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November 16, 2008

Words from the (Investment) Wise for the Week That Was (November 10 - 16, 2008): Part II
by Prieur du Plessis

Markit: CDS update: gross inaccuracies
"The size of the CDS market has been one of the most controversial - and misunderstood - issues during the current financial crisis. The oft-quoted figure of $54 trillion, sourced from an ISDA survey, has caused many an uninformed pundit to speculate that it was 'out of control'. But though the ISDA survey is relatively accurate in describing gross notional outstanding, it is flawed in representing total risk.

"Figures published by the DTCC, only made available in the last two weeks, give a truer picture. The table below, for the week ending November 7, shows that the total net notional outstanding - which offsets long and short positions within the same institution, thus giving a more accurate figure of risk - is only a small fraction of the total gross notional. This is because the ISDA survey counts the same position several times and doesn't take into account aggregate risk. Gross notional in the CDS market has itself decreased significantly in recent months. This is due to compression exercises conducted by Markit and others, which allow offsetting trades to be torn up.

"The latest figures show that total net notional outstanding fell by $229 billion from the previous week. Most of this was due to a $200 billion reduction in single name CDS exposure. The fact that gross single name exposure rose by $30 billion highlights the inadequacy of this metric as a risk indicator. Clearly, investors have been entering into offsetting trades to reduce their risk exposure, a fact not captured by the gross measure, which overstates exposure.

"Drilling down into the single names, the DTCC data shows that the Republic of Ireland is the subject of the biggest increase in net risk exposure this week. The sovereign was the first in the eurozone to go into recession, though it has since been followed by Germany and the region as a whole. Its credit profile worsened significantly after it guaranteed its banking sector and the dire economic news has continued to flow. It looks set for a deep and prolonged period of contraction and the domestic banks will be reliant on the government guarantee for funding."

Source: Gavan Nolan, Markit (via FT Alphaville), November 14, 2008.

Bloomberg: Faber says corporate bonds "more attractive" than stocks
"Marc Faber, publisher of the Gloom, Boom & Doom Report, and Charles Maxwell, an analyst for Weeden & Co., talk with Bloomberg's Pimm Fox in New York about the outlook for the US economy and stock market, Federal Reserve monetary policy and commodity prices."

Source: Bloomberg, November 10, 2008.

Bespoke: Bypass the depression and head straight for 1907
"'On October 17, 1907, panic began to spread on Wall Street after two men tried to corner the copper market. In the months preceding the panic, the stock market was shaky at best; banks and securities firms were contending with major liquidity problems. By mid-October, Wall Street was paralyzed; for days, there were runs on several large banks. Millions of dollars were withdrawn, and banks closed their doors.'

"Sound familiar? The above passage is from an article on the NPRs website titled 'Lesson's From Wall Street's Panic of 1907'. 101 years later, the US economy finds itself in an eerily similar situation, and following today's [Thursday] lunchtime plunge in the Dow, the index is now closing in on 1907 to be on pace for the index's worst year ever."

Source: Bespoke, November 13, 2008.

Financial Times: Opaque earnings
"One reason cited for the extreme volatility on Wall Street of late is a lack of clarity for US companies' future earnings.

"'How can investors value a stock if they don't have the foggiest what the 'e' in p/e will be?' is a common refrain.

"Data from Thomson Reuters supports this 'confusion hypothesis'. Now that most companies have reported their third-quarter results we can see how analysts' expectations for earnings compared with the actual outcome.

"While results for all sectors were worse than forecast in January, some industries have been easier to gauge.

"The expected third-quarter earnings growth for healthcare of 11% was, under the circumstances, not much different to the 7.3% outcome.

"Financials, on the other hand, moved over the same period from expected growth of 46% to minus 106.5%. Strikingly, a decline of 'only' 61% for financials was expected as recently as the beginning of October, suggesting analysts have been scrambling to keep up with the fast-deteriorating prospects.

"The finger-in-the-air nature of the forecasting is further illustrated by the eerily palindromic nature of the number of financial companies that beat, missed, or matched expectations: 45%, 10% and 45%, respectively.

