pace in the third quarter. Unsurprisingly, home construction was one of the biggest drags on growth, dropping -24% and subtracting -1.2 percentage points from GDP in 4Q07.

"... the Fed is clearly getting increasingly worried about the recession specter. Indeed, yesterday, the FOMC did what most investors expected them to do and cut interest rates by another -50bps to 3.0%. In addition, the Fed also indicated its willingness to act again in order to prevent a full-scale recession, as the accompanying statement had a significantly more dovish tone - stating that 'downside risks remain', and 'recent information indicates a deepening of the housing contraction, as well as some softening in the labor market'. Overall, the cumulative reduction in interest rates is now the fastest easing of US monetary policy since 1990, making it clear that the Fed is taking the possibility of a US recession very seriously.

"However, we think the important news of the past days is the direction of policy in the US. In the US, US policymakers, whether it be the Fed or the government, are now committed to doing everything in their power to support the economy and the struggling financial sector. While we are once again hearing rumblings that this is nothing more than 'pushing on a string', we still believe the risks of a serious recession in America are now much smaller than they were a week ago."

Source: GaveKal - Checking the Boxes, January 31, 2008.

Asha Bangalore (Northern Trust): Weak labor market conditions point to further easing of monetary policy
"Nonfarm payrolls dropped 17 000 in January after an upwardly revised gain of 82 000 in December. Revisions of November and December estimates resulted in a net gain of 9 000 jobs.

"Nonfarm payroll employment rose only 0.7% on a year-to-year basis in January. The growth in payroll employment peaked in March 2006 (2.14%). The level of payroll employment appears to have peaked in December 2007 for current cycle, which is subject to change after estimates are revised.

"A number of economic reports will be published before the March 18 FOMC meeting. Barring another 'tantrum' in the stock market or some other financial market calamity, we believe that the FOMC will refrain from another inter-meeting interest rate cut. Given Chairman Bernanke's apparent eschewing of Greenspan's gradualism, another 50 basis point reduction in the fed funds rate cannot be ruled out for the March 18 FOMC meeting."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 1, 2008.

Asha Bangalore (Northern Trust): Consumer Confidence Index loses ground
"The Consumer Confidence Index dropped to 87.9 in January from 90.6 in the prior month. The Consumer Confidence Index has declined in five out of the last six months."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, January 29, 2008.

Financial Times: Corporate America bracing for recession
"Leading US companies are shifting into recession mode and preparing to cut costs, freeze hiring and reduce capital spending as they brace for an economic slowdown, senior executives and industry experts said. Their concerns are likely to be reinforced by the International Monetary Fund, which slashed its forecast for US growth and warned that no country would be completely immune from what it termed a 'global slowdown'.

"Separately, a US study due out today shows that chief financial officers' views of the economy are the most pessimistic in nearly four years. Business leaders say rising oil prices, sagging consumer confidence and the on-going credit crunch are prompting them to put in place contingency plans to protect against the expected economic downturn."

Source: Francesco Guerrera, Financial Times, January 29, 2008.

The New York Times: FBI opens subprime inquiry
"The Federal Bureau of Investigation has opened criminal inquiries into 14 companies as part of a wide-ranging investigation of the troubled mortgage industry, FBI officials said Tuesday.

"The FBI said it was looking into possible accounting fraud, insider trading or other violations in connection with loans made to borrowers with weak, or subprime, credit.

"The agency declined to identify the companies under investigation but said the inquiry, which began last spring, involves companies across the financial industry, including mortgage lenders, loan brokers and Wall Street banks that packaged home loans into securities. It is unclear when charges, if any, might be filed."

Source: Vikas Bajaj, The New York Times, January 30, 2008.

Bloomberg: Subprime lenders get big accounting break at SEC
"Just when it seemed as if the mortgage mess had hit a new low, now comes this: The Securities and Exchange Commission's staff has granted the subprime-lending industry a huge exemption from the normal rules for off-balance-sheet accounting. In effect, the move will let home lenders keep their balance sheets looking much smaller and less leveraged, even while the off-the-books loans they made get a makeover.

"For months, banking regulators and politicians have been pressing lenders to freeze the interest rates on many adjustable-rate subprime mortgages that are scheduled to reset soon at higher interest rates. The idea is to minimize defaults and foreclosures.

