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October 12, 2008 Words from the (Investment) Wise for the Week That Was (October 6 - 12, 2008) |
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I have been away from the trading desk, and the stock market's bloodbath, during the past few days as I am on a business visit in Geneva. Just as well, but I can nevertheless associate with the frustration of the trader in the animated image (hat tip: Rob Fraim). In order to allow me a bit of extra time to consult with the Suisse gnomes (disguised as private bankers), I am only doing a shortened version of "Words from the Wise" this week. Although I have managed to compile some very interesting excerpts from news items and quotes from market commentators, I will not be doing my customary review of the financial markets' movements and economic statistics. Confusion and irrational fear characterized financial markets during a remarkable week, with the CBOE Vix Index (the so-called "fear gauge") spiking above 70 for the first time. According to data from Bespoke, the week's US stock market crash of 18.2% ranks second as the worst Monday-to-Friday movement for the Dow Jones Industrial Average since 1900. Amid the dumping of stocks on all bourses, the US dollar, Japanese yen and precious metals were the only safe havens. (Also see related posts: Stock market performance round-up: Crash of 2008 and Stock market decline in perspective.) The realization that the economic damage from the credit crisis was intensifying weighed on investor sentiment. Selling of equities therefore persisted despite a litany of initiatives announced by governments and central banks around the globe, aiming to boost liquidity and restore confidence in the banking system.
Source: Slate The media headlines were cluttered with reports of various actions being taken to alleviate the financial turmoil (as dealt with comprehensively in the news section of this post). However, none was as succinctly formulated as that of the Central Bank of Jamaica (hat tip: Barry Ritholtz's The Big Picture).
Next, a tag cloud of the text of the plethora of articles I have read during the past week. This is a way of visualizing word frequencies at a glance. As the saying goes: A picture paints a thousand words ...
As far as the outlook for stocks is concerned, Paul Kedrosky (Infectious Greed) said: "I am trying very hard to look through all of this to see what things look like on the other side. And I can see faint outlines, for sure, but that other shore still seems awfully far away." On the other hand, Tim Bond, head of global asset allocation at Barclays Capital, was quoted in the Financial Times as saying: "We believe global equity markets are starting to offer a long-term buying opportunity that is typically only seen once in a generation. We are not calling the bottom in the bear market today, but we do suggest that the low will be seen within the next two or three weeks." Bond also suggested that returns from equities purchased during this interval may well be extremely higher over the next year and could - if history is any guide - turn out double-digit long-term returns over the next decade. As a sign of these extraordinary times, mulling through my head at the moment are the lyrics of Peter Gabriel's song "Perspectives": "I need perspective, 'cos I'm facing the wall. I need perspective, 'cos I'm not that tall. I need perspective, heard the trumpet call. Don't trust my eyes, want to know where things fall." Having said that, I yesterday summarized my views in a post as follows: "Nobody really knows what happens next, although some indicators are starting to signal that a bounce may not be all that far off. But stock markets are unlikely to find a cycle low before measures are implemented to stem the decline in confidence. It may take a while yet before we see the bear's corpse, but look out for a 90% up-day as a signal of the completion of the selling climax." Economic reports
Source: Yahoo
Finance, October 10, 2008.