"So, an important question for investors is: are we close to a point when even perceptions of earnings clarity may improve?

"Sadly not, because so many statements with the third-quarter reports have been laden with bosses bemoaning the murky economic outlook.

"Bulls, however, may point to a possible benefit of such gloom-mongering. The longer the uncertainty goes on, the more one would expect shell-shocked analysts to overdo the pessimism.

"That could pave the way for some pleasant surprises."

Source: Jamie Chisolm, Financial Times, November 12, 2008.

Blogging Stocks: Are market extremes calling a bottom?
"Money manager and advisor Jim Stack, who accurately sidestepped the bear market over the past year, is now turning more optimistic. Here's the latest from his InvesTech Market Analyst.

"'As a bear market unfolds, investor emotions travel down a slippery slope of anxiety, fear and panic. And it is just this kind of emotional upheaval that creates some of the extremes that we are seeing now.

"'Media headlines containing the word 'depression' and images like this are appearing more this year than in any year since the 1930s.

"'Stock market volatility, as measured by the number of 1% daily closing moves in the S&P 500 Index, is near a record high. The percentage of stocks on the NYSE hitting new 12-month lows is higher than any previous record level during the past 50 years.

"'Yet, bear markets bottoms occur right in the midst of fear and panic - at the point of maximum gloom. And for consumers, it's hard to get much gloomier: In addition, more bear markets have ended in October than in any other month.

"'On Wall Street, fear and market volatility go hand in hand. However, this is not necessarily bad news. Day to day volatility in the S&P 500 is currently at its second highest level in 70 years - exceeded only by the bear market bottom in 2002.

"'Of particular interest is the fact that all past 'peak' levels have occurred during years in which important market bottoms have appeared.

"'Downside leadership is also hitting new extremes as this bear has tightened its grip. On October 10, a record 88% of stocks on the NYSE hit new 12-month lows - 14 percentage points greater than the previous record set on May 29, 1962. Once again, this is not necessarily bad news!

"'We've identified the days when more than 50% of the NYSE stocks have fallen to new 12-month lows and we've tracked the percentage gain and/or loss in the S&P 500 that followed. Not one instance saw the market lower 3 months and 6 months later.

"'While there isn't much precedent - only 4 periods before this have seen such extremes since 1962 - this still offers hope that there is light at the end of the tunnel.

"'Meanwhile our technical 'pressure factor' indentifies overbought or oversold extremes in the market, which typically occur at points of maximum optimism or pessimism. Historically, oversold levels such as this usually precede some type of market bottom.

"'This indicator has proven to be reliable even for short-term bottoms during prolong bear markets like 2000-02. On October 22, the Pressure Factor hit its fifth most oversold level in the past 40 years.

"'Such prior extremes occurred in October 1987, March 2003, and February 2007. Following each of these oversold readings the market moved upward on average for a 13% gain after 3 months and 17% after 6 months.

"'The odds are high we are either near (or past) a market bottom ... but only time will tell how important this bottom will be.'"

Source: Steven Halpern, Blogging Stocks, November 10, 2008.

David Fuller (Fullermoney): Stock markets are cheap, but no base formations yet
"By most measures stock markets are cheap. We have certainly seen extremes of sentiment and price trend, and valuations are much improved. Reactive and crisis oriented central banks are no longer targeting the inflation which they helped to create, because it has been in rapid retreat since July. Urged on by their respective governments, central banks are now attempting to cushion a steepening global economic decline. Having embarked on this journey, they will not desist until conditions improve. Additionally, governments are now using fiscal policy to fight a disinflationary recession.

"However while deleveraging continues and more of America's best known companies face insolvency, we have reason to think we are living through an epochal event. As Richard Russell points out: 'Mattel makes toy cars. Mattel is now worth more as a company than General Motors.' It gives one pause for thought.

"I often feel confident in my analysis, sometimes justifiably so, and sometimes naïvely or rashly so. Today, I have far more questions than answers. An important reason for this is that too many of the price trends intrigue rather than entice me. I see the climactic action in many charts, but not the base formations to support sustained recoveries. The performance of many financial stocks remains a concern.