"While that's a noble objective, all good deeds must be accounted for, and that's been a sticking point for many banks. Through September, just 3.5% of subprime mortgages that reset in the first eight months of 2007 had been modified, according to Moody's Investors Service. Even lenders inclined to help don't want to hurt their financial results. And now they might not have to, thanks to a Jan. 8 letter from the SEC's chief accountant, Conrad Hewitt."

Source: Jonathan Weil, Bloomberg, January 30, 2008.

Bill King, (The King Report): US solons fear system implosion
"Each day it becomes more apparent that US solons fear a system implosion. The fact that the SEC willfully obstructs full accounting and disclosure of subprime problems supports this notion. The waver is a cover up by those that are supposed to protect the public by enforcing full and total disclosure.

"With the global credit system paralyzed due to uncertainty over institutions' exposure and solvency, the SEC and US solons (we doubt the SEC made this decision in a vacuum) decide that continued secrecy about the extend of problems is better than full disclosure. Obviously things are horrendously bad!"

Source: Bill King, The King Report, January 31, 2008.

The New York Times: O wise bank, what do we do? (No fibbing now)
"Richard E. Sylla, professor of market history at New York University's Stern School of Business, said one had to go back to the Great Depression, a period of regular bank failures and relentlessly falling stock prices, to find a time when losses at a broad swath of financial firms were as profound as they were last year."

Source: Gretchen Morgenson, The New York Times, January 28, 2008.

GaveKal: Equities well-positioned for rebound
"The world equity markets are now, by and large, in a bear market. In fact, roughly 3/4 of the major stock markets are now more than 20% off their peaks (the technical definition of a bear market). But of course, the same factors that have triggered this big sell-off on equity markets have also incited a variety of policy responses from governments:

• Monetary easing: In addition to the emergency liquidity injections last summer, the Fed has since led the charge with 175bps of rate cuts. Behind them, the Bank of Canada has cut 50bps, while the Bank of England has cut 25bps.

• Fiscal easing: With this being an election year in the US, neither party wanted to be seen as sitting on their hands or spoiling the party while the other argued for a stimulus plan. As such, a US$150 billion fiscal stimulus plan is flying through Congress with bipartisan support.

• Focused government intervention: The first major examples of this were the bailout of Northern Rock in the UK and the three bailouts in Germany (IKB Deutsche, SachsenLB and WestLB). And now the US government is stepping in to provide its own targeted assistance - namely to the monoline insurers and the mortgage industry.

"The big question now is: Will such government measures prove to be enough to stem the unfolding bear market? In trying to answer this question, we suspect many have dwelled on the traumatic experiences of 2000 to 2003. Indeed, at that time, the government did provide a long series of monetary easing measures, and yet equities continued to their relentless drive downward. Instead of supporting equities, the fresh liquidity was funneled into bonds, real estate and commodities ...

"As the most recent period of monetary easing, and as the last time the Fed was forced to deal with the consequences of a bubble and bust, the 2001 to 2003 time frame makes sense as a reference point. However, one should note one major difference: In 2002, equities were, by and large, still overvalued from their heydays of the late 90s (see graph). Today, however, equities stand out as the most attractively valued asset class - while it is bonds that are actually looking top heavy. As such, we think equities are well-positioned for a rebound as soon as the Fed is seen to be 'back on the curve'."

Source: GaveKal - Checking the Boxes, January 28, 2008.

BCA Research: Favor stocks over bonds
"Although near-term risks persist, equities should outperform government bonds over the balance of 2008.

"Given the lack of coordinated central bank easing and mistrust of the banking system, stocks are likely to remain choppy in the coming weeks and put in an extended bottom. However, we have highlighted that downside from here should be limited. Economic pessimism has reached an extreme, leaving equities oversold and attractively valued. In contrast, the flight to safety has left government bonds overbought and overvalued. While the risk/reward outlook justifies maintaining a neutral allocation, odds favor that the next move in yields is up.

"Netting out our biases, leaves us favoring equities over bonds on a 6 to 12 month horizon. Similarly, we have noted that economic pessimism is hitting an extreme and reflation is becoming fully discounted. This combination is typically supportive of stocks over bonds."

Source: BCA Research, January 31, 2008.