In addition to Fed Chairman Ben Bernanke speaking at the Economic Club of New York on Wednesday, October 15, next week's economic highlights, courtesy of Northern Trust, include the following: 1. Retail Sales (October 15): Auto sales dropped to an annual rate of 12.5 million in September from 13.7 million in August. Non-auto retail sales are expected to show noticeable weakness. Reflecting these aspects, the headline retail sales number is projected to have fallen 0.7% in September after a 0.3% drop in August. Consensus: -0.6% versus -0.3% in August, non-auto retail sales: -0.3% versus -0.7% in August. 2. Producer Price Index (October 15): The Producer Price Index for Finished Goods is predicted to have dropped 0.4% in September reflecting lower energy prices, while the core PPI most likely moved up 0.1%. Consensus: -0.4%, core PPI +0.2%. 3. Consumer Price Index (October 16): A 0.1% increase in the CPI is our forecast for September following a 0.1% drop in August. The core CPI is expected to have moved up 0.1% after a 0.1% gain in August. Consensus: +0.1%, core CPI +0.2%. 4. Industrial Production (October 16): The 1.0% drop in the manufacturing man-hours index in September suggests a 0.8% decline in industrial production. The operating rate is projected to have dropped to 77.9 in September. Consensus: -0.8%; Capacity Utilization: 77.9 versus 78.7 in August. 5. Housing Starts (October 17): The elevated level of inventories of unsold new homes points to another monthly drop in housing starts (870,000 versus 895,000 in August). Consensus: 880,000. 6. Other reports: Inventories (October 15), NAHB Survey, Philadelphia Fed Survey (October 16), Consumer Sentiment Index (October 17). Click here for a summary of Wachovia's weekly economic and financial commentary. A summary of the release dates of economic reports in the UK, Eurozone, Japan and China is provided here. It is important to keep an eye on growth trends in these economies for clues on, among others, the trend of the US dollar. Markets
Source: Wall Street Journal Online, October 10, 2008. Now for a few news items and some words and charts from the investment wise that will hopefully assist in guiding our investment portfolios through these troubled times. And do remember to heed Charles Kirk's (The Kirk Report) words: "The best we can do is manage our risk, stay opportunistic, keep our emotions in control, and keep our eyes open for signs that the worst is really behind us." That's the way it looks from Cape Town (or rather from next to Lac Léman in Geneva). Au revoir.
Source: Slate CNBC: Gloom, Boom and Doom economy
Source: CNBC, October 7, 2008. John Authers (Financial Times): Grim anniversary for US equities
Source: John Authers, Financial Times, October 10, 2008. Fox Business: Ron Paul - "Rescue Plan is not good"
Source: Fox Business (via YouTube), October 10, 2008. BBC News: Credit crisis - world in turmoil
"As global markets fall sharply, BBC News looks at the regions of the world most affected to see what governments are doing to alleviate the financial turmoil. "The US Federal Reserve, the European Central Bank, the Bank of England, and the central banks of Canada, Sweden and Switzerland took the unprecedented step on October 8 of co-ordinating a half-point percent cut in interest rates in an effort to ease the credit crunch." Click here for the full article. Source: BBC News, October 9, 2008. Bloomberg: G-7 commit to "all necessary steps" to stem global meltdown "'The current situation calls for urgent and exceptional action,' the finance ministers and central bankers said in a statement after talks in Washington yesterday. They pledged to 'take all necessary steps to unfreeze credit and money markets' without detailing how that would be accomplished. "Signaling they would intervene to avoid a repeat of last month's collapse of Lehman Brothers, the officials promised to ensure major banks have access to cash and are able to tap public funds for capital. By refraining from specific fresh measures such as embracing a UK plan to guarantee loans between banks, they still run a risk of disappointing investors." Source: Simon Kennedy, Bloomberg, October 11, 2008. MarketWatch: US recapitalization plan for financial firms "With the legislation's main mechanism - an auction system to purchase bad mortgage-based securities - still weeks away from implementation, Paulson now plans to make big capital injections into large financial institutions and get equity in return. "In a news conference Friday evening, following the Group of Seven meeting in Washington, Paulson said the plan is to offer a term sheet for needy banks. The government will not get voting rights status for its injection in most cases. Paulson said the government's efforts were focusing on 'liquidity' needs and 'systemic risk'. "Paulson said recapitalization was now 'necessary' and would let 'taxpayer dollars go further', because it is a 'more efficient' use of capital than the auction process, which is meant to deal with illiquid assets. "'This a plan I am quite confident will work,' Paulson said." Source: Albert Bozzo, CNBC, October 10, 2008. Asha Bangalore (Northern Trust): Coordinated Move of Central Banks Necessary
But Temporary Panacea "The People's Bank of China eased monetary policy 27 bps and the central bank of the United Arab Emirates lowered the repo rate 50 bps, while the Bank of Japan issued a statement of support. Norges Bank (central bank of Norway) sat out today's round but announced it would bring its next policy meeting forward by two weeks, to October 15, when it will 'consider rates' in the face of recent developments.