"Looking ahead, I suspect we will not be able to fault our politicians for effort. However there is certainly no unanimity regarding the solutions."

Source: David Fuller, Fullermoney, November 11, 2008.

Barry Ritholtz (The Big Picture): Is the US market cheap?
"Maybe not, if this graph of the trailing 12-month P/E ratio is anything to go by."

Source: Barry Ritholtz, The Big Picture (via Mike Panzner), November 14, 2008.

Bloomberg: Jim Rogers - global stock market rout may continue
"The rout in global markets may continue while bonds will be a 'terrible' investment as economic problems may persist until 2010, investor Jim Rogers said.

"'Stocks in the West are still expensive on any historic valuation method,' while 'bonds are going to be a terrible place to be for the next 10, 20 years', Rogers, chairman of Singapore-based Rogers Holdings, said at a conference in Seoul today. Equities in the West will be 'in a trading range for years to come,' he said.

"'I have started going back into the markets; that does not means it's the bottom,' Rogers said. His purchases since mid-October include commodities and equities in China and Taiwan, as well as 'a Korea stock', he said, without giving details.

"'We may be hitting 'a' bottom,' Rogers said. 'I don't know if it's 'the bottom.'"

"Rogers continues to favor commodities as an investment as fundamentals are 'unimpaired' amid a global liquidation of assets, he said. 'You will see that stocks have gone down more so far than commodities. That will continue as far as I'm concerned.'"

Source: Kyung Bok Cho, Bloomberg, November 12, 2008.

Richard Russell (Dow Theory Letters): Tread with caution
"... so many well-known analysts are proclaiming that stocks now represent great values, and therefore, we must be at or near the bottom of this bear market, and that this is the time to accumulate selected 'great value stocks'. These bullish analysts may be right or wrong, but from a Dow Theory standpoint, there is nothing yet to indicate that we are at a great stock market bottom.

"First, the Dow is not selling at historic great values since the dividend yield on the Dow is only 3.88% - still far below the classic 6% seen at great bottoms.

"The Lowry's studies have been invaluable in assessing the situation. I have followed the Lowry's studies for half a century, and currently I don't see indications of a major bear market bottom in their statistics. Normally, prior to a major bottom Lowry's Selling Pressure Index embarks on an extended decline - an indication that the inventory of stocks for sale has been exhausted. Once the sellers have completed their selling, a bear market is ready to form a bottom. Unfortunately, Lowry's Selling Pressure Index (supply) is currently still in the vicinity of its recent record high. Therefore, we know that potential selling is far from exhausted, despite the recent series of 90% down-days on the NYSE.

"I'm not trying to frighten my subscribers. What I am trying to do is to caution subscribers, and notify them that the lows for this bear market may still be far away. We simply do not know, nor to we have evidence to indicate that the bottom is in or near."

Source: Richard Russell, Dow Theory Letters, November 11, 2008.

Bespoke: Breaking the back of Buffett
"With nearly everyone and their brother lately questioning the investment prowess of Warren Buffett, it looks as though the shorts have finally broken the back of Berkshire Hathaway stock. After riding out most of the credit crisis and actually benefiting from it for awhile, the stock has finally succumbed to the pull of the overall market and broken below $100,000 for the first time in over two years. It's amazing how index derivative contracts are coming back to haunt the man who once called them 'financial weapons of mass destruction.'"

Source: Bespoke, November 13, 2008.

Bespoke: Biggest increases and decreases in country P/E ratios
"Below we highlight the country indices from the list in our last post that have seen the biggest increases and decreases in P/E ratios (trailing 12-month) in 2008. As shown, Bulgaria's P/E ratio has fallen the most of any other country this year, from 48.46 down to 6.22. China ranks second, with its P/E ratio falling from 44.28 to 14.55. A 14.55 trailing P/E for China is very low.

"Just five countries of the 84 on our list have seen their P/E ratios actually increase this year. Unfortunately, the US is one of the five. During bear markets, P/Es usually contract because the price (P) of the index falls more than earnings (E). Since P/Es have increased (albeit slightly) in the US in 2008, it means earnings have fallen even more than price."