David Fuller (Fullermoney): Japan - land of rising possibilities or endless disappointments?
"Japan's stock market was a huge disappointment last year and it suffered a downdraught earlier this month, in line with global equities. Understandably, many investors are discouraged by this poor performance. They may have cause to cheer before long.

"The last time Japan's politicians targeted the stock market was in 2Q 2003. Looking back on the bull-run that followed, one might conclude that conditions are less auspicious today. Only because time and a good result inevitably blank out memories of what proved to be unjustified concerns.

"In 2Q 2003, serious people feared that we might be nuked by Saddam or even Bin Laden, and that a slide into deflationary depression was distinctly possible. Sentiment is similarly dire today.

"I do not wish to sound complacent but the world is full of problems, great and small. Investor sentiment has always been characterized by pendulum swings between manic and depressive. The inexperienced, and those who mistake their emotions for analysis, buy at the manic tops and sell at the depressive lows. We can do better than that. Japan has not looked this interesting since 2Q 2003."

Source: David Fuller, Fullermoney, January 31, 2008.

Financial Times: Qatar considers dropping dollar peg
"Qatar is reviewing its currency policy and could revalue or drop the dollar peg as the booming Gulf state struggles to tame inflation while the US reduces interest rates to head off a recession.

"Qatari officials on Wednesday said the gas-rich emirate was considering revaluing its currency or linking it to a trade-weighted basket of currencies as well as other policy proposals aimed at cooling rampant inflation of up to 15%."

Source: Simeon Kerr, Financial Times, January 30, 2008.

Bloomberg: China's yuan may gain more than 10%
"The Chinese yuan may rise more than 10% this year against the dollar, allowing Japanese policy makers to accept further gains in the yen, said Eisuke Sakakibara, Japan's former top currency official.

"China's currency has strengthened 1.4% this year, on course for the biggest monthly advance since the end of a dollar peg in July 2005, as the government seeks to curb inflation. The Group of Seven industrialized nations have called on China, Japan's biggest trading partner, to stop keeping the yuan artificially weak to support exports.

"'Chinese authorities now recognize that they need to appreciate their currency quite significantly for their own sake,' Sakakibara, 66, currently a professor at Tokyo's Waseda University, said in an interview with Bloomberg Television. A rising yuan would make Chinese goods more expensive in global markets, bolstering the competitiveness of Japanese exporters. The yen may advance as much as 12% to 95 per dollar by summer as the US economy slows and the Bank of Japan refrains from intervention to slow the rally, he said."

Source: Kosuke Goto and Catherine Yang, Bloomberg, January 29, 2008.

Richard Russell (Dow Theory Letters): Will the renminbi become a convertible currency?
"Who is the world's largest miner of gold? The answer is enough to make old-timers do a double-take. The answer is China. Why is China so interested in mining gold? Why has China encouraged its citizens to buy gold? Why has China made it increasingly easy for its citizens to buy gold and gold futures? Why has China hinted that sometime in the future, China - not London and not the US futures market - could set the price for gold?

"My own thinking runs along the following lines. As the US dollar slowly loses its treasured reserve status, the Chinese renminbi becomes stronger. Could the renminbi, sometime in the future, gain reserve status? Will the renminbi become a convertible currency? It will, the Chinese already promise it. Could the renminbi, sometime in the future, be convertible into gold? Yee gods, if that were to happen, the renminbi might become the world's strongest and most desired currency. Incredible thought? Fantasy? Absurd dream? You know something, it wouldn't surprise me. These days, nothing surprises me. Here's a thought - would China announce that 'the renminbi is now convertible' just before next year's Olympics in China? Don't bet against it ..."

Source: Richard Russell, Dow Theory Letters, January 29, 2008.

Minyanville: Oil - a slippery subject
"With the price of oil reaching record highs, understanding world oil supply has never been more important. Hoofy and Boo present a clear look at this often opaque subject." Click here for the video clip.

Source: Minyanville, January 31, 2008.

The Wall Street Journal: Investors rush to gold
"The new gold rush is on. As inflation has picked up and the stock market has tumbled, investors seeking a safe haven have piled into gold, driving the metal to all-time highs.

"Historically, the world's most enthusiastic buyers of the metal have been catastrophe-fearing 'gold bugs' in places like India, where banks aren't always trusted and currencies can be unstable. Today, a different class entirely is powering gold's rise: mainstream investors and money managers who once shunned it. They hope adding gold to their portfolios will help soften the blows of inflation, possible recession, the sagging dollar and gyrating stock prices.