"The most important message from this historic action is that central banks are standing ready to provide liquidity to prevent a systemic implosion of the global financial infrastructure arising from growing perceptions of counterparty risk. The world's major central banks are using all tools at their disposal to prevent a replay of the Great Depression. "Is today's action the elixir that will fix the wide array of financial and economic problems that have crept across the globe? The honest answer is 'no'. Are additional coordinated actions likely? Possibly, but the nature of the action will be related to the monetary policy options available to each nation."
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, October 8, 2008. Financial Times: Moscow to pump $37 billion into biggest state institutions "Even as Dmitry Medvedev, the president, unveiled the plan to offer the five-year loans - mainly through Sberbank, the state-controlled bank - three big Russian companies announced cutbacks in production because of a shortage of finance. "Investors shrugged off the rescue plan amid mounting fears that the state funding would not find its way to the real economy. A previous state package to boost liquidity by more than $100 billion is being hoarded by the biggest banks instead of being lent out to entities most in need of cash. "'The bigger problem is question marks over future growth,' said Chris Weafer, chief strategist at Uralsib investment bank. "The lack of financial lubrication is causing the economy to grind to a halt. These funds need to be ramrodded into the system." Source: Charles Clover and Catherine Belton, Financial Times, October 8, 2008. Eoin Treacy (Fullermoney): Concerted efforts required to revive confidence "The focus of the current panic is that banks are unwilling to lend to one another because they don't trust their counterparties or because they need the cash themselves. If government agencies take shares in their respective banking sectors, thus adding capital, the question will remain outstanding as to whether it is enough. If however, governments guarantee loans made between banks, it will almost certainly get the market moving once more. This approach runs the risk that suspect institutions will survive when they would normally have gone bust. However, given the extreme nature of this crisis, this question of moral hazard is going to be put off for another time. "The best indicators of liquidity remain the TED spread and the OIS spread. Both made new highs today and remain in accelerating uptrends. The VIX also hit another new high today and further indicates that fear is the overriding emotion gripping investors right now. Stock markets are unlikely to find an important low until these spreads begin to contract." Source: Eoin Treacy, Fullermoney, October 10, 2008. Financial Times: UK Treasury unveils bank rescue "The government is to put up to £250 billion into the banking system in an effort to keep banks lending. It will also offer a guarantee to banks issuing medium term debt, which could mean backing a further £250 billion of bank borrowings. But it is likely to demand dividend cuts and the end of big bonuses at the banks in return. "Under the plan, announced by the Treasury on Wednesday, seven leading banks and the Nationwide Building Society will initially apply for £25 billion in permanent capital to raise their Tier One capital ratios, with a further £25 billion available as a stand-by and for other eligible institutions. The banks have agreed to conclude their recapitalisation by the end of the year. "The banks involved are Abbey, now part of Santander of Spain, Barclays, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland and Standard Chartered as well as Nationwide. Other UK banks and building societies are invited to apply for the scheme as well. "Referring to 'extraordinary market conditions', the Treasury said it would provide at least £200 billion under its £200 billion special liquidity scheme 'until markets stabilise'. "The government will also, for a fee, guarantee new short and medium term debt issues by the banks to help them refinance wholesale funding obligations as they fall due. It said it expected the take up of this guarantee to be of the order of £250 billion." Source: Financial Times, October 7, 2008. Financial Times: Germany guarantees savings to avert panic "'We want to tell people that their savings are safe,' Angela Merkel, chancellor, said at an unscheduled press conference on Sunday. The scheme would cover existing accounts and others which savers might open. "German government officials also late on Sunday said the country's commercial banks had agreed to inject an extra €15 billion of liquidity into Hypo Real Estate, the ailing German mortgage and public sector lender, raising the bail-out agreed last week to €50 billion, the largest since the outbreak of the financial crisis. The original rescue attempt had threatened to collapse after it emerged at the weekend that the full extent of Hypo's funding gap had not been disclosed." Source: Bertrand Benoit and James Wilson, Financial Times, October 6, 2008. John Authers (Financial Times): Fed to start buying commercial paper