Source: Bespoke, November 10, 2008.

Bespoke: Comparing valuations in China and the US
"Since US markets peaked last October, the S&P 500 is down 41%, while China's Shanghai Composite is down 68%. Over the same time frame, the trailing 12-month P/E ratio of the S&P 500 has gone from 19.62 to 20.21, while the P/E ratio of the Shanghai Composite has fallen from 45.85 all the way down to 14.31.

"So even though China's equity markets have declined much more than the US on a percentage basis, earnings have held up much better. China is still considered an emerging market and is experiencing growth of 8% or so. Growth stocks generally have much higher valuations than value stocks, and it's surprising to see China's P/E at 14.31, or 6 points lower than the S&P 500's P/E of 20.21."

Source: Bespoke, November 11, 2008.

Bespoke: Dollar bull has more legs
"The one bright spot in the current market environment is the strength in the US dollar. Months ago, we wrote that the dollar was in store for a lengthy bull market, and at the end of October, the currency officially made it to the +20% threshold confirming a new bull. As we've noted in the past, bull and bear markets for the dollar typically last much longer than other asset classes, and below we highlight the four prior bulls for the currency since 1970. Three of the four bull markets for the dollar have lasted 500 days or more, and two lasted for 7+ years. Using history as a guide, we expect the current bull market in the dollar to continue through 2009."

Source: Bespoke, November 10, 2008.

Bloomberg: Ruble devaluation concern triggers stock plunge, rate increase
"Russia's ruble fell the most in two months as the central bank loosened its defense of the currency amid the country's worst financial crisis since the 1998 devaluation.

"'They're going to move the line in the sand back a little bit, where they hope they can defend it,' while resisting a formal devaluation that would erode confidence in ruble deposits, Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow, said in an interview today. 'If people start to lose confidence in the banking system, we could have a massive run on the banks as we saw twice in the nineties, and then the game is up.'

"Russia drained 19% of its currency reserves to stem a 17% slide in the ruble against the dollar since the start of August, prompting warnings of possible downgrades from Fitch Ratings and Standard & Poor's.

"The central bank is raising rates, at a time when the US, Europe, China and India are cutting to help unlock credit markets, after a 1% slide in the ruble against the euro-dollar basket today. Investors sold the Russian currency after central bank Chairman Sergey Ignatiev said the ruble has a 'tendency toward weakening', during a televised press conference yesterday."

Source: Laura Cochrane and Emma O'Brien, Bloomberg, November 11, 2008.

Richard Russell (Dow Theory Letters): Gold is being manipulated
"I've never been a big fan of the 'gold is being manipulated' thesis. However, I'm now giving the manipulation thesis second thoughts. Most of the world's central banks are now in the process of fighting recession and deflation. This requires government spending and the production of enormous quantities of new fiat money. The last thing the central banks want is for the public to realize what they are doing. Normally, surging gold would be the signal for the public to ask questions - rising gold is a red flag for the fiat money creators.

"It's amazing and beyond coincidence the way gold rallies, and then immediately is hammered down below 740. I know that there are huge short positions in gold on the COMEX. I'm no longer a skeptic on the 'gold is being manipulated' claim. Somebody is selling gold every time gold rallies toward a breakout above 870 or more properly gold at 840. I don't think the manipulators (if there are such people) can keep it up."

Source: Richard Russell, Dow Theory Letters, November 13, 2008.

Richard Russell (Dow Theory Letters): Gold in early accumulation period
"I believe that gold is 'trying' to bottom here, and I believe hedge fund selling is easing off. It's significant that gold coins and bullion bars have been swept off the market even while the price of gold has been fairly static. Central banks have also been sellers of gold and I believe the IMF will be a seller. Once all these various entities get rid of their gold, the supply of gold for sale will be reduced drastically, and the stampede for gold will begin in earnest. I look at the present as the early accumulation period (first phase) in the coming great bull market for gold. The second phase of the gold bull market will begin once gold is firmly above 1000 again. Near-term, December gold above 775 will be very bullish."

Source: Richard Russell, Dow Theory Letters, November 10, 2008.