"Gold's backers are believed to include government-run investment pools called sovereign-wealth funds in China, Russia and the Middle East, seeking to diversify away from dollars and weather the market storm.

"There's also talk about gold prices benefiting from the difficulty of finding new metal deposits, and the likelihood that demand in developing countries will increase as their populations become wealthier."

Source: E.S. Browning, The Wall Street Journal, January 31, 2008.

Richard Russell (Dow Theory Letters): Gold - the great stealth bull market
"The US is now in the position where bad news in the economy will spur an increase in fiat money creation. That means more dollars in relation to a relatively fixed amount of gold. The result, logically, is that gold will move higher in terms of paper dollars. Which is exactly the phenomenon that we are now seeing.

"Obviously, that is much too simple an explanation. I happen to see the picture a bit differently. I see rising gold as real money pulling away from a world of paper money. We're nearing the point where investors around the world are beginning to distrust the whole universe of fiat money. Gold rising to new record highs marks the beginning of that global distrust. The US public is still in the dark. Most people in the US have never even seen a gold coin.

"How could gold, how could any item, rise from 250 to over 930 without attracting intense interest from the public? Damned if I know, but I can tell you this - somewhere ahead, rising gold will attract the interest of the public. I've never seen a rising market that didn't, at some point, bring in the public. But the higher gold rises without public participation, the higher gold will ultimately go.

"I guess decades of anti-gold nonsense and ignorant propaganda has left Americans 'brain-washed' when it comes to real money. It really does seem like the ultimate irony - Americans have faith in fiat junk paper, but they distrust real tangible money - gold. Americans will 'get it' somewhere ahead. I'm in no hurry, and you shouldn't be either. Meanwhile, let gold 'creep' higher. I continue to call it the 'great stealth bull market'."

Source: Richard Russell, Dow Theory Letters, January 28 and 29, 2008.

David Fuller (Fullermoney): Developing countries' hungry for resources
"China isn't alone in its hunger for resources. Demand is increasing throughout most of the world as developing countries benefit from capitalism, globalisation and the resources boom. This has led to a self-feeding cycle of GDP growth, infrastructure development and consumerism. It will continue for decades, short of an ecological disaster of biblical proportions.

"Coincidentally, Western infrastructure needs repair and modernization, requiring more industrial resources than recycling will produce.

"For these reasons, my personal long-term investment portfolio will remain overweight in the resources sector."

Source: David Fuller, Fullermoney, February 1, 2008.

David Fuller (Fullermoney): Agricultural commodities in long-term supercycle, but short-term overbought
"Agricultural commodities have certainly been the in-form sector in recent months, outperforming precious metals until the last week and also those most unlikely bedfellows, long-dated government bonds. However we need to be wary of a crowded trade, while taking our timing cue from the price action. Fullermoney maintains that all commodities are in long-term supercycle trends, in line with our 'Supply Inelasticity Meets Rising Demand' theme of the last five years. Nevertheless the sector is always volatile, not least because of the cyclical versus secular debate.

"Foods have had a big move, mostly led by the grain and bean complex. It would not be surprising to see a medium-term consolidation of gains. Meanwhile, farmers around the world will hope to profit from this strength by increasing plantings wherever possible. Weather conditions in the main growing regions are less predictable for 2008 but acts of nature usually contribute to price volatility. Where accelerated upward trends have occurred, short trades have a better chance of performing although it is usually prudent to wait for evidence of a downtrend.

"On a longer-term basis, I maintain that the paradigm for agricultural commodities really has changed, due to increasing populations and middleclass prosperity in developing countries, leading to greater demand for protein, for which grains and soybeans are a key food source. There is additional demand from bio-fuels. All of this is occurring against a background of low carryover stockpiles from previous crops."

Source: David Fuller, Fullermoney, January 29, 2008.

Mark Mobius (Franklin Templeton): Outlook for emerging markets remains good
"The long-term outlook for emerging markets remains good. In the short-term, however, we can expect more volatility, particularly with the continued unwinding of the subprime situation in America. We could even see corrections in equity markets, including emerging markets, if global economic growth slows. The good news is that bear markets tend to be much shorter in duration than bull markets and bear markets go down by a smaller percentage than bull market increases. This is why one must invest with a long-term view.