Click here for the full article. Source: John Authers, Financial Times, October 7, 2008. CBS News: Wall Street's shadow market
Click here for the full article. Source: CBS News, October 5, 2008 Bloomberg: Lehman bondholders get little insight on price from CDS auction "Yesterday's auction determined that investors who bet on a default of Lehman's debt by buying derivatives called credit default swaps should get 91.375 cents on their dollar. The price was set by auction administrators Creditex Group Inc. and Markit Group Ltd., with 14 financial institutions bidding. That figure was calculated based on an 'inside market midpoint' price of 8.625 cents on the dollar for Lehman's debt. "The auction has little to do with what bondholders will recover once Lehman's bankruptcy, filed September 15, has been fought out in court by creditors, said Matt Dundon, managing director of distressed analysis at Miller Tabak Roberts Securities. "'I take very little directionality on the ultimate value of the bonds from the CDS auction,' Dundon said. "Kevin Starke, an analyst with CRT Capital Group LLC said there are too many unknowns so far in the Lehman case to accurately predict recoveries." Source: Tiffany Kary, Bloomberg, October 11, 2008. Reuters: NY Fed calls Friday meeting for CDS players "Calls for regulation and centralized clearing of credit default swap trades have gathered steam in the wake of Lehman Brothers' failure last month. "Critics charge that credit default swaps are central to the spreading fears in the markets and pose systemic risks, as the market's private nature makes it impossible to know the size of a counterparty's exposures and where they are distributed." Source: Reuters, October 8, 2008. BCA Research: Policy response - timeliness is key "Bottom line: History suggests that a rapid and sizable policy response (that deals with the majority of problem loans) is needed when faced with a banking crisis. Hesitation allows a negative economic feedback loop to develop, ultimately leading to greater cleanup costs. This is already evident in the US and Europe, where recessionary pressures are intensifying."
Source: BCA Research, October 6, 2008. Bloomberg: Treasury to hire asset management firms to jumpstart rescue "The Treasury began implementing the plan within an hour of Congress yesterday giving Paulson the powers he sought to combat the US financial crisis. Paulson is seeking to assemble a team to determine which toxic securities to target, how to value them and how to buy them. BlackRock, Pimco and Legg Mason are seeking to become money managers for the program, people familiar with the matter said. "'This is something that, for a typical company, would take no less than five years,' said Lynn Turner, a former chief accountant at the Securities and Exchange Commission. 'Anyone who thinks they can do this in two weeks is insane.' "Ed Forst, the former Goldman Sachs executive Paulson hired to head the transition team, started work last week and is charged with helping establish the new Office of Financial Stability." Source: Rebecca Christie and Robert Schmidt, Bloomberg, October 4, 2008. Financial Times: IMF sees greatest shock since 1930s "Though Olivier Blanchard, the fund's chief economist, said that the chance of another Great Depression was 'nearly nil', the IMF said that the US and European economies were mainly already in or close to recession. "'The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,' the IMF said. 'The situation is exceptionally uncertain and subject to considerable downside risks.' "The fund said that global growth was likely to slow to 3.9% in 2008 and 3% in 2009, sharply down from 5% last year. Some economists regard 3% or 2.5% global growth as equivalent to a world recession, given the trend rates of growth in the global economy, but Mr Blanchard said that such definitions were unhelpful. "The IMF chief economist's optimism that the world would avoid a repeat of the Great Depression of the 1930s was based on an expectation that governments would follow the right policies. European governments were having difficulty in coordinating their response to the crisis and more action was needed to shore up their shaky financial systems, he said." Source: Alan Beattie, Financial Times, October 8, 2008. CNBC: Lazear on the global economy