Leon Esterhuizen (RBC Capital Markets) Gold prices poised for gains
"The current financial crisis has delivered the perfect conditions for the price of gold to rise over the next year or two, believes Leon Esterhuizen, equity analyst at RBC Capital Markets.

"He points out that, historically, banking crises have tended to be hugely deflationary, as interest rates are cut aggressively and for extended periods.

"'We expect the Federal Reserve to ease further in order to turn market sentiment away from pricing in low or no growth, which would be reflected in a low long bond yield.'

"Ultimately, this would be likely to lead to dollar weakness - which is beneficial to US exports but heightens the risk of steep inflation, Mr Esterhuizen says.

"'If economic growth rapidly rebounds, the gamble will have paid off. If not, be prepared for an even bigger collapse in a year or two from now. Given current conditions, the US has little option but to take that bet.'

"He adds that Europe will converge with the US in terms of cutting rates, strengthening the case for an extended period of rock-bottom real rates.

"'Finally, oil could play a key role, as recent efforts by producers to reduce output might leave crude prices higher than many expect.

"'If this is the case, inflation will most certainly be rising in an environment where rates are being cut. This is gold price heaven - declining real rates or even negative real rates will drive the gold price much higher.'"

Source: Leon Esterhuizen, RBC Capital Markets (via Financial Times), November 11, 2008.

Commodity Online: Why gold mines are collapsing in Zimbabwe
"Gold contributes 35% of Zimbabwe's foreign currency earnings. But gold mines are shutting shops in this African country.

"Reports say several gold mines in Zimbabwe have stopped operations as a result of inadequate capital. Metallon Gold, the largest gold producer in Zimbabwe with four mines, has since stopped production.

"The company has also been hit by massive turnover of key staff after it failed to pay salaries for the past two months. Metallon chief executive Collin Gura confirmed that production at his company was at a standstill.

"Gold miners say they cannot continue with operations because the Reserve Bank of Zimbabwe (RBZ) has not paid their foreign currency revenue from gold sales. RBZ, through its subsidiary, Fidelity Printers, is the sole marketer of gold in the country.

"Gold mining companies are obliged by law to sell their gold to the central bank, but for the past two years it has been falling behind on payments 'due in terms of official policy to be made four days after delivery'."

Source: Commodity Online, November 7, 2008.

Financial Times: IEA warns of new oil supply crunch
"A lack of investment in new sources of oil risks a supply crunch worse than the problems that pushed prices to $147 a barrel this summer, the developed world's energy watchdog said on Wednesday.

"The International Energy Agency (IEA) warned that cuts and delays in investment that were prompted by the fall in oil prices and the credit crunch had put the world 'on a bad path'.

"Fatih Birol, chief economist at the IEA, said: 'We hear almost every day about a project being postponed. This is a major problem.'

"Last year, $390 billion was invested in oil and gas exploration and production, one of the highest amounts in recent years. Yet it still fell short of the $450 billion the IEA said would be needed in both sectors.

"Oil prices have fallen as economies have struggled in the credit crisis and demand has dropped, especially in the developed world."

Source: Carola Hoyos, Ed Crooks and Javier Blas, Financial Times, November 12, 2008.

Financial Times: Brazil oilfield may house 100 billion barrels
"Brazil's newly discovered 'pre-salt' oilfields may contain more than 100 billion barrels, Haroldo Lima, head of the industry regulatory, said on Friday.

"Mr Lima said just the pre-salt oilfields already under concession may contain between 50 billion and 80 billion barrels and that the total area could surpass 100 billion barrels.

"If so, the new fields would propel Brazil up the world league table of oil producing nations. Brazil currently has reserves of about 12.6 billion barrels (or 14.4 billion barrels of oil equivalent if natural gas is included), according to a statistical review produced by BP of the UK, a standard industry reference.

That compares with 79.4 billion barrels of oil in Russia, for example, or 101.5 billion in Kuwait, according to BP.

"'Dimensions are so big that we still don't have a good vision of what this means for Brazil,' Mr Lima told reporters in Rio de Janeiro."

Source: Jonathan Wheatley, Financial Times, November 7, 2008.