"Current risks include but are not limited to a major slowdown in the US economy, instability in the Middle East and South Asia, rising inflation globally, economic overheating in China and India, as well as highly volatile exchange rates and commodity prices.

"Emerging markets cannot be insulated from the subprime problem since a significant portion of their exports is still to the US, the world's largest economy. In general, a slowdown in the US economy could lead to a reduction in domestic and export demand. Thus, the subsequent influence on emerging markets exports cannot be avoided.

"However, with increased globalization, the impact of developed economies on emerging markets has, in general, lessened. And in fact, emerging markets have also begun to have some impact on developed markets. Take for example, China. China's growth and global demand for commodities has impacted economies globally."

Source: Mark Mobius, Franklin Templeton, January 25, 2008.

Times Online: Further write-downs loom for Swiss banks
"Switzerland's banking regulator sent another shudder through the sector yesterday by hinting that further credit-related write-downs were imminent. Swiss banking is reeling from the huge provisions taken by UBS to prop up reserves against investment losses.

"Daniel Zuberbuehler, director of the Swiss Federal Banking Commission, told a newspaper there that financial risks were spreading from mortgages to other forms of borrowing such as credit cards and retail and commercial loans. Banks have so far been badly affected by the falling value of their investments in American sub-prime mortgages.

"Mr Zuberbuehler said: "People here are talking about the next hot spots, meaning areas that will come under pressure next ... It cannot be ruled out that there could be more to come."

Source: Christine Seib, Times Online, February 1, 2008.

Ambrose Evans-Pritchard (Telegraph): ECB's covert rescue of Spanish banks
"Spanish banks are issuing mortgage securities and asset-backed bonds on a massive scale to park at the European Central Bank, using them as collateral to raise money at favorable rates from the official credit window in Frankfurt.

"The rating agency Moody's said lenders had issued a record €53 billion in the fourth quarter, yet almost none of the securities have actually been placed on the open market. Most have been sent directly to the ECB for use in 'repo' operations.

"'The market has shut down,' said Sandie Arlene Fernandez, the author of the report. 'Few, if any, of the transactions in the RBMS market (mortgage securities) have been placed since September. Some of the banks are hoping that the market will open up again but most are just preparing these deals to use as repos, which they can do since the ECB accepts AAA-rated securities,' she said.

"Reliance on the ECB window appears to have kept the mortgage sector afloat despite the sharp slowdown in the Spanish property market and the de facto closure of the capital markets for this type of business, allowing Spain to avoid the sort of mishap suffered by Northern Rock in Britain and Countrywide in the US."

"The data appear to confirm suspicions that the EU authorities have carried out a covert rescue of the Spanish mortgage banking system. It may equal the taxpayer rescue of Northern Rock in Britain, and possibly exceed it in proportion to the overall size of Spain's economy."

Source: Ambrose Evans-Pritchard, Telegraph, January 29, 2008.

Reuters: South Africa faced by power crisis
"South African mining companies were allowed to resume underground maintenance work on Sunday as a power crisis that has crippled the country's mining industry entered a third day. But mineral extraction was still not permitted after a flurry of weekend talks and mining officials said it appeared that no production would be possible for a few more days.

"The power crisis became a national emergency on Friday, stopping production in the world's biggest platinum and No. 2 gold producer, helping send prices in those metals to record highs and weakening South Africa's rand currency.

"The crisis started after Eskom took down some power plants for routine summer maintenance. But other plants have broken down and heavy rains have made coal stockpiles wet and unusable.

"Analysts fear the booming economy, whose growth hit a near three-decade high at 5.4% in 2006, could slow down and say the government ignored warnings as far back as 10 years ago from Eskom to build new power plants.

"President Thabo Mbeki's government, distracted by a power struggle in the ruling African National Congress, faces growing criticism for years of underinvestment in power generation. The government promised healthy economic growth based on voluntary cutbacks in energy usage, and insisted that the crisis does not threaten South Africa's plans to host the 2010 soccer World Cup.
"Eskom plans to invest 300 billion rand ($43 billion) in power generation and infrastructure over the next five years, and has warned the country to expect a bumpy ride until then."

Source: James Macharia, Reuters, January 27, 2008.



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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