Source: CNBC, October 7, 2008. Barry Ritholtz (The Big Picture): Fix the credit problem, not its symptoms "The primary problem is that banks are refusing to extend credit to each other. Why? Because they do not understand the liabilities of their counterparties. Translated into English, that means they don't know if the other bank whom they are dealing with will still to be standing tomorrow. "The thing roiling markets today is not the lack of confidence; It is capital, or more accurately, the lack thereof. Thanks to a series of very poor trades - excessively leveraged and absurdly risky to boot - banks are now dramatically undercapitalized. "As we have seen in just about every historical financial crisis, the shortage of capital is the underlying cause of monetary mayhem. Too much debt, too little equity, makes any financial system cease to function. "So what would solve it? The first step to accomplish this is triage. Identify the banks that cannot survive, and like Old Yeller, 'gently' put them down. Euthanize the bad ones so the good ones can survive. Nationalize 'em, sell their accounts to strong banks, and prevent further liabilities to the FDIC (which insures all accounts up to $250,000). "Next, recapitalize the banks that can survive by buying preferred stock. That is what Warren Buffett did with General Electric and Goldman Sachs when he made his investments. The Treasury should announce a matching program, where any private investment into a Bank is matched by the government, dollar for dollar, and on the same terms. This fixes not merely a balance sheet issue (like TARP does) but the actual capital structure at the root of the current crisis. And it does so on terms that are good for the taxpayers too. "As this process eliminates the bad banks and recapitalizes the good banks, normal lending will resume. Defaults and insolvency will no longer paralyze the financial industry. This is how Sweden resolved its financial crisis in the nineties, and how England just started to address their problem this past week. "The good news is that the US is that there are signs the US is starting to move towards the Swedish / British / Buffett model. The bad news is that it has taken this long to even begin contemplating this. "When banks know their counterparties are not in danger of going belly up tomorrow, they will begin lending again. Confidence will return once the underlying problem is resolved, and not a minute before." Source: Barry Ritholtz, The Big Picture, October 10, 2008. Richard Russell (Dow Theory Letters): Fiat empire - Why the Fed violates the US Constitution
Source: Richard Russell, Dow Theory Letters, October 6, 2008. Casey's Charts: Market mayhem has the Fed off balance "As the government's primary tool for stabilizing the US banking system, the Fed is now in dire need of a new source of lending to bail out other troubled banks."
Source: Casey's Charts, October 8, 2008. Bespoke: $700 billion and what it can buy "As shown in the chart below, when the TARP plan was first announced in September, that $700 billion was equal to less than 40% of the S&P 500 Financial sector's market cap. Today, that $700 billion represents over 55% of the sector's market cap. At this rate, by the time the Treasury opens up its wallet and starts spending that $700 billion, they might be able to buy the entire sector!"
Source: Bespoke, October 9, 2008. Bill King (The King Report): Adjusted monetary base and reserves soaring
"Adjusted Reserves are up 768.1% compounded annually since July 30. This is beyond Argentina."
Source: Bill King, The King Report, October 10, 2008. BBC News: US debt clock runs out of digits "The clock's owners say two more zeros will be added, allowing the clock to record a quadrillion dollars of debt. Douglas Durst, son of the late Seymour Durst - the clock's inventor - hopes to replace the Manhattan clock with its lengthier replacement early next year. For the time being, the Times Square counter's electronic dollar sign has been replaced with the extra digit required." Source: BBC News, October 9, 2008. CNBC: Bernanke on the US economy
Click here for part 2 of the video. Source: CNBC, October 7, 2008. Asha Bangalore (Northern Trust): Sluggish labor markets - part of scenery
Source: Asha Bangalore, Northern Trust
- Daily Global Commentary, October 9, 2008. Zillow Survey: US homebuyers worried about interest rates "Interest rates were most often cited as a financial worry by US adults who plan to buy a home within the next two years, according to a Zillow survey, which was fielded by Harris Interactive. 68% of adults who plan to buy a home in the next two years said interest rates were a concern, while 63% said local property taxes were a worry, and 57% cited purchase price (respondents could choose more than one answer). "Of those planning to buy a home within the next two years, 94% said they had at least one financial worry about buying a home. For people who plan to buy in three years or more, those worries changed a bit."
Source: Katie Curnutte, Zillow, October 7, 2008. Bespoke: We can't get no ... satisfaction
Source: Bespoke, October 7, 2008.
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Dr Prieur du Plessis
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. Copyright © 2008-2009 Dr Prieur du Plessis Image rendition and html coding Copyright © 2000-2009 SafeHaven.com ADVERTISEMENTS
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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.