Ifo: Economic climate for the euro area
"The Ifo Economic Climate in the euro area has worsened again in the fourth quarter of 2008 for the fifth time in succession and has now fallen to the lowest level since 1993. The decline in the Ifo indicator is primarily the result of less favourable assessments of the current economic situation. The pessimistic level of the expectations for the coming six months remains virtually unchanged. These survey results suggest that the economic decline will continue in the euro area.

"The economic climate indicator has fallen in the fourth quarter of 2008 in nearly all countries of the euro area and is now clearly below its long-term average. The most unfavourable economic climate prevails in Spain and Ireland. The assessments of the current economic situation have worsened this time especially in Italy, Belgium, France, Austria and Germany. The expectations for the coming six months remain clearly pessimistic in most countries, in Ireland, Portugal and the Netherlands they have further deteriorated.

"In the course of the coming six months a strong decline in the rate of inflation is anticipated. Key interest rates will be lowered further during the coming six months in the opinion of the World Economic Survey (WES) experts; capital market interest rates are also expected to decline.

"In comparison to the euro, the US dollar is assessed as undervalued despite the increase in value that has occurred. In the coming six months a further recovery of the US dollar is expected. After having increased in value the Japanese yen is now seen as only slightly undervalued. The British pound is regarded as properly valued vis-à-vis the euro."

Source: Ifo, November 12, 2008.

BBC News: German economy now in recession
"Germany has entered a recession after government figures showed that Europe's largest economy contracted by 0.5% in the third quarter. This is the second consecutive quarter that the economy has shrunk after a 0.4% contraction in the second quarter.

"The fall in economic output, driven by falls in exports, was greater than many analysts had expected.

"'This confirms the German economy is in a marked slump,' said Klaus Schruefer at SEB. 'We will definitely get a further contraction in the fourth quarter, probably of a similar order,' he added."

Source: BBC News, November 13, 2008.

BCA Research: UK Housing bubble - rapid deflation to persist
"The UK housing bust will prove to be much worse than in the US, ensuring that the BoE continues to aggressively play catch-up.

"Yesterday's release showed that the RICS survey came in at -82% for October (up only modestly from -84%). Although the release shows evidence of flattening off, it is doing so at historically depressed reading, indicating that the vast majority of realtors continue to expect a steady rot in prices in the coming months. Our UK housing model echoes this sentiment, suggesting that house price deflation will level off over the next six months, albeit at a whopping -12% YoY rate.

"In short, the bubble has much further to deflate, given that the rise in the house price-to-income ratio was much larger in the UK earlier this decade than any other economy in the developed world. The once virtuous circle has clearly now turned vicious and will lead to dramatic knock-on effects for the consumer and overall domestic economy in the months ahead. Already, sentiment has been shattered (due to declining housing and financial wealth as well as rising unemployment) and consumers have begun to retrench.

"Bottom line: Last week's aggressive 150 basis point rate cut by the BoE will be followed by significantly more easing in the months ahead. Stay overweight gilts within a global hedged fixed income portfolio."

Source: BCA Research, November 12, 2008.

James Pressler (Northern Trust): Is Beijing's $586 billion "new deal" stimulus plan really "new"?
"For a change, the latest news to rock global markets actually triggered a rally in Japan, Hong Kong and other regional markets. Yesterday, Beijing announced a 4 trillion yuan ($586 billion, or about 16% of GDP) fiscal stimulus package to be implemented between now and end-2010 to shore up its ailing economy. Regional markets rose in hopes that renewed Chinese import consumption would keep exporters throughout Asia and the industrialized world busy, and commodity prices went higher in anticipation of a recovery in demand. This package has been coined by some as a 'New Deal' for China. We decided to pick through the details and see how much of it is 'new', how much is a good 'deal', and to see if there could be any downsides that have so far been overlooked.

"The actual economic activities cited by this package center around the further development of infrastructure - rail and highway connections, housing construction and earthquake recovery support - mostly in the western provinces. Considering how underdeveloped that part of the country is relative to wealthier eastern coastal regions, such investment seems a worthy cause and very much in line with the government's long-term plan to spread development to areas that have so far been left out. However, lost within the blurry figures is how much of this 'new spending' is actually a repackaging of programs already queued up for implementation, with their costs now announced as 'stimulus'. Details are sketchy, but there seems to be a suspicious amount of overlap between previously announced projects and new, stimulative projects. In short, not all of this program is 'new'.

"There is, perhaps, a 'deal' within this package, regardless of how much spending is actually 'new'. The market rallies throughout Asia were not based solely on hopes that those countries would benefit from China's extra economic activity. There is also a growing feeling that China will be able to avoid an economic hard landing and a prolonged period of weak growth. If this fiscal package shores up the waning confidence of foreign investors, it could keep investment flowing into the country and prevent growth from taking a precipitous dive - a nice way to maintain the virtuous cycle of investment, development and growth.

"There is one lingering concern we have about today's announcement, however, and it is the same concern we have about any country's stimulus package - where is the money to pay for this? If it considers liquidating any of its many US-backed assets or no longer buying as much of our debt, this New Deal would be a bad deal for the US."

Source: James Pressler, Northern Trust - Daily Global Commentary, November 10, 2008.

Times Online: CLSA's Fishwick says that China may be heading for a severe economic slowdown
"China must be radically reassessed by investors and could be lurching towards a more dramatic economic slowdown than Beijing authorities will admit, a CLSA report says.

"The grim assessment from Eric Fishwick, chief economist at CLSA, an Asia specialist brokerage firm, argues that it will be impossible for China to achieve anything like the growth rates it is presently projecting for next year.

"Even with aggressive government measures, growth in 2009 could plunge to 5.5%, he said.

"The super-bearish forecast depends on certain weak signals that may emerge in the fourth quarter of 2008, but comes amid reports from the Chinese electricity sector that suggest the country's mighty manufacturing engine-room is already sputtering badly.

"More than 70% of the electricity generated in China is consumed by industry and according to reports, monthly national power output in October fell for the first time in a decade.

"Traders in Singapore said it could be a slump that would have a huge negative impact on global commodity demand: ferrous and nonferrous metal-processing industries are among the heaviest consumers of electricity in China and it is their slowdown that is reflected in the drop in power usage.

"In the report circulated to investors yesterday, Mr Fishwick dismissed the idea that the authorities in Beijing would be able to manipulate the economy as effectively as other analysts believe.

"Not all analysts share CLSA's bleak assessment. Goldman Sachs issued a report on the Chinese economy yesterday that told investors to expect it to stabilise in the second half of 2009, with a potentially strong positive effect on stocks.

"Deng Tishun, Goldman's China strategist, said that the index of Chinese stocks listed in Hong Kong could rise more than 50% next year."

Source: Christine Seib, Times Online, November 8, 2008.

US Global Investors: Sharp decline in Chinese power output
"The October decline of China's electric power generation, widely watched as a proxy for its economic activity, was even worse than during the Asian Financial Crisis. With recent production cutbacks at power-consuming industrial companies besides energy and environmental conservation mandates, electricity usage could remain sluggish in the near term."

Source: US Global Investors - Weekly Investor Alert, November 14, 2008.

Bryan Crowe (Northern Trust): Hong Kong goes to recessionland
"The latest quarterly data released today officially confirm that Hong Kong is indeed in a technical recession. After a startling Q2 decline of 1.67%, real GDP continued its downward trajectory through Q3 posting a 0.5% contraction from a quarter earlier. Hong Kong became the second Asian economy thus far to officially tip into recession, after Singapore, and will certainly not be the last. The two main culprits have been identified as exports and consumer spending."

Source: Bryan Crowe, Northern Trust - Daily Global Commentary, November, 14, 2008.

Prison Planet: Gerald Celente predicts revolution, food riots, tax rebellions by 2012
"Trend forecaster, renowned for being accurate in the past, says that America will cease to be a developed nation within four years, crisis will be 'worse than the great depression'."

Click here for the full article.

Source: Prison Planet, November 13, 2008.

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Dr Prieur du Plessis
investmentpostcards.com

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.

Copyright © 2008-2009 Dr Prieur du Plessis